In this episode, Brandon and Thomas are joined by JC Castillo of Velo Residential and Paul Peebles of Old Capital Lending. Together they host the Operate for Profit real estate podcast.
We discuss the current state of the multifamily market, the lending environment, and why operational excellence will be key to success for multifamily owners and operators over the next 10 years.
JC Castillo has been in the multifamily business for about 15 years and has experience in acquisition and property management in the Dallas/Fort Worth Metro area. He has recently branched into SFH property management with Velo Residential.
Paul Peebles has been lending on apartments for almost 35 years and has closed about 5,800 apartment loans across the US. Old Capital does about 1.5BN in apartment loans a year.
10-year Bull Market
Some people think the market is getting to a point where it will stop carrying everybody up along with it. The rising tide that lifts all boats may be coming to an end.
"The Golden Age of multifamily investing, the 2010s, is effectively dead and over. That's not a bad thing. If you look back through the history of the 80s and the 90s... if you think about what happened with the tax law change that Reagan enacted, where they eliminated a lot of the passive loss rules that were very favorable to buy properties, that created the savings and loan crisis. In the 90s, people were just fighting to keep their properties..."
The pandemic ended the Golden Age of multifamily. We're beginning to see a large increase in expenses. Labor is a huge cost as an operator, it's really hard to find great talent in maintenance personnel and on-site staff, and property taxes are increasing. The pandemic also put a lid on the rental growth.
"Income is coming down and expenses are going up. The margin for your profitability is so much slimmer than it used to be. That's where we see this being an operational decade: you have to become a master operator and work with amazing property management companies."
"[In the 2010s] Expenses were stagnant, from an inflation perspective. Revenue was going up 4%-6% a year. You look like a genius in that environment. It's not that way now."
What is a Master Operator?
A master operator is someone who is a student who is the craft of running a profitable business. People often forget that multifamily is no different from any other business. You have to be a master marketer, fill your units, and diligently analyze expenses. You have to utilize technology to discover operational efficiencies.
"I always like to think I do the basics brilliantly and never overcomplicate things. This business is simple."
JC has learned that multifamily operators win when they work hard to ensure on-site staff is happy. These are the people that are going to close your leases and take care of repairs and maintenance.
"What am I making my on-site staff do today that they shouldn't be doing, that isn't creating value?"
Leverage technology to make their lives easier. Artificial intelligence bots that answer questions from visitors to your website 24/7 is the current standard. You must set this up.
Apartment tenants, especially in larger cities, generally move within a small radius. So your job is to keep them at your location once they sign. You must analyze the search engine presence of all of your competitors in your area. This is everything from Google search ranking to ease of website navigation and online virtual assistance to star ratings and reviews written. Listen to reviews! Read your own reviews and read reviews of your competition.
"Heading into the economy we have now, resident retention is very valuable."
"The pandemic has accelerated the technology trends, and a lot of them are here to stay, they're only going to grow. The obvious ones are virtual tours and paperless applications and leasing processes. People don't want to interact in person as much as they used to, you've got to give them a way to self-serve it."
The Lending Perspective
Paul sees many educators and mentors that aren't focusing on operational efficiency. These educators and mentors are looking to help people enter the business. JC and Paul focus more on what happens once you receive the keys to the building. The journey doesn't end upon acquisition, it barely starts.
Many people new to this industry haven't run a business before, they are coming from a W2 wage. This is a major business.
Lending is still very aggressive. Asset values have increased so much that the NOI has not been able to keep up. Bridge loans are very popular in the marketplace right now to close the gap between what you're paying for based on the NOI of the property versus what the seller is asking.
Paul advises physical due diligence and investigating the operator of the property. Be a pessimist in these deals and make the operator convince you to invest. Yields are so thin, it all comes down to the operation.
Learn more about JC and his work: https://www.veloresidential.com/
Learn more about Paul and his work: https://oldcapitallending.com/
Make sure you check out the Operate for Profit Podcast and the Old Capital Podcast to hear more from JC and Paul!