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On today's show, we're joined by Josh Eitingon, co-founder of DXE properties and experienced multifamily syndicator in acquisitions, asset management, and investor relations. In this episode, we will discuss Josh's take on the multifamily value-add investment strategy, the tax strategies he uses including the dynamics of using 1031 exchanges as a GP in a syndication, where he believes we are in the current market cycle, and much more.
From a high level overview, you're coming in and making a change to the property to enhance its function. You're looking to make changes that will either increase income or decrease expenses, improving the NOI.
Right now it's a very competitive space, so the opportunity is in the details. You really need to spend the time to understand the market, the sub market, the rents, and potential rents before making large value adding investments. Josh defines value-add based on the IRR projections over 5 years, and he shoots for about 15% to make it worth the effort and leg work necessary to get there.
Outside, there are options to liven up the outdoor environment. Revamping pool areas or water features and adding grill stations are some examples. Investing in common areas, such as a game room, can be difficult to asses for a return. If possible, the investor could speak directly with tenants or send a survey. On the interior some examples are different flooring materials, refacing cabinets, resurfacing or replacing counters, or redoing lighting and paint.
Many units are occupied when you're looking to add value. Josh's approach is to come in fully capitalized, moving as quickly as possible on the exterior and getting aggressive on redoing the interior where it's realistic. There is a case to be made to wait and make sure the rents are looking right and consistent before you're renovating many units at once.
It's important to be mindful of the cost of the investment per unit when determining your return on the improvements. You can also look at similar properties and asses their amenity investments to see how your property stacks up against competition. Different target demographics also value different amenities.
When Is It Time To Sell?
There may not be a right answer. Josh believes in the long-term wealth building of holding a property for a long time. There is also something to be said for the law of diminishing returns, where you may have a lot of equity tied up that could be better used in another deal.
If you can create the right formula where the property is optimized and creating great cash flow, Josh likes to hold the property in these situations by recapitalizing or refinancing to redeploy equity elsewhere.
It's important to be mindful of the debt you take on when adding value in this way, this could influence your exit timeline as other investors may not be willing to assume that debt.
First allocating value to the land, building, and improvements allows you to get more aggressive on the depreciation side. It's helpful to use the depreciation to offset income, especially with the real estate professional status. With the real estate professional status, you can also write off losses in excess of the capital you raise for a deal.
Many investors don't want their money back - they want to keep their money in real estate and to continue trading up in deals. A 1031 exchange is a great option for these investors, so as the deal sponsor, Josh will run the 1031 exchange on behalf of the investors.
Current Market Cycle
Josh is feeling moderate about the current market but acknowledges that demand seems to be high enough to prevent any significant drop-off. Without a collapse, the competition could remain very tight for years especially if rates don't rise dramatically, debt remains cheap, and multifamily continues to be seen as a safe asset class. Lending has also been responsible lately, especially on construction loans. This has been keeping developers a bit more honest as far as the projects they take on.
Learn more about Josh and his work: https://www.dxeproperties.com/