Herve Francois here here with the DeRosa group, we're going to get Palmy and Nancy,
sisters on here to the Market Hunter Thursday. How did you come about by choosing Phoenix?
As far getting to start in real estate journey, we were in fashion world. And there's a saying
in fashion world: one day you're in and the next day you're out. At that time,
we were making great income in our fashion business that we didn't realize the importance of
passive income via apartment investing. So we were just spending our money or just doing what regular
people do, which is work hard, earn our money, and then we buy liabilities. Right? At that time,
we didn't realize that important thing that the reason we were making good income wasn't because
we were smart or we're doing something different. It's because we didn't manage to spend all our
money yet. Having known what we know now about passive income via apartment investing, we would
be safe in these circumstances, even if there's global pandemic or even economic downturns.
And then that's what our financial freedoms means to us. And that's why
we come up with the name Not Nine To Five, because we need to stop grinding from nine to five and
have our money start working for us instead of us working for our money. Yeah. So that's
why when we started our name is kind of like our mission statement, that we want to bring everybody
along with us to our journey so that you guys can have financial freedom like us now that we do.
Yeah, and live a non nine to five lifestyle as well.
Yes. And then why did we choose Phoenix market? Well, Palmy is going to get into a little bit.
Well, the reason Phoenix has been such an attractive market is it has long-term stability.
Population growth has skyrocketed, especially in this year. You can see that job growth has driven
net immigration into the sub markets. They have an extremely business friendly
environment. So the government is encouraging new businesses to move their headquarters are
moving there. Operationally, it's really nice. There's no rent control. In LA-
It's landlord-friendly. Why not LA? LA has massive rent controls and
they keep passing new legislations that make it very difficult for small landlords to be able to
survive. So those are deterrents. High yields. Historically, Phoenix has been a really high
yielding market. And this year the yield is like 9%. And historically, like in the 1990s, it's
been like 6, 7% year over year yield. Again, net migration is also a key factor because you're-
More and more people are moving from cities, like California, like New York.
So would you say a lot of the investors that you come across in Phoenix, are they folks that
are from Phoenix, based in Phoenix, or are they investors from outside of Phoenix,
such as yourselves? Yeah, outside.
Yeah, outside. In Phoenix, what type of
properties do you guys prefer to pursue in regards to what's worked well for you in the past?
So for us, we love to invest in an asset class that has a little bit of both. So it's value add
but also it's yield play as well. So basically what that means is we don't do, unlike single
family flips, we don't go for the ugliest, dirtiest property. We seek properties that maybe
have been mismanaged. Maybe the ownership has been there for a long time so they
haven't felt the need to raise rent because they're comfortable and they don't want to
stir the pot. So what we do is when we invest, it's like 90% occupancy or higher.
So one of the property that we invested in, we took over, it was 100% classic unit. And
that's what we love because we can go in and then renovate and push up the rent costs
to the market. Because right now it's been under-rent and what we'd be doing
the pandemic, we actually been able to do distributions for our investor. We didn't-
We didn't stop at all. We didn't stop. The Phoenix
market is on fire and then we've been doing well. There are some hiccups. We're not going to say
everything is rosy, but we're able to manage with our team and able to give the distribution
on a quarterly basis to our investor. The type of properties I think are best for
multi-family investors is B and C. And why B and C? Is because: A, when they're building new
properties, they're not building B and C. They can't.
They can't, right? Because there's a high default.
The replacement cost is also high. So they're going to build mostly are As.
So A properties, they're going to be concessions or there's going to be some battle up there when
you're coming with [inaudible 00:04:31] homes. But B and C are workforce housing
and transitioning to white collar workers, tech workers, in the right community. So therefore
it's a really nice area where you can force appreciation by doing renovation,
like Nancy said, while you can buy at a C price, but hopefully you can bring it up to a B value.
Yeah. When you do though that value add renovation,
and it's an amendment that we pursue our opportunities as well over here on the East coast,
what type of rent bumps do you guys see as a benefit to your business model after you get
in there and maybe you replace property managers, you lower your operating expenses and then take up
the bumps. What kind of average increase in rents are you doing once you finish that renovation?
We're looking for about a $100 to $150 in bumps.
Okay. Depending on... And that's kind of
across the board, that's what we look for. So in this case, we're also doing washer and dryers
in the units. So that's another $50 bump. Okay.
And all this, when you do these kind of renovation it's really important to
verify what your comps are doing. So there's no point in making it granite countertop,
high-end appliances when the comps aren't doing the same thing. It's going to be overkill and
you'll never be able to achieve that rent bump that you expect. But you really have to balance
it against what other people are doing. Never be the trailblazer. Always verify, let someone else
take the lead. They can take the baton. Fine. We'll come in after you and we'll see where you
come in and then we'll do what you did. When you talk about the deals that you've
done in Phoenix, number one: how have you found them? Right? I mean, that's a huge
question we typically get investors. How do you find your deals? It's so tough to
find deals. And then number two: typically how have you financed those deals in the past?
Multi-family is a team sport so we leverage our team too. And then also through our broker
relationship to find a deal. We learned from a long time ago about OPM, which is Other People's
Money. So if we go out there and try to look for a deal, we can only probably find like one or two
[inaudible 00:06:39] that we can fund personally. So what we do now is leveraging other people's
money and then do a apartment syndication. And then as far as specific financing, we use
agency debt. So it's Freddie or Fannie. And these are amazing because they're, non-recourse.
For large multi-family apartments, of course we never plan to default or walk away, but if
it ever comes to that it's not connected to your personal guarantee. So that's why it's a really,
really nice vehicle. And also on top of that, it's long-term fixed debt.
Well, it can be variable, which right now is actually good to do floating,
but basically traditionally it's 10 to 12 year debt. So we'll rent properties for five years,
five to seven years. So you should try to get debt that exceeds your market plan hold. So if
your business plan is, "I'm going to hold this for five years," you want something longer.
Like 10 years. Smaller deals, like 1 million or less,
commercial loans would be fine. But anything above that, go with Freddie or Fannie.
Like 1 to 6 million: Fannie, and then anything above 6 million...
Freddie is a good one. Yeah. Freddie is a good one. Yeah.
Especially with 20 million up, Freddie is amazing. They have very good terms right now.
Is there a certain number of units that you guys tend to stick towards? You do have some
universities over there in Phoenix. Do you look into student housing for your investors
or is it predominantly workforce housing? 65 units and up is what we look for. And that's
because we want economic efficiency. We want to be able to hire full-time staff onsite. We want at
least one property manager, a leasing person, and also then a maintenance guy, maybe an assistant.
We have someone on site because we want to sign that lease. Maintenance-wise, once we have them
on our property, we want to take care of them. We want to make sure that they're happy. We want them
to renew. And that means that we have maintenance people who are there to quickly address issues.
Yes. So you don't want... So
that's why 65 units and up- Economy of scale.
Yeah. Will be helpful for that. At what point do you get concerned?
Unless you've already started getting concerned in regards to the amount of supply coming on to
the market? Well, new development from developers out there seeing the same, reading the same tea
leaves that you guys are reading and because of that, they want to now start adding shovels to the
ground for new development. Is that a concern of yours? Number one. Number two: from a competitive
standpoint, are you beginning to reach the top in regards to the bidding that may be going on
back and forth between the properties over there? What kind of impact it might have on the cap rates
and because of that, you guys need to start looking at other cities for your investments?
Yeah. First of all, is that the absorption rate, which is the rate at which apartments that become
available are being leased up? Phoenix is top three in the country in 2020. In Q3 that's the
case. So there are new properties coming online. In fact, there's 15,000 units right now under
construction and year to date, 7,200 have been delivered. And you can see right now, even with
the amount of new products coming online, it's being absorbed really, really quickly because the
rent growth is extremely high in that market. Right now multi-family occupancy rate is at 95.6.
Phoenix is the top seventh market in the country with occupancy rates. So
that part means that new construction isn't a huge concern, but you can see... Cap rate. I
see cap rate as important but at the same time, it depends. So if the property has been under market,
has been held by the same ownership group for a long period of time, like 17, 20 years,
maybe repurchasing at a lower cap rate. But that doesn't mean that it's overpriced. It just means
that it is... It's a way of measuring things, but it's not the be all or end all of it because...
Okay, we bought a property for 96,000 per door, right, last year. So that property,
I think the cap rate was like 4.6, something like that. And the reason for that is it was so under
market, right, when we bought it. Right now, the average per unit price in Phoenix is like-
130. No, 161,000.
161,000? Of course, we raised it by $40,000
per unit already right now. So yeah.
So cap rate is important, but it's not going to be... It can't be the only thing,
the only tool you use. You have to look more overall picture of the asset class. As far as
bidding, everyone is looking at the same market. Retail, commercial, other commercial assets,
retail, warehouse, office, hospitality have all been tremendously affected by COVID,
not apartments. Right. Right.
So everyone's pouring more and more money into multi-family. So that means that yes, it's become
really competitive. But I would assume that people who did this 30 years ago would probably say the
same thing. So you have to be in it to win it. So since 2008, overall in real estate, they're like,
"Oh my God, there's a new bubble." So they've been waiting. Holding, holding,
and boom, 2020. Right? Yeah.
So had they been on this ride that represent yield per year, they would have been crushing it. But
you to buy at the right price, you have to understand what you're doing. Multi-family-
And building the right team you can leverage and then also grow with them.
Yeah, like Nan was asking me earlier this morning, like, "Think about it. Do you think
that home prices are going to be more expensive 30 years from now? Or is it going to be cheaper?"
Right. Yeah. Would you think healthcare, college
education, would it increase or not increase? Right? And that kind of go back to what the
government is doing, which is quantitative easing. They're printing out money. And that's what we're
seeing the rise in the inflation. And then- Yeah, so the money supply, we have a lot more
money in the system right now. We have other people looking to the business. So
yeah, it's competitive. But if you know what you're doing and you're in it for
the longterm... We're not looking to buy hundreds of properties, we're looking to buy a couple.
In a year. So therefore-
Got you. [inaudible 00:12:44] do that.
Nancy, this is Chris and Maricella. I guess they met you on the 12th.
So they want to to ask, you had mentioned that you look to increase your rents by about $100 or $150.
Overall, what percentage is that in Phoenix? Relative to what they've been seeing in Austin,
Texas, because there's been an explosion of real estate growth values down there. They've been
able to increase over 33% over the past couple of years. So that $100, $150 rent bump in Phoenix,
what percent increase is that for you guys? Well, if you take nine-
Let's say our rent was like 900, 950- Or 700, right [inaudible 00:13:27] one.
Whatever that percentage is. Yeah. So, okay. Let's say it's 700. 150 to
700. What are we? Yeah. [crosstalk 00:13:36].
I have my calculator. [crosstalk 00:13:39] That's
cute. [inaudible 00:13:40] numbers, it doesn't matter but your calculator looks cute.
20%. 20%. So why [inaudible 00:13:45].
One thing, you don't have to be a math genius to invest in apartment.
Use a calculator. We have a technology.
We all got calculators, the Google sheets, all of that. Now [inaudible 00:13:56].
We didn't invest in Austin. We love Austin. The only thing is the cash flow producing versus...
We are passive investor in a deal in Austin. It's been doing great.
It's just there's no cashflow. So... Oh, there's no cashflow? So it's mainly... So
the majority of that IRR is going to take place once they sell the property? Right. And that's
where you get the majority of returns. 2.5 is annually, not even monthly.
Oh, wow. So...
But they did refinance it.
But we still love it because you always want to do a cashflow play and you want to do-
A yield play. A yield play. So you want to do both. Either or,
but we want to do both. For immediately, to help finance our expenses, to live the not
nine to five life. And also to- You want the 1.7, 2X at the end.
As well. I mean, for us, if you
hold it three to five years, and that's something that can be achieved, I think that's amazing.
Yeah. Population of 1.7 million. There's got to be some
nice areas to invest within Phoenix and maybe not so nice areas to invest in Phoenix. So
where do you guys kind of plant your flag as to: these are the areas within Phoenix that
you're going to focus on your multi-family? That's a great question and I think it's... Most
people don't ask that. So your audience who are really... Obviously, they're very sharp to
really consider that point. So what we found is along Interstate 17, Northwest Phoenix,
has had the highest rent growth. It's the strongest in the market. Rent growth is
around 8% in the past year. So the Metro Center and the surrounding area is what you look for.
Also, close to ASU which is basically the Silicon Desert area. That's a nice market because you're
going to be able to catch people who are... Maybe you have a workforce housing apartment, but you're
transitioning to more tech people. That's going to be a good thing because what you want is...
Inevitably you want to be able to bump rent up, and you want to find an area where people who are
moving to that area can afford higher rent. So if you're renting to a landscaper, he may not be able
to afford your 100, 200, 300 bump up.