Learning From Mistakes, Assembling Superpowers, Buying 740 Units In 6 Months
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Anna Myers. How are you doing, Anna?
Anna Myers: I’m great, Joe. Thank you for having me.
Joe Fairless: I’m glad to hear it, and you’re welcome. A little bit about Anna – she is a Vice-President at Grocapitus, which is a commercial real estate investment company. She applies her 20+ years experience in technology and business to finding, analyzing and acquiring commercial properties across the U.S. Based in San Francisco, California.
With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Anna Myers: Sure. I grew up in L.A, Southern California. My grandfather was basically a Maverick of commercial real estate in the Southern California area, so that was the kind of the fabric of my upbringing, was this guy that started out flipping houses, and then started buying orange groves and walnut groves, and building shopping malls. I was the youngest grandchild, so I grew up around this, all kinds of shopping malls etc. so it just was something very normal for me. My father was an architect, so a very entrepreneurial background. However, I went into programming, because the IT industry was really taking off, and I was just a great problem solver, and there were so many real estate people in my family… My dad was happy to have me go into IT, as an emerging field.
So I did that for about ten years, became a systems architect and was very successful in that career… But then that industry kind of crashed in 2000, the IT industry had a hard time. I went on as an entrepreneur, but realized I need to be careful about my future, because any industry has its volatility. So I started investing in real estate as an investor, and learned a lot of things along the way, had some bumps in the road. I started investing in single-family and small multis…
I live in California still, and I’ve used my technology background to do what I thought I could do to analyze markets at the time, but I wasn’t very good at it. I had all these massive spreadsheets, and trying to figure out the best market to be in, and analyzing houses, and it just took me a long time to learn. We didn’t have as many resources back in the early 2000’s as we do now. We never had Joe Fairless shows and the various opportunities that are online as we have now.
So along the way I’ve made a lot of mistakes, and then I started really getting my groove, in 2014. I had a short sale in the early 2000’s, so that set me back for a while. Then once I got back in the groove and educated myself, I landed in multifamily, I started volunteering to underwrite projects for a person that I was working with and learning from. That developed into a full-time gig, and then over six months we have acquired 750 units and five apartment buildings across the United States, and… I’m very happy to be where I am now, but it’s been a long road.
Joe Fairless: Well, thank you for sharing that. It’s nice to hear the ups and the downs, because sometimes we don’t get to learn from the downs from people, so I appreciate you offering that up. Let’s talk about the mistakes first, and then we’ll talk about the good stuff, just so we can learn from both. So you said you made a lot of mistakes… What are some specific ones, just so we can learn from those?
Anna Myers: Well, being that I was investing remotely, it was much harder to do in the early 2000’s. We still had fax machines, we just didn’t have as much information on the internet as we do now… So it was not as easy to do. So I ended up investing in Diamond Head, Mississippi. It was post-Katrina. I thought that it was a good market, because the houses were kind of expensive there, with like a golf, leisurely-type environment, and the rent was really good because construction people were staying there post-Katrina that were doing all of this work.
My brother, who’s a forensic architect, was in the area a lot, and he found a house for me… So I felt really good about it. Well, those elements alone aren’t enough to buy on; that market changed very quickly, because 1) there weren’t enough jobs there, and 2) a lot of people had second homes there. Most of them were second homes… So when the economy turned there, a lot of people just abandoned their houses, and the whole community just went into like a spiral. So I could not get the rents that I wanted; the rents turned into half of what they used to be, and I ended up having to do a short sale in order to save my primary house. I kind of had to make a decision, am I gonna be out of pocket $1,000 a month on this place, and only be taking a little bit of rent, or I’m risking losing my primary house.
Joe Fairless: For people who aren’t familiar with a short sale, will you just briefly describe what that is?
Anna Myers: Sure. It’s when you are in a situation where you decide not to continue owning a property, and the property is valued under the amount that your mortgage is set for. So you owe the bank more than what the property is now worth… And in order to get out of that, you can either foreclose and just walk away from it, which has a much more severe impact on your credit scores, or you can do a short sale, where you’re basically kind of working with the bank to find the best possible scenario where yes, you’re not paying them the full money back, but you’re getting market value, and hopefully it’s not a lot in-between.
Back in those times, they kind of forgave the difference, because so many people were doing short sales… So other than a seven-year hit on my credit score, I didn’t have any additional repercussions from that short sale.
Joe Fairless: Thanks for describing… I was gonna ask you what are the repercussions whenever you do one… So what does show up on the credit score during those seven years?
Anna Myers: Well, like I said, it’s not as bad as a foreclosure; I think it probably brought me down about 150 to 175 points. I was used to being 850, really high 800 scores, and so I was in the 600’s. It takes seven years to come off; anytime you’re going to apply for anything, you have to explain it, you have to produce all this paperwork… And I thought during that time – and I was not correct, because now I know differently, that I really couldn’t invest in real estate during that timeframe. And that really held back my investment career.
Joe Fairless: And knowing what you know now, if something like that were to happen to someone and they were to say “Well, Anna, I have to wait seven years before I invest in real estate”, how would you navigate that conversation to say “Yeah, actually, blah-blah-blah”?
Anna Myers: I would say “Absolutely you do not”, because I have learned the power of teaming up and the power of partnerships. In addition to that, by doing partnerships I’m able to get into larger deals, and those larger deals that are in this case apartment buildings – they’re not necessarily looking at my credit score. That is one factor if I’m being underwritten for the loan… But what they’re looking at is the value of the asset, and my liquidity, and various other aspects.
So my credit score really doesn’t matter that much, especially if I’m partnered with people who have strong credit scores. So I needed to become a team player and stop being an island as a real estate investor, and that was a big turning point in my investing career.
Joe Fairless: And I imagine – but let me know your thoughts – if people are team players going into their career in real estate investing, there will be a less likelihood of going through a big financial hit, because you’re bringing the right people along with you right out of the gate. What are your thoughts on that?
Anna Myers: I think that’s absolutely correct. I think we all have superpowers that we excel at, and we have things that we’re quite mortal when it comes down to it; skillsets that we don’t have superpowers at. And I think that when we team up with other people who have different superpowers than us, it makes us an unstoppable team, and it also just feels great.
Joe Fairless: What are your superpowers?
Anna Myers: My superpowers are that I am a great underwriter; I can see the big picture, as well as the small picture. If there is a detail in that underwriting that’s off, I’m usually the person that will find it, a mistake in a formula… Because my background is a financial programmer, I actually understand the model. So when I’m looking at underwriting, I look at a lot of underwriting for different projects, for coming in on different Excel spreadsheets. So of course I’m gonna look at the returns, but then I’m also gonna look at the underlying model to try and understand the philosophy of what this model is trying to do. I wanna understand what is the structure of the deal, what’s the structure of the partnership, how much money is going to different parties, and what is the underlying premise of the financial model, which is different for different models. Everybody’s got their own 70/30, pref/no-pref, and we capitalize back, don’t recapitalize back… There’s a lot of variables.
I love getting into the details, and I love solving problems. I think that I excel on the underwriting aspect… And I’m a people person. I’m good at talking with investors as well.
Joe Fairless: I’d love to talk more in detail about what you just mentioned, and that is looking at the underwriting and understanding — not intention, but just how they have the underwriting model set up. And you’ve just mentioned a couple examples – the structure, the recapitalization, the money to certain parties… Let’s pick one of them. The recapitalization – will you just talk a little bit about that?
Anna Myers: Sure. So assuming that a project is going to have a refinance, and that refinance is going to produce additional money because you’ve stabilized the property, you’ve increased the NOI and thus you’ve increased the value of the property, so assuming you’re refinancing and taking money back – that money is supposed to go to the investors, unless you’re using it to add on an additional block, or do something like that. My understanding is that refinance is supposed to go to the investors.
Now, what does that do to the investor that put in $100,000 and you’re recapitalizing back $40,000 of their money at that point? Do they continue with $100,000 in the project? Is their returns going forward based on $100,000, or is it based on $60,000? That’s a big difference.
Joe Fairless: That is a big difference. So you’re reviewing underwriting from potential partners where you all would bring your underwriting and the equity from relationships that you all have to partner with those operators. Is that the dynamic we were talking about before we jumped into–
Anna Myers: Yes, that is correct.
Joe Fairless: Okay, So is there something that you look for in particular with recapitalization when you partner with an operator?
Anna Myers: Well, it’s definitely a good thing for the general partners to have the recapitalization occur, because then more money is going into the partner’s pocket for the remainder of the project. There’s less of the equity investment that’s out with the investors; so more of the high is for the GP. So from a GP’s perspective, it’s a good thing. But I’ll tell you a new scenario that I’ve started thinking about, and I’m not sure how it’s all gonna pan out, where it may be something not good for the investor, and that’s with opportunity zones. With opportunity zones, there is a timeframe that’s at 2027, where the people that brought in capital gains – they need to pay those capital gains. Either they’re paying it at 100%, or they’ve been stepped down to 90% or 85% of their basis… But some amount of capital gain they will be paying at that time.
Now, many of these funds are talking about doing a refinance to give money back to the investors, so that they have money readily available to pay those taxes. Well, are we recapitalizing back their money? Do they now have less money in, and how does that affect the amount of money that’s going forward? …that we’ll hold it for ten years, and then the capital gains on that opportunity zone project are tax-free to them.
I think a lot about opportunity zones these days, because we’re very invested in it. This is a very specific refinancing situation, because you’re trying to solve a problem in the structure of the deal, and is very specific.
Joe Fairless: When you take a look at underwriting from operators, and you mentioned if there’s a mistake or an issue with some aspect or detail of it, then you’ll likely find it because of your financial programming background… What are a couple mistakes that you’ve seen in the past?
Anna Myers: Well, this is the most common thing, where there is a formula that has been left over from some previous thing that was removed, and a hardcoded number was put in in its place, and then that hardcoded number is just copied across, so somewhere you lose the formula. I’m always looking for that, and it happens quite often.
Joe Fairless: Will you repeat that, so I make sure I understand?
Well, then the person later correctly changes the insurance amount on the other tab, but it doesn’t get changed in the proforma, because it was hardcoded in… So you start getting these places where you’re changing things and it’s not changing in the proforma, so your numbers aren’t correct.
That’s a very common mistake, because it’s such a rookie way to do Excel spreadsheets, and not understand that you never touch the formulas, you only touch the input areas.
Joe Fairless: What else?
Anna Myers: Let’s see… There can just be formulas that are just incorrect. I’m always having to dig into the formula. It’s usually, again, just somebody changed a formula in a previous thing to make it correct for the specific project that they were doing… And then the next project they forgot that they did that. So what I always do to avoid that is I have a clean version of my spreadsheet and I always start with the clean version. With that one, all of the formulas are pristine. So… Most of them have to do with that.
But I’ll tell you one of the things that I see that varies probably the most between. It’s not necessarily an error, but it varies the most in between the different Excel spreadsheets I see, which is how the partnership structure is handled, and the returns to the general partners.
We all are familiar with the different ratios – 70/30, 75/25, 85/15; those all work great. But what is really different is what happens when a pref is introduced.
In the case where you have, let’s call it a 70/30, 8% pref, we’re giving the investor the 8% – they get the first 8%. Then the general partner and the limited partner are supposed to split afterwards the additional money. But what happens for the life of the project? Is there a catch-up term where the general partner is caught up so that they’re making their full 30%? Even though they gave pref to the investor, there’s a catch-up at the end or as they’re going along. Now, that is our favorite type, because then the general partners are certainly making their fair share of the pie. If you are doing a 70/30 with an 8% pref, if you’re not getting a catch-up, instead of making 30%, you’re more making 18% of the project… And it’s a huge difference. A lot of syndicators that I talk to don’t understand that; they’re like “Catch-up? What are you talking about?”
Of course, not all projects can support catch-up, because you have to have a lot more available returns in the deal. Once you put a catch-up in, that could kill the whole deal, because there’s not enough in there.
Joe Fairless: Based on your experience underwriting deals, what’s the most challenging aspect of the underwriting prospect?
Anna Myers: I think the thing that I struggle with the most is the market benchmarks. Because I invest in so many different markets, and I really wanna be correct, and it’s so hard to be correct 100% of the time when you’re looking at market benchmarks… But understanding – you’ve gotta plug in the right data. You have to go through a lot of due diligence to make sure that your rent comps are correct.
If your rent comps are not correct, your whole deal falls apart. Once you buy the place, and you can’t get the rent — you thought you could get those rents, and it turns out you can’t, that’s a terrible situation to be in. Then just the various expenses; you don’t get those expenses right. I think that’s a really critical part of underwriting, and it’s not easy. It sounds like it should be easy; “Oh, I’ll just get it from my property manager.” But you need to get it from multiple sources, and then you need to keep verifying that they are correct over time. And if things are happening at your property, you need to be an instigator in terms of asset management. You need to watch the underwriting after you’ve purchased the property, to see “Are the trends going the way that you thought it would go?”, and if they aren’t, you need to get in there and address that issue by bringing in more leads, by lowering the expenses, by making sure that you’re accomplishing what you’ve set out to do.
Joe Fairless: You mentioned just a bit ago you need to get the comps from multiple sources… What are those sources?
Anna Myers: Well, the three online sources are Apartments.com, and Rentometer, Craigslist, so various sources like that. Then multiple property managers, not just one. And then the last one, which is very critical, is actually calling the competition, and walking the competition, and understanding what the rents are at those places, and then experiencing what that means. When you actually walk that unit, and you’re like “Okay, this is what $800/month is, for this market.” So you have to get personal about it, and you have to actually make the phone calls and do the shopping to your competition in the area.
Joe Fairless: Based on your experience, what’s your best real estate investing advice ever?
Anna Myers: Don’t skip out on a full demographic analysis of your market and neighborhood. We believe the cashflow may be king, but the market fundamentals are really the emperor. If you have strong market fundamentals – the jobs, population, median household income – then you’re gonna weather the ups and downs of the market, your asset will weather those ups and downs much better. So don’t just look for cash; try and find good deals in markets that have strong fundamentals.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Anna Myers: I am.
Joe Fairless: Best market fundamentals that you look for?
Anna Myers: Population growth, reduction in crime level, median household income… These are all things we look at from 2000 to 2017; we’re looking for specific numbers of growth for each of those. Job growth and median house or condo value growth. Then we get down to the neighborhood level once we have the actual asset and we’re looking for a median household income that’s between 40k and 70k, we’re looking for a diversity that’s about 75% with lots of different types of slices making up those 75%. Median rent – we are happy with $700 to $1,000 in median rent. And unemployment should be no more than 2% higher than the city’s unemployment rate. So whatever the unemployment rate is for the city, you don’t want your neighborhood unemployment to be more than 2% higher than that. Poverty level – a poverty level under 20%, but preferred under 15%.
Joe Fairless: What’s the diversity of 75%? Diversity of what?
Anna Myers: The pie. A diversity that looks at the make-up of all the potential pool in that neighborhood that could be rents for you – we like to see a lot of diversity, versus just one type of person.
Joe Fairless: In terms of ethnicity?
Anna Myers: Yes, ethnicity.
Joe Fairless: Got it. So no one ethnicity makes up more than 75%.
Anna Myers: Yeah, and we like to see a lot of different slices within that pie. That way you’re able to have a broader tenant base; it’s gonna be appealing to more types of people, versus if you just have a majority of one slice of pie – then that is going to be your tenant base, and you are reducing your attractiveness to other types of people.
Joe Fairless: Best ever book you’ve read recently?
Anna Myers: I have to say The Best Ever Syndication Book. It is still one of my favorites.
Joe Fairless: Well, that means a lot coming from you and your underwriting background, that’s for sure, so I appreciate that.
Anna Myers: I am a big fan of Joe and Theo’s book.
Joe Fairless: Best ever deal you’ve done?
Anna Myers: I turned an investment that was generating $620/month into $500,000 in tax-free money, plus a replacement investment of $6,000/month.
Joe Fairless: Okay, say that again, please? It was generating $600/month, to $500,000 in —
Anna Myers: $500,000 in tax-free money.
Joe Fairless: Tax-free money, so you did a 1031…
Anna Myers: Yes, a 1031, but it was a 121 exclusion, so the balance above the 500k was invested into a historic duplex in downtown Charlestown; it’s a legal Airbnb, and that generates $6,000/month after expenses.
Joe Fairless: Huh! What is a 121 exclusion?
Anna Myers: So I sold my primary house… What we did is we had our primary house in the Bay Area for 16 years. We moved out of it because all of our kids had gone to college and we didn’t need such a big house. We rented a house and we rented out the big house for two years. At that point – that is the key moment when you need to tell the tenant “Thank you for staying, your lease is up”, and then you sell what was your primary home; it has been converted into a hybrid, where it is still your primary house, but it is now also considered an investment vehicle by the IRS… So you’re doing a 1031 on the amount of equity over $500,000. I’m married, so that’s why it’s $500,000; it would be 250k for a single person. That’s the 121 exclusion. And then 1031 the additional equity to avoid paying tax on that, into a like-kind replacement.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Anna Myers: Being too nice when I bought that Diamondhead, Mississippi. I should have walked away from that one at closing. There were some signs at closing that I didn’t pay attention to, and I was just too nice and bought the house anyway.
Joe Fairless: Best ever way you like to give back?
Anna Myers: I love teaching. I teach free webinars weekly at multifamilyu.com, I teach underwriting, I also co-host a lot of webinars with cost-seg people, and lenders for multifamily, CPAs… I like teaching people how to invest in apartments.
Joe Fairless: And how can the Best Ever listeners learn more about what you’re doing?
Joe Fairless: Anna, thank you for spending some time with us and talking about your experience, how you got going, your super-power… I picture you with a cape, by the way, whenever you’re talking about your super-power in underwriting, and some advanced things to look for, like the recapitalization, and some other things like the claw-back…
Anna Myers: Yeah, the catch-up.
Joe Fairless: The catch-up, sorry.
Anna Myers: Yes, claw-back and catch-up – those are two different things.
Joe Fairless: And also, when you look at different markets, as well as neighborhoods… I really appreciate you spending some time with us. I hope you have a best ever day, and we’ll talk to you soon.
Anna Myers: Thanks, Joe.
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