Multifamily Data Science and Optimization
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Welcome to the Old Dawg’s REI Network, where cash flow is king. Real estate investing as a means so you can enjoy your retirement dreams. This is the show where we cut right to the chase. No sales pitch, no long monologues, just simple how-to real estate investing advice so you can earn the passive income you need to enjoy your retirement today.
Now, your host and chief Old Dawg, Bill Mannassero.
Bill: Welcome to the Old Dawg’s REI Network. I’m your host, Bill Mannassero, and this is a show where 50-plusers and anyone else who wants to join us, gets solid, no-sales-pitch real estate investing advice to help generate real cash flow. This podcast airs twice weekly on Mondays and Fridays and if you aren’t already a subscriber, go to iTunes, type in Old Dawg, spelled D-A-W-G, find our podcast, and subscribe.
We have a great show ahead for you here. We’ve got a very interesting guest who has a great background, a very techy-oriented background, and just has applied her whole thought processes and really, this is sort of almost a scientist-type of an approach to real estate investing and here name is Anna Myers.
Anna Myers serves as Vice President at Grocapitus, a commercial real estate investment company in the San Francisco Bay Area funded by Neal Bawa. You’ll recognize his name because he’s been a previous guest on the Old Dawg’s REI Network Podcast.
She applies her 20-plus years of experience in technology and business to locating, analyzing, and acquiring commercial properties in key markets across the U.S.
As the lead underwriter of the company, Anna also teaches deal analysis for MultifamilyU, an apartment investing education company also founded by Neal, both via monthly webinars, as well as quarterly MultifamilyU bootcamps.
Anna Myers also cohosts two real estate investor Meetups in the Bay Area with over 800 members. She participated in equity raises with her company of $8.5 million for multifamily acquisitions in 2018, resulting in over 500-plus units purchased.
In addition, she’s an Airbnb super host—there’s something I want to talk about, I’m an Airbnb guy—in two markets in the U.S.
Well, Anna, welcome to the Old Dawg’s REI Network!
Anna: Thank you so much, Bill. It’s so great to be here. I’m really excited to be here with you.
Bill: We’re excited to have you. You have just a great background and Neal is a guy we greatly respect as well. But you’re bringing kind of a different angle to things we’ll talk about as we start to get into it.
Bill: Yeah, I thought maybe first you could just give us a little bit about your background. How did you even get into real estate and where did you come from?
Anna: Sure. I live in the San Francisco Bay Area. I was born and raised in Southern California, in the Los Angeles area, and I am the youngest grandchild of a commercial real estate maverick that, you know, my grandfather was in Southern California. He moved there during what he perceived as the real estate boon and opportunity and he started flipping houses in the ‘40s and ‘50s. He really didn’t have any money, so that’s how he started to generate his wealth and he became a self-made millionaire through real estate and worked his way up and eventually had a commercial real estate office and was buying and building commercial properties, such as he would, for example, buy walnut groves and orange groves in the San Fernando Valley and build shopping malls on.
So, I grew up with that as my foundation. My father is also an architect, my uncles were also in the business, all of my cousins, everybody was in the business, but I was the youngest grandchild and my grandfather died when I was very young. He was a fairly young man. He was in his early ‘60s. I didn’t know him very well and everybody else kind of had that business under wraps. It was the fabric of my life, the background of my life, so I always had confidence in real estate, which I think is important, and I knew that it was a vehicle for wealth because my family’s wealth was based on my grandfather’s efforts. Which, again, he came from nothing to a self-made millionaire in that regard.
What I did though, is I did not go into real estate when I broke off and went to college. I moved to the Bay Area, and I actually went into the tech world, and I’ve always been a problem solver. I loved puzzles and all that type of stuff, so I became a programmer.
Bill: Really? Wow.
Anna: Yeah. So, layered into that, as an additional aside, is that I had a child very young. So, I was a teenage parent and I was a single parent. So, I was a college student that was a teenager and had no income to help from the father, so my additional impetus to become a programmer was to figure out—again, problem-solver—how do I make the most money on an hourly basis possible and still be around my child?
I figured out that at that time, by taking a couple of programming classes, I could make $45 an hour two days a week and then be able to put myself through school and take care of my child. So, that’s what I did and went through UC Berkley and put myself through graduate school and had a very successful career in IT. Went from a programmer to systems architect. I was working in large corporations, leading huge teams of programmers and designers. I have a very strong visual eye, so I’m kind of a science and art-type person, so I became the UI architect for huge portals at Sybase and PeopleSoft, that type of thing.
Then what happened is in the year 2000, IT crashed. There was a tech bubble that crashed in the year 2000 and at that time, I was married, with my first husband, and we both were in IT and it really hit our household very hard. I realized, we are overinvested in this IT world. They wanted to pay me a third of what they had been paying me and I was like, “No, that’s not going to work for me.” I did what any reasonable person would do, and I started a photography business in the San Francisco Bay Area.
Bill: [Laughs] That’s a big difference there.
Anna: Yes. Yes, it was a big difference. Now, I had always loved photography. Again, I’m a visual artist and because I’d become a parent so young, I couldn’t be a photographer because I had to put all of my energy into creating income to just survive. That was a great choice, so I felt like I had done a great job of that and I will always be a programmer as well, but I had been doing photography on the side all these years and everybody was always like, “Oh my god, you’ve got such a great eye, you should be a photographer.” I was always like, “I can’t afford to be a photographer. Do you know how much money I make in IT?”
That story wasn’t necessarily true anymore because the salaries in IT were just shredded. I said, “Well, maybe I can be a photographer,” and at that moment, digital photography had become viable because Kodak and Cannon had partnered and created this digital camera that you could actually start doing digital versus film. Now, I had been shooting film for years, but I saw this as a way in.
If I started a digital photography studio with my background in computers, I would be ahead of the old school photographers that really didn’t understand computers. That was kind of how I leveraged myself into the photography world.
I then ran a photography studio. For 18 years in the San Francisco Bay Area, I had a 1,500-square-foot studio, all digital. I focused on portraits and people, because I love people. Babies, children, you name it.
An interesting thing happened though, what happened is that I realized that business, the photography business, is a terrible business model, even though I was very, very successful and I had employees, etc. The problem is, it doesn’t scale. All they want, they want my eye.
So, I started realizing that there was no retirement scenario that was good. No matter how hard I worked, what happened is, the government, the taxes took all my money. I would have a fantastic year and the government would say, “Thank you very much, you made us so much money this year.
I said, I got to figure out, first of all, how to take care of my taxes and what did I resort back to is real estate. I realized the benefits of real estate were helping me solve my tax problem. So, I started investing in single family and land and some different things that I got into and in the process, I solved my tax dilemma, so my taxes became much more manageable because of the benefits of depreciation that real estate brings to my tax basis.
I was like, that’s good, and that’s when I also realized that this model doesn’t scale for photography and I needed to find a way to go real estate full time. Even though I loved photography, but again, there’s nothing that says I can’t be a photographer. My studio is no longer around, but that doesn’t mean I’m not a photographer. I’m still a photographer. No one can take that skill away from me.
But my goal is to be able to be a photographer on my own terms and have a retirement, which photography as a career could not give me. Again, not a good business model.
So, real estate is what I determined was scalable and was going to give me the life I wanted and the retirement I wanted, and I could still be a photographer.
Then I went back to using my tech skills, so now I’m like, all right, how am I going to leverage into real estate? Yes, my family has a background in real estate, which gives me confidence as an entrepreneur to pursue this, I know this works, but how do I leverage into the space? So, I set a five-year plan to educate myself and I’d leverage my technology background into real estate, and that’s been a huge boon for me.
Bill: That’s great, that’s great. Now, you have continued as an investor, continuing to buy properties or are you investing in real estate in other ways?
Anna: Well, yes. Here’s what’s happened: My husband and I have a portfolio, a small portfolio, and we were actively engaged in pursuing that and again, I’m all about efficiencies. Problem-solver, so always trying to figure out how to get there in the best way. I realized that the way to get there the fastest is by scaling big, which is going into multifamily.
Currently I have a small portfolio on my own with my husband and then I have scaled into multifamily, again, using my tech skills, I brought value to a person, Neal Bawa, who needed an underwriter and so I volunteered at first, not realizing what was going to come of this volunteering, but I dedicated myself to say, this person knows a lot, I’m going to learn a lot from him and so I’m going to volunteer for this project that he’s asking for. I was a bootcamp student at the time and volunteered to write a deal analyzer for him, because I’ve got a financial programming background. He needed somebody to do that, so I offered, as well as other people. I let him know my background story about my decades-long as a systems architect that worked with multiple programmers managing teams that were remote worldwide.
And he said, “Great, you’re going to be my team lead.” I was like, “Uh, okay.”
Bill: [Laughs] Awesome.
Anna: So, I’m running this volunteer group of people that had quite a variety of skills. Some of them not much skills in terms of creating this deal analyzer, but I did what I know how to do, which is manage groups of people and deal different personality complex and get people on track and get something delivered.
So, I was emailing with Neal to keep him updated of the progress that we were making and the challenges we were facing. After about two weeks of email interactions, he emails me back and he says, “I don’t care if this deal analyzer ever gets made. I would like to work with you. I like the way you think. I like the way you solve problems.”
We started. He continued to give me some additional projects to work with and then offered me a job working with him full time in his company.
At that point, I had been cutting back at the studio actively, you know, from five days to four days to three days over the course of the year, so I was increasing my real estate, decreasing my photography. At that point, when he offered me to work full-time with him, I closed my photography studio and jumped all in.
Bill: Wow. Wow. Whatever happened to the analyzer, did it get completed?
Anna: It did get completed, yes.
Bill: [Laughs] This is like you’re leaving us hanging here!
Anna: No, it did get completed. The version one went out and it is part of—it is included in our bootcamp and I actually teach underwriting and I teach using that analyzer on a monthly basis and in fact, our version two of the analyzer is coming out this week for our bootcamp students.
I have continued to pursue the analyzer and have reached really quite stellar heights in what the analyzer can do. So, yes, we have pushed it and pushed it and it’s been a great—it’s kind of like my partner in crime. It’s what has launched me into this field and again, if I didn’t have that technology background, I’m not sure how I would be adding value to be able to first volunteer and then find my way.
I started, he offered me a job as an acquisition specialist. I continued to prove my worth, not only in underwriting, but given my entrepreneurial background, I bring a lot of skill sets with me, so he started out saying, “Well, you can do this, and you can do that,” and I started taking on those tasks as well. In a matter of months, he made me the Director of Acquisitions, and as of a week ago, he made me Vice President.
Bill: Wow, congratulations. That’s awesome.
Anna: Yeah, it’s been about a ten-month process.
Bill: [Laughs] Man! That’s impressive.
Anna: Yeah, but you know, I was President of my own company for two decades. I had my own S-corp, my own LLC, so I think I bring a lot of business acumen to the arena and was able to take on a lot of things that in a growing business needed to be done and I had the skill set to do it. Besides being a very effective underwriting, there’s a lot of other things.
Again, that visual artist’s eye comes in very handy. I work with the marketing team and I develop the webinars and I develop the investment summaries and have brought, I believe, a whole nother level of brand to what we do because I’m a real stickler for things looking fantastic.
Bill: That’s neat, that’s neat. Wow. That’s a very impressive story there and definitely, I mean, you have a—usually you don’t have the right brain and left brain working! I think Neal is all, like, you know, [laughs], he’s all tech. He’s an engineer through and through, you know?
Anna: Yeah, he’s the engineer through and through, but he does appreciate the artistic. He knows what’s supposed to look good, so he appreciate that parts for sure.
Bill: Oh, yeah. That’s a great blend, to be able to bring those skills into the fray. I mean, that’s wonderful.
Acquisitions is huge. That’s a big area and at this time in particular because I know four years ago, five years ago, the market was very different.
Bill: And trying to find those great deals was actually pretty easy, but it is a very different market. What have you seen that’s been challenging and how are you dealing with those challenges?
Anna: Well, we have a really interesting model. Again, Neal and I, we approach it as data scientists, so we study markets. We’re based out of San Francisco Bay Area, but we don’t invest in the San Francisco Bay Area. We invest in markets that we hand select and we review our markets every quarter, so we mash up the data from various sources, paid and free, that provide information on jobs and population and employment, median household income, all these various metrics about cities and metros.
I mash them up into a spreadsheet and we analyze what markets we want to be in and where we want to be focused in. We’re also looking, of course, at cap rates and the valuation of real estate. We don’t invest in places where the cap rates are too low, because there’s just not enough cash flow that you’re going to generate when you buy there, and we don’t invest in places where the pricing of houses is too high above the economic engine that is supporting that metro.
Bubble cities, like for example, Denver is very overvalued right now in terms of real estate. Areas like Tampa are getting a little high as well. We’re always looking at that valuation as well.
Using these methods, we’re focused on markets that are going to be producing great returns for our investors.
Anna: The other thing that’s interesting in our model is because we’re technologists and we bring a lot to the game in terms of analyzing markets, as well as the way we operate our assets once we have them, we bring a lot of technology systems and processes to running that asset.
There are operators out there, people that are finding properties that need money to close on the deal and they not only want our money, our investor money, they want us as equity partners on the deal, but they want us because of the efficiencies that we bring in running the business. They want to partner with us.
People that are familiar with syndication, where you’re using other people’s money to buy an asset, that’s called syndicating, well, we consider ourselves to be like a syndicator of syndicators because syndicators are coming to us, so we’re no longer necessarily going out and actively finding deals in those markets. I have people bringing deals to me that they’ve either got under contract or about to get under contract. I probably see on a slow week, about three deals a week. On an average week, five to seven deals a week.
These are deals, and the first thing I’m going to do is look at the market and look at the address. We also very carefully scrutinize the neighborhood that the property is in. Even if it’s in a great metro, it might be in a bad neighborhood of that metro.
We’re in an extremely fortunate position that we’re able to cherry pick some of the best deals that are being put in contract in the United States because I think people really respect our brand and our discipline of data science.
Bill: Maybe you can move into that area a little bit, too, and that’s something that I’m very much impressed with Neal, especially how he was finding tenants.
Bill: The story about his Chicago property that was not in the best area, and yet he was able, by using virtual assistants and a lot of other methodology to bring this massive group of tenants to at least be considered for this property. I was just really impressed with that. Maybe you might want to zero in on sort of that optimization part.
This is something that I notice with a lot of folks that own properties, too, is because it’s a little bit slower finding properties, focusing in on the ones you have to sort of maximize out the cash flow and the return and value is really key right now.
Anna: Yes, I agree. We are very focused on systems and processes and that’s really the way that we optimize our real estate returns to our investors. It’s also something that I’ve always been focused on for my personal portfolio. Something I think we may touch on later, I’m going to talk about the systems and processes, but one of the objectives for me, to create these systems and processes, is so that I can live wherever I want to live and virtually be able to manage these systems and processes. None of these require me to be physically in the room with somebody, which is very important to me and the way I want to live my life.
Neal, because again, we’re in California, all of our properties are in other states. These are some of the things that are very important to us. One of the main things that’s really important is you need to facilitate team communication. If you’re not in the same room with people, how do you get things done? We use technology extensively to help us with that.
Some of the key applications that we use for team communication, we use an application called Slack, which many people might be familiar with and some people may have never heard of before. It’s kind of like group texting on steroids, which doesn’t sound very interesting, except the thing is, if you think about text messages, when you’re on a group text, if you want to find something, if you’re like, “I know somebody said something. I’ve got to find it in my text,” it’s so hard to find it in a text message.
Bill: Oh, yeah. Yeah.
Anna: Well, with Slack it’s very easy because it’s very searchable. What we have with Slack is we’ve got the entire history of our project as a group. All of the communications that have gone on are searchable and we have that as an archive. It’s extremely helpful to be able to search that over months and years and find out exactly what was said or where and then you can attach documents and that type of thing.
The other thing is that it’s secure, which is very important. If we’re transmitting secure information, you can do that via Slack. That’s not necessarily a good idea over text.
Anna: Another thing that makes us able to work virtually and not be in the room with each other is our project management software. There’s a lot of them out there. We use Asana. It’s a very key part of our system.
As we’re meeting with people, as we’re Slacking people things, we’re meeting or we’re conferencing with Zoom or Skype, however we’re doing it, there are always action items that come up. Well, besides taking notes from a meeting, we actually put these items into Asana and make sure they’re assigned to somebody.
That’s a really important thing, even if you’re doing it for yourself, for your own portfolio, to have a project management system and assign yourself tasks and make sure that you’re actually getting them done.
So, how do we make sure we’re getting them done? We actually have an audit that we do every week of the project management system to see how many—there’s a person that’s assigned to do it and it’s a virtual assistant, by the way, we’ll talk a little bit about those in a minute. But this virtual assistant goes in at a random time, so nobody knows, “Oh, Monday at 10:00, Sally is going to go in and do her audit.” No, we don’t know when it’s going to happen. At any moment, you’re going to be audited.
That audit is going to show how many tasks you have open and how many you’re behind on. How many are you behind on 7 days and how many are you behind on 30 days?
Having audits really helps people stay on top of their game so that things don’t fall in the cracks. Whatever systems and processes you put together, having some source of audit to make sure things are actually getting done, is really critical. So, I just use that as an example.
The other technology we use is Dropbox, by the way, because you have to share things, right? Share files. That’s another technology we use.
Talking about how we find properties, we have a whole due diligence that we do on metros, as I mentioned. Again, systems and processes, we’re very disciplined about what we’re looking for in terms of do we have standards for the cities and it’s important because we’re using other people’s money to purchase, so we have a higher level of due diligence that is required.
We believe that better markets that have better market fundamentals will deliver better results. As the economy changes, then the markets that have the jobs, the markets that have the population coming in, those are going to better whether the storms that could come in the economy. Economies will always have ups and downs. So, they’ll be more padding in a market that has better fundamentals.
We don’t just look for cash flow because if you just go for cash flow, that market might not have good underpinnings. It could just be somebody that’s—you’re just getting a good deal on a building, but that building is in a neighborhood that doesn’t have good job potential. For now, that building has good cash flow, but the market fundamentals are not there. As the economy shifts, that cash flow could go south on you really quick. So, data science is really important for us.
Bill: Yeah. That’s great. A lot of our folks may not have the extension you have in terms of having a lot of employees. It can be assigned tasks, and so forth. It may be just a husband or maybe just a wife or maybe as a team, they’re trying to build up this real estate portfolio that will help them through the retirement years. One of the biggest challenges that many face, especially if they’re investing out of state, is your property manager being such a critical element in your success.
Bill: Some of the things you’re talking about, how can people make better decisions in terms of selecting the right property manager and the overseeing of that property manager?
Anna: Well, the selecting of property manager, you need to have a rigorous set of questions. For example, in our MultifamilyU education, there’s a set of questions that we’ve cultivated. It’s a 90-minute interview. We figure out who the four best property managers are in the area by a variety of ways. By looking at Apartments.com and seeing who is managing the properties that look to be like ours. We use LoopNet. There’s various sources that you can see, Craigslist, that you get to see who are the property managers.
We pick the top four in the city and then we run them all through the exact same interview. Again, the set of questions is very comprehensive. It’s a 90-minute interview. We put it on a spreadsheet, so we have the questions as rows and then four columns, and each interview that you do, you fill in one column for that person.
When you finish the interviews, you can look across the see the answer for each person to that question. So, it becomes really obvious who your pick is when you go to that level of voracity, to make sure that you got all your bases covered.
That’s something about how we pick our project managers. And then also, we record those meetings, so if the project manager doesn’t work out, we can not only look back at our notes of what they said, but we can listen again to the previous ones, so we don’t have to re-interview them.
Bill: When you say project manager, you also mean property manager.
Anna: Sorry, property, yes. I’m sorry, Bill.
Bill: I mean, I guess it could be interchangeable.
Anna: No, they’re not interchangeable. It’s property manager. Just was using the wrong word there. It is the property manager. Thank you, Bill.
Now, what we do once we have our property manager on board and this is whether you have your own portfolio or in our case, we’re asset managing large buildings. They have to deliver to us an MMR, which is a Monday morning report, on a weekly basis, which is important when we’ve got 200 units in a building.
But when you have a smaller portfolio, if it’s very small, you might do it every two weeks or every month, where they have to deliver certain information to you. We have an Excel tracker that we have. It’s a specialized Excel sheet that the property manager fills in all the data. The types of data that are on there—again, this is a large apartment building—we need to know the current status as of Monday, because it’s a Monday morning report, of the occupancy, all of the move-ins, all of the move-outs, all of the lease renewals, all of the leases that are not renewing, what is the status of the units that are being turned? The ones that are waiting for the maintenance to turn, the ones that are already turned.
And then very importantly, we look at the leads that are coming in because the only way you’re going to fill those vacancies is via leads coming in. Those leads come in through advertisements that the property manager has placed online, whether it’s Craigslist, Apartments.com, Zillow, all these different ways. How many leads are coming in and then of those leads coming in, how many appointments are being booked? Of the appointments being booked, how many shows are coming? If the appointments are booked, but that doesn’t mean somebody showed up to look at the property. Of those shows, how many applications are being placed? Of those applications, how many leases are being placed?
We call that LASAL, leads to appointments to shows to applications to leases, LASAL. And then we look at the ratios between each of those.
For example, if you have 50 leads coming in and of those 50 leads, you’re getting 5 appointments and of those 5 appointments, you’re getting 4 shows. Of those 4 shows, you’re getting 2 applications, and of those 2 applications, you’re getting 0 leases, well, there’s a problem going on. Somewhere in your system, you’ve got a breakdown. Where is the breakdown?
By breaking it up by this, we’re able to analyze the ratios between each one and understand, do we not have enough leads? Is there a problem with the appointments? Were the people not calling the leads fast enough because now they’re losing interest because they’re not calling them for two days?
There’s all these points where the leads to leases can break down. On a big apartment building, it’s very critical that these are addressed.
Now, on a smaller apartment building, when you’re working with your property manager, you can come up with what are the most important things that you want your property manager to convey to you. How fast are they turning the unit? When are the leases coming up? It depends on how large your portfolio is, but it is very important to work with your property manager and I still believe in assigning that property manager tasks in your project management system.
Even with my husband and I on our own portfolio, I assign him tasks, he assigns me tasks. That’s how we stay on top of it.
Project management system is critical, even with your own personal portfolio to make sure that you are setting goals for yourself and setting tasks and getting things done.
Bill: Right. That’s key. Again, trying to manage all these processes, what early on did you discover sort of may be your biggest mistake? Something that you’ve learned from though. I don’t look at mistakes as negatives at all. I think that’s a great part of the education process, but you learn from and sort of reengineer to make things better the next time.
Anna: Well, I guess I could take that question in two ways. One is on my own personal journey and one is looking at the portfolio that we’re managing now and what I was just referring to with the large apartment buildings. One potential mistake in terms of the apartment buildings is trying to slam technology in too quickly with a property management system that is not used to it. You may need to take your time. It may be several months to adapt to this type of a system. Instead of trying to force a system in and when you’re facing a lot of resistance.
You have to work together as a team and understand that sometimes things will take a little longer to adapt, so you can achieve your goals better by understanding the proper timing of how to implement it.
Then in terms of my personal portfolio, I would say that one of my larger mistakes that I would change and make things happen earlier, is by not partnering earlier. I think that I was feeling like I should just partner with my husband and that we should just use our own money and that that was the safest and best way to proceed.
What I learned about scaling is, if you truly want to scale, then you need to partner with people and potentially join together, join resources together in like a joint venture with other people to better to buy a bigger apartment building with two or three people coming in, versus only buying what you can afford to buy and buying a single family, because that’s the money that you have.
I’d rather be a piece of a bigger pie than full owner of a very small bit.
Bill: Right. Got it. Yeah, it’s true, especially when it is a big chunk. You also have the advantage of having a lot more people sort of in that project.
Bill: So you don’t have to do everything yourself.
Anna: Yes. I think it’s really important and I think that it’s a mind shift and I think if I had had that mind shift earlier, I would’ve gotten a lot further. It’s something I really would want people to encourage. They don’t have to buy big apartment buildings that are 200-unit apartment buildings. But instead of buying single families you are now able to join together with two or three partners and buy a 25-unit or a 40-unit, that’s going to scale a lot quicker and the economies of scale with multifamily are just staggering.
If you have a tenant leave, well, if you’ve got a single family, you’re 100% unoccupied. If you have a 20 or 30-unit and a tenant leaves, you’ve got a lot more padding. You also have a lot more control of the value of the building, if it’s a multifamily, because of the way that commercial buildings are valued, the way that the property is evaluated, how much it’s worth, is based on the net operating income, which you control as the owner.
Whereas if you have a single family home, the value of that building is based on how much your neighbor sold their property for.
Bill: Right, exactly. Well, looking at sort of the other side of the coin, too, what things have you done? Maybe I’ll take this more from a personal standpoint in your portfolio that really worked well and is working well and you’re looking to do more of it?
Anna: Sure. Well, I had something that we did that I think lends itself to the lifestyle that my husband and I wanted to create, which was we wanted to not have to live in the city where we worked. We wanted to be able to sample different cities and live in different places. Our kids were all out of the house or heading out of the house at that point, and we had a large house in the Bay Area that was too large for the two of us, now that the kids were all going off to college. So, we made the decision to move out of that house with the intent of selling it, but here’s what we did.
We moved out of the house, which was a big ordeal, as you can imagine, to move out of the family house of 16 years, downsized into a rental in the same city, because we both still had jobs that we needed to be close to, physical jobs, and we rented out our previous house. We didn’t sell it right away, we rented it out. We rented it out for two years.
The key here is, we then had the tenants move out and put it on the market. Now, what we had achieved at that point, is we had taken our primary household, which we had more than 500,000 in equity, okay? We wanted to keep the 500,000 in equity, but we wanted to be able to leverage the money over that 500,000 into a new asset instead of paying taxes on it.
Because we had done this two years of renting, we had created a hybrid asset, where it was our primary home, as well as an investment vehicle. The IRS viewed it as an investment and primary, so we were able to keep the $500,000, once we sold it, and then the balance over the $500,000 that was the profit, we were able to leverage into a 1031. We bought a duplex in Charleston, South Carolina, which is an Airbnb to this day, and it was a very successful transition for us.
When we were renting out the house and we were making $600 a month on that rental after the mortgage was paid. Okay?
Anna: Now, with our Charleston duplex, which I manage remotely as an Airbnb, we make $6,000 a month.
Bill: Well, that is awesome. That’s something that I just wanted to touch on a little bit, too, is as real estate investors, many of us are just buying a place and renting it out, just sort of the traditional one-year lease.
But you made that decision to go Airbnb on this property. Did you do that initially when you bought the property?
Anna: We did.
Bill: Okay. You were looking at it as hey, this would be a great Airbnb.
Anna: Yeah, and we actually bought this particular property because it was zoned correctly for short-term rentals in Charleston, so it was legal. That was important to us. I knew I wanted to do an Airbnb model, but it was important to me that we did it all correctly. We’re licensed, it’s zoned, the fire marshal has come through and checked. We pay our taxes as a business.
Now, what’s happened since then in Charleston, is there’s been new regulations that’s cracked down on short-term rentals and all of the illegal places have had to close down, but we were always legal, so there’s no problem with us. All of our competition has closed down, which is great for us.
Bill: Wow, wow.
Anna: Yeah, so when you do things, if you are going to do Airbnb or short-term rental of some format, you really need to understand the rules and the laws and ideally put yourself in a city where you can be grandfathered in, because laws are changing around Airbnb short rentals.
Bill: Yes, big time.
Anna: You need to really be careful. If you buy there, you need to make sure that you have multiple exits. Along those lines, even if we hadn’t been able to run an Airbnb, which I knew we could, but say the Airbnb hadn’t worked out, the property is in a location where there are college students all around. There are four colleges in downtown Charleston, so we would’ve been able to rent out for $1,000 a bedroom, and it would’ve more than covered our mortgage. In fact, we would’ve replaced that $600 a month and more.
I knew that my worst-case scenario, I was still good in terms of my mortgage, but my best case scenario is what’s been happening since 2016, which is an Airbnb business that’s been a great money generator.
Bill: That’s great. What personal skills and gifts do you think have been most advantageous in sort of being where you are today?
Anna: I think I’d go back to the problem solver in me. I’ve always been a problem solver. I love solving problems. I’m very detail oriented. I’m tenacious, I don’t give up on things. I’m always trying to figure out, if you can’t solve it that way, can I solve it a different way? And I always try to bring grace to whatever I do. I think when you’re working with people, you need to be gracious. You need to bring the human element to it as well. So, I think problem solving and graciousness.
Bill: That’s awesome. Probably makes you a good Airbnb host, as well.
Anna: I think so.
Bill: [Laughs] That’s great. Well, a lot of our folks listening are people that are 50 years of age and older. Some are approaching retirement, some are in retirement, and there’s that concern that we may not have what we think we have in terms of our retirement funds or just whether or not maybe the longevity that we were hoping for, because people are just living longer, too, and what happens if there’s a major medical expense? Just a lot of issues and that it brought a lot of people into the space of real estate investing as a means to be able to fill that gap and to be able to provide the kind of retirement that they really want to enjoy in their retirement years.
What advice would you have for them? These folks that are listening that are either considering it or maybe they’re already in real estate investing already, that can really make it something that works well for them.
Anna: I think there’s two paths that people can go down and sometimes people don’t realize there’s two paths. I think that some people should do one, some people should do both. The two paths are passive investing and active investing.
Some people just don’t think that they’ve got the time or they’re not passionate about real estate, but they want the advantages of real estate and the depreciation, and they can get that through passive investing, putting their money into syndications or lending their money to others. Again, they need to vet those people carefully, but they can be a passive investor and be getting returns of 10% cash-on-cash per year, 20% average annualized returns, and more. That is always an option for people.
Again, you should always vet the group that you’re going with to make sure that they’re doing their job correctly.
The other way they can go is being an active investor and that would be acquiring your own stuff or working with teams and doing it as a group.
I would encourage people to go out and educate yourself. I think that local REAs are a great source of partnering. If you want to get out there and meet other people that are doing things and try and find people to work with or at least learn with. Even if you’re not comfortable with partnering, when you team up with other people and learn together, it can help push you.
Bill: That’s true. You’ve got that person that’s kind of there on the side, just saying, “Are we going to do this? We going to do this? We’re going to move?”
Anna: Yeah, there’s an accountability thing. You can join masterminds. There’s lots of masterminds that you can join online as well that provide education, as well as accountability, so everybody in the group is really pushing themselves and understanding their strengths and weaknesses and encouraging each other.
Really, I guess, put yourself out there. I’d say to facilitate change, sometimes you need to get uncomfortable. It was not comfortable for my husband and I to give up our comfortable house, but it created a freedom for us that was astonishing.
Now we just feel like the sky’s the limit because we’re no longer tied down. Sometimes you just need to get a little uncomfortable to give yourself the space to grow.
Bill: Yeah, great advice. Your business, it sounds like is just going crazy. You guys are going gangbusters here and you’ve got all kinds of, sounds like new projects that are coming up in 2019.
Anna: Yes, we do.
Bill: What’s the thing that really excites you about what you’re doing today?
Anna: Well, I love the scalability that we have. We have an astonishing track record. In the last 6 months, we’ve closed 750 units across 5 apartment buildings, so I’m very proud of that.
But the thing that I’m most excited about in 2019, in addition to continuing to grow that side of the portfolio is opportunity zones. We’re very focused on taking advantage of the tax offering of opportunity zone that’s very key for December 2019 and 2020, our key timeframes to educate yourself about opportunity zones and take advantage of the tax breaks that you can get by selling whatever your asset is, whether it’s art or stocks or property and putting it into an opportunity zone so that you can take advantage of the step-down tax basis of 85% versus 100% and the future value of the tax-free burden. No taxes on the capital gain of that current asset.
Bill: Could you define a little bit what opportunity zone is?
Anna: Sure. When the tax reform bill came, there was a part of it that had this section about opportunity zones. At first, people didn’t pay very much attention to it, but then—because there was so much else to pay attention to and so many changes.
But then people started saying, “Hey, look at this thing,” and what it is, is it defines a lot of areas in the U.S. that are supposed to be considered blighted, that are areas that if you invest in those areas and there’s very specific formulas of what you need to do, then you will get major tax benefits. Being the first thing that the money you bring in to purchase that, the money that’s brought in, you will have to pay capital gains on that, but potentially you get 15% discount of the capital gains you pay on that, and it’s deferred. You don’t have to pay those capital gains until the year 2027.
That’s your first. People are like, “Enh.” That’s all right, I mean, I guess that’s good.” But the big, big, big deal about opportunity zone is for that asset that you purchase. You must hold it for 10 years and then the gain that you get on that asset is completely tax free forever.
Anna: There’s no taxes that you pay on it. Now, interestingly enough, there’s over 8700 opportunity zones in the United States that have been defined, which is just an astronomically huge number. There used to be like under 100.
Now, states have indicated what areas are these opportunity zones and if you look at these opportunity zones, they’re not all in blighted areas. Some of these areas, there’s opportunity zones in San Francisco. There’s opportunity zones in Oakland. I mean, you name the city, Salt Lake City, Provo, Utah. Look at the maps and you can see. Google “opportunity zone map” and then your city or whatever city you’re investing in and find out where your opportunity zones are.
Now, there’s a lot of rules about it. For example, in order to get those advantages, you have to have bought it after it was declared, so if you already own a property that is in an opportunity zone, this doesn’t work for you. A capital transaction has to occur after it was identified. Okay?
Then I believe you have to buy within an opportunity zone fund. You have to buy it correctly so that it’s targeted as an opportunity zone fund. Okay?
And then one of the key things is you have to bring enough extra money in to add value to that building or that land. This is really key. Say that you buy a building for $1 million. The way that building breaks down is $250,000 of that is deemed land value and $750,000 is deemed the building. The way opportunity zone law works, is you now have to put an additional $750,000, equal to the value of the building, to add value to the building. You bring that in as additional CapEx.
That’s like major development. A lot of buildings, like you look at, you’re like there’s no way I can add that much money onto this thing. It’s not going to work out, it doesn’t make sense.
It’s more often going to be a ground-up development or an opportunity where there’s already a multifamily on the property, but it’s zoned that you can add an additional 40 units in the back, but it’s a significant piece of money that you need to bring into it besides just purchasing it, and that additional value has to be completed within, I think it’s a 30-month process.
So, there’s lots of rules that have to be ticked off. I believe the best way to approach opportunity zones is to educate yourself on them and then align yourself with people that are doing it right because not all opportunity zone areas are going to succeed. It’s kind of like that 80/20 rule. 80% of them are not going to succeed. 20% of them will succeed. You want to be investing in the 20% that will succeed.
Again, we approached it from a data science standpoint. We’re looking at the opportunity zones and figuring out which ones are the best ones to invest in and then we’re proceeding with those and we’re partnering with—again, here’s that partnering—we’re partnering with developers because this is going to be a project that requires a developer. It’s not just a property manager that’s going to turn the unit. This is like construction. This is major construction.
It’s not going to be easy for individuals to do on their own, but in terms of again, more of that passive investing side, which even if you’re an active investor, I recommend all active investors have some amount of passive investing going on in their life. This is a huge opportunity that doesn’t come around very often, to have tax-free money that you don’t need to 1031 out of. It’s just tax free forever.
Bill: That’s great.
Bill: That’s great. Wow. Some good stuff you’ve given us, Anna. We ran a little bit longer tonight. I told you, I hope that’s not going to be a problem for you.
Bill: But we are sort of moving into our wrap-it-up section now and this is where I ask you a series of real quick questions and you can give us your references and resources that have been valuable to you. So, if you’re ready, we can go ahead and wrap it up.
Anna: I’m ready! Fire through. Fire through.
Bill: All right, you got it. Favorite real estate book?
Anna: Currently, the Best Ever Syndication Book, by Joe Fairless and Theo Hicks.
Bill: I got it sitting right on the desk in front of me, so that’s great. [Laughs] Yeah. Favorite business book?
Anna: All right, it’s not straight business, but it’s about success, Barking Up the Wrong Tree by Eric Barker.
Bill: Excellent. Most valuable website for success? Of course, other than your own.
Anna: Bigger Pockets.
Bill: Favorite app?
Bill: All right! Yeah, definitely for you. Favorite quote?
Anna: This is something I learned from my family. They used to tell me all the time growing up and I have taken it to heart: It’s not what you make, it’s what you keep.
Bill: That is a very good quote. Our final question: If you had, let’s say, lost everything, everything you’ve accumulated, all your assets, all you really have is, maybe have a place to live, but you’ve got like $1,000 in cash. What would you do with that $1,000 to sort of relaunch your success in real estate.
Anna: Well, I’m going to assume I have a computer with an internet connection. I’m going to figure out my best market to invest in. I’m going to find partners in that market and I’m going to spend the $1,000 on marketing and schmoozing brokers and partners.
Bill: Very good. Very good answer.
Wow, we are almost at the end here. I’m sure there’s a lot of people listening that would like to find out more about you, what you do, your company. What’s the best way for folks to reach you or get info on you?
Anna: Sure. Grocapitus.com, G-R-O-C-A-P-I-T-U-S, dot com. There’s no W in that, by the way, Grocapitus.com, is where we have our apartment buildings and offerings. You can find out a lot about me there. It’s [email protected]
And I teach webinars regularly on the sister site, which is our education platform, which is MultifamilyU.com. That’s Multifamily, the letter U, dot com. By the way, we have webinars on there right now about opportunity zones that you can watch, as well as, again, I teach underwriting, which is how to analyze multifamily deals on a regular basis, and we have lots of great guests on there on multifamily and commercial topics.
Bill: Sweet. That’s great, good stuff. We’re not completely done. We have a tradition here that our guests all get to close us out with their best old hound dog howl.
Anna: Oh, my goodness!
Anna: Are you going to do it with me though?
Bill: Oh, of course not, no! [Laughs] I’m howling all the time here, so, people are sick of my howl. But you got an opportunity here to set a new precedent for our guests and just the best old hound dog howl you can give us.
Anna: All right, here we go, one, two, three [hound sound].
Bill: [Laughs] That was great! I had to pull my headphones off here. [Laughs]
Anna: [Laughs] That comes from being a children’s photographer. I’m used to making all kinds of crazy noises to make babies smile. That’s the skill set I will never lose. [Laughs]
Bill: I love it! Oh, that is so great. That’s so great. Well, Anna, it has been awesome having you on. Thank you for coming on.
Anna: Yes, thank you so much. Great spending some time with you.
28.2% Projected AAR · 2.3x Projected EM · 1031 Exchange · QRP · Solo 401K · SD-IRA
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