Learn a Stoic's 8 Rules for Superior Value-Add Multifamily Returns
Guest Post by Paul Shannon, Fund Manager at InvestWise Collective
At The LineUp, we strive to maximize the value for readers. To this end, we will, from time to time include insightful guest posts by operators and investors from our community of real estate entrepreneurs.
Paul Shannon writes the main post in this week’s newsletter. He is the Owner and Principal at Redhawk Real Estate, a value-add real estate investment firm operating in Ohio and Indiana. Paul is also the Fund Manager for the Investwise Collective, a RE debt and equity fund.
Paul has a wealth of entrepreneurial experience managing multifamily value-add projects, and today he shares some valuable tips. Enjoy, and we’d love to hear from you in the comments!
Paul Shannon writes:
I’ve had the opportunity to reposition multiple 40-plus unit apartment communities with sub-60% occupancy, reducing vacancy to close to zero.
Here’s how I'd approach the next one to be successful in any part of the cycle.
Start by buying right. THE biggest risk to your capital is overpaying. Your eyes should pop out of your head when you pencil out the deal on a scrap pad, cause this could be "the one." A wide margin of safety means you can screw up a lot but still win. You won’t find these deals listed on-market.
Talk to the residents as part of your due diligence. They’ll tell you all the bad history so you’ll know what matters most and what to fix. You'll be surprised what you learn.
Use fixed-rate debt. You’ve got enough to worry about to pull off the heavy lift of rejuvenating a tired community. You don’t need a floating rate on top of that. If the numbers work on the front, fix it and forget it. Could you make more money with a short-term floater? Sure. But you could also lose your shirt.
Watch your budget. Get quotes before you close and negotiate guaranteed max pricing. Have a defined change order process. Know when you need to step in and how you'll handle it before things get to that point.
Don’t borrow to fund the cap-ex if you can avoid it. Use your funds or raise the equity. Keep your leverage low and your skin in the game. Don’t fund cap-ex through operations either.
Be over-capitalized. Throw the excess funds in a high-yield savings account so they are earning something. It’s there, and it’s liquid if you need it. Things always come up in projects like this. Expect them, so they aren't a surprise but rather a part of the process.
Have multiple options in your business plan. Flip and sell, refinance and hold for a few years, refi and hold forever, etc. The market changes. You want to be able to change with it. You’ll be thankful you have flexibility.
I haven't found a deal like this in two years. That leads me to rule #8.
Be stoic. I'm perfectly content in saying no to an okay deal so that I can say yes to a great deal. There are plenty of investment options out there. If one strategy isn't working, don't force it. Patience is the greatest virtue of the most successful investors. Remember that overpaying is the fastest way to lose money. You simply can't pay stabilized pricing for an unstable product like these assets.
I hope to find another "ugly duck" someday to turn into a swan. The upside is great, but the greatest reward is hearing praise and thanks from the long-time residents of the community who've lives have improved, even a little bit.
Below are videos of an example of these principles in action on Redhawk Real Estate’s Foster Cove project in Evansville, Indiana.
*Before Renovation - Walk-Through*
*After Renovation - Walk-Through*
Thank you Paul for sharing your insights and the example project at Foster’s Cove!
Below are links to learn more about Paul Shannon and his real estate ventures:
Links we are reading this week:
The Real Deal - Pendry Hotel West Hollywood - From $526M to $139M in value in 3 Years
Bloomberg - Florida’s Booming Housing Market Has a Moral Hazard Problem
Wall Street Journal - Don’t Build That E-Commerce Warehouse in My Backyard
Thesis Driven - 8 Ways to Make Cities (and Buildings) Better for Families
Yahoo Finance - Grant Cardone Tells Team to Immediately Halt All NY Underwriting
The Real Deal - KKR’s Real Estate Credit Pipeline to $15B - Distress Still Expected
Become a Real Estate Tech Insider Now on Spotify!
The Real Estate Tech Insider podcast, by John Pugh and Rachel Walters is now live on Spotify. Our conversations focus on what technology and new innovations are driving developer’s returns today. Give us a listen and if you like what you hear, please give us a review!
In college hoops a women’s D2 player Lauryn Taylor of Francis Marion University pulled down 43 rebounds setting a record for both the men’s and women’s game. This is an extraordinary amount of rebounds. That is more rebounds than most teams get in a game. In other college hoops news there has been a shifting of who is in and who is out of the NCAA men’s tournament.
Teams that I like that are on the bubble include: Seton Hall, Gonzaga, Providence, UVA, and Villanova. Who do you want to be in the tournament that might be teetering on the post-season abyss?
In the NBA the Celtics continued to cruise and it truly would be a disaster if they don’t make the finals with the runaway season they have had this year. The only teams that could contend include the Miami Heat and New York Knicks(!?). Nice to see NY playing well.
Minnesota is standing tall right now at the top of the West standings. It’s great to see them doing well after the trade for big man Rudy Gobert. It is also exciting to see how well the Oklahoma Thunder are still doing this year currently in 2nd place in the West. Getting into the last 2 months of the regular season in March and April it will be exciting to follow along and see who comes out on top in the West.
From Half-Court! Links of Interest
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