The Real Estate Preacher Podcast

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Transcription

If you’re looking for honest, real world, no BS advice on how to create income, build wealth, and achieve true freedom with real estate, your in the right place. Welcome to another episode of the real estate preacher podcast, Joe, where your host, Randy Lawrence shares with you, his experiences and strategies from over decades as a successful real estate investor. This episode is sponsored by prosperity capital partners. Learn more at prosperitycapitalpartners.net. Now onto the show.

Hey, I want to welcome you to today’s show. We have an exciting episode. We are going to be talking about construction and you’re thinking, well, praise the Lord. Why is construction exciting well because when you add value, that’s done by construction in many ways. Now there’s other ways. And we’ll talk about that in another episode, but we’re talking about being an operations assassin, and realistically, you’ve got to have a good construction plan as it relates to purchasing and renovating an apartment complex, right? I mean, people, people can kind of screw up on a house flip, which is a, you know, 20k, 30k, $40,000 house flip when you’re buying an apartment complex, you know, oftentimes the renovation numbers or three, four, six, 800,000 1,000,005, you know, $2 million, depending on the size of the complex and the scope of the work. So, you know, definitely it’s something that you have to have a quality plan going in.

So I want to talk about that. And again, as you look at this and digest this information, I want you to recognize that what you have to begin to develop is a systematic approach to the things that you’re doing. The truth is success is not sexy. Success is a system it’s a doing the regular activities or the correct active, correct, correct activities on a regular basis consistently to then yield the outcome. Now, again, sometimes it is you’ve got to pivot and adjust those applications that you’re doing in order to then monitor the outcome. And then once you start getting the outcome you want, you consistently do the same things over and over again. So let’s talk about the operations as it relates to construction. So first and foremost, and we’ll use a sample property of say like a hundred unit apartment complex. And so when you’re going in to purchase the complex, again, at least from our perspective, we’re looking at oftentimes complexes that are built in the late sixties, seventies or early eighties, and many times, most of those complex is on the interiors.

They’re still in original condition, meaning that they are dated. And the owners that own them over the years have just really simply maximized or siphoned out the cash flow. They haven’t really reinvested dramatically in the property. And so, and that’s okay because that’s one of the qualifications that we look for that really gives us the ability to go in and add significant value, because then we’re going in. We evaluate the sub market, we look at the two, three, four, five other immediate competitors right there in the immediate sub market and see, you know, what is the condition of their properties? What are the rents that they’re getting? And realistically, as part of our business model, you know, we’re identifying properties where let’s say maybe the rent is 800 a month on the two bedroom or three bedroom. And the competitors are at, you know, nine 50 or nine 75, but they have a nicer, newer, you know, quality of product.

Maybe they have nicer or more amenities as well. So it’s just a more attractive type product. So again, once we’ve established that we go in and look, we have developed more of a national approach now again. So we do all of our complexes, the same in terms of the interior finishes. We have a national contract with our appliances, so that we’re getting them at a cheaper price then what maybe the local guys are getting at Lowe’s or home Depot or something like that. And so again, you know, when you look at it, you have to look at a bigger picture, right? So, and again, this comes back to a plan. So we have a strategic plan where we have three levels of finishes that we offer, we offer what would be called a classic plus finish, where things have been partially updated.

We offer an updated you know, or renovated finish we’re meaning that all of the interior has been updated. And then we offer an elite, which then it really is, you know, like new cabinets and everything’s finished a new potentially backsplash in the kitchen, that kind of thing. So let’s talk about what does that look like? So when we’re purchasing the complex, for the most part, the complexes are occupied 85, 90, 95% occupancy. So then you develop a strategic plan to do the renovations on the turn. You identify the, the individuals that maybe are not going to be the ones that get renewed. Those are the people that move out, or you have identified the people that are, you know, late pay behind pay that kind of thing, where they’re just not, you know, maybe a positive contribution to the community. Those are the ones that, you know, typically you want to non-renew or help encourage them to move on.

Again, they have not paid their rent. And again, that’s a matter of eviction, but so with that, then now you have a certain number of units that you’re going to be able to renovate right out of the bat. However, prior to focusing on the interiors, you have to have a plan for your exterior construction, and that needs to take place to execute that plan within the first 30 to 90 days. And so what does that look like? Well, every complex is a bit different, no doubt, but it really does entail making sure all of the exteriors have been updated to have a fresh clean look. So what that means is you’re evaluating the condition of the property. So it may mean that the buildings need to be painted. There may be some roofs that need to be replaced. So one, you’re doing some of the things that are structurally necessary like the roof or maybe repairs to balconies or stairs or things of those nature.

Those are items that, you know, are done out of necessity for the structural concerns of the property. But then second, you have to look at also the exterior appeal. And so that may mean that you look at a new signage. You also may look at new landscaping or expansion of landscaping to freshen it up and make it look better. Again, you also look at what does the parking lot in paving look like it, you know, maybe the paving is in good condition, not alligator cracked in such like that, but for, you know, 10 to $15,000, you’re able to stripe and seal that, which one preserves the asphalt further, which gives you, you know more longevity out of it. But also too, it looks good. But again, sequentially, what you want to do is to get the heavy structured, done, meaning the roofs and those kinds of things, any additional, you know, painting of the buildings, doing the repairs, those kinds of things, that all comes first.

And then the last thing is where you’re then sealing and striping the parking lot. And the reason for that is you don’t want all of these heavy construction trucks and this, that, and the other driving through there on your freshly read on parking lot. You want it to maintain that look for as long as possible. So again, sequentially, what you’re doing. And again, we do this in advance is you have your vendors that are going out. Yes. Again, you want to develop a way regular series of vendors, right? So we have a regular group of roofers that would be our roofing supplier. We have a regular group of people that would be the asphalt and parking repair people. We have a regular group of vendors. It would be engaged in the plumbing. And then also a regular group of vendors that are engaged in the painting.

Now, if you were in a marketplace where you don’t, you have that, you need to develop that. It’s like, how do you develop it? You get it done. That’s how you do it, right? You connect together together with local management companies, find out who reliable quality vendors are, get in contact with a minimum of three of those, and then engage them to say, Hey, look, we’re looking to have you do work on this property, but again, now I don’t know where you’re at, but for us, when we’re going into a marketplace, we’re going to expand. If we’re going to buy one complex, then we’re going to expand to buy more because you get economies of scale. And so we’re engaging those in a new market. We’re telling them, Hey, look, we’re going to add more apartments and more units, and we’re going to be in this market.

And so that gives them an incentive to want to work with you and give you quality pricing. And then you have to know the numbers, right? If you don’t know your numbers, people are going to take advantage of you. Right. And that’s just a fact. I mean, I seen the thing where one of my team members just like on a simple repaint thing they were repainting doors and it was like, whatever, four grand for all the doors in the complex , $2000 for the office. And then there was a ton of sample paints in some other stuff. And it was like $2,000. And he now not me, but he teammate was like, dude, what the heck is this? Right? And then he brought it to my attention in the team meeting. Like, dude, Randy, look at this. I’m like, yeah, good catch, bro. That’s like, you’re fricking crazy.

I remember those pink colors and whatever, but like, not that. And so he went back to the vendor and it’s like, dude, there’s no way that’s insane. And the vendor came back and said, okay, we’ll do it for 500. Right. So that’s part of the thing that you’ve got to know your numbers so that people are not slipping it past you in terms of what they’re charging. Right? I mean, unfortunately some people look at it and go, Oh, apartment complex, ah, big money. Let’s charge him. And if you’re foolish enough to pay, they’re more than happy to willing to accept it. So again, that’s where you got to know the people, you work with work with quality people and still be vigilant on top of that. Right? So again, once you get that series in place, now you’ve got a systematic approach where you’ve got your plumber, your painter, your roofers, your parking lot vendors, right.

You’ve got your exterior team and then you can develop a execution strategy to do those in a sequential order. Like I said, you’d go in immediately do the signage, do the landscaping. Why? Cause those things make an immediate impact that make it look good simultaneously to that you could do the structural repairs of the roofing balcony, stairs, those kinds of things that need to be done. And then as that’s done, then finish with painting the buildings if necessary or painting the balconies and stairs and that kind of thing, or pressure washing the buildings, you know? So it depends on what it is. And again, here’s the thing, look with that. And then the last step would be, you know, parking lot ceiling Stripe, if that’s again necessary. And I see if necessary because you don’t want to over improve or waste spending money where you don’t need to.

Right? So we’ve bought properties where the brick looks great. And instead of painting the brick, which they cost $50,000 for all the buildings, and then now you’re going to have to repaint it again. In five years, we pressure wash the brick and then we use a proper accent colors for the window, trims or doors or shutters. And that in conjunction with the balconies and the pink color of the balconies in the landscaping pal provides a fresh quality look. One, we save $50,000 and then three years from now, or four years from now, instead of spending more money to freshen up the paint, we can spend five grand to pressure wash the buildings again, and they look phenomenal. So again, you have to understand and look at what you’re going to do with the property and you know, what those costs are. And then also too, you’ve got to look at, you know, what do you need to do to properly compete in that sub market, right? You’ve got to make your place one of the nicest and attractive. Now, again, that doesn’t mean you have to over improve it. But again, you want people to drive onto your property and look at it and go, wow, this is a nice place. And then the other thing that’s kind of a side note, we’ll probably cover this in the repair area, but again, on your maintenance guy,

You need to be picking up the trash every day, every day, right? Like you drive on to a property and it looks like crap because there’s trash. That is a detractor from people wanting to, you know, live in the complex. And so that’s really key, right? So we have a system where it’s like the maintenance man has to go out on Monday. It takes a little more time Monday morning and the manager can help him depending. And then every day of the week, right. It’s like 20 minutes, first thing in the day, bam, just to do a cruise of the property, check it out, pick up any stuff. It makes it look nice. Right. And so that’s key. All right. So, and then again, the other thing that you’re looking at on the exterior as it relates to construction is your systematic approach to doing the amenities, right? So again, you need to, depending maybe your property has a pool, maybe it doesn’t have room for a pool or didn’t have a pool.

If it didn’t have a pool, we don’t put a pool in, but again, you can add different amenities of barbecue area, pergola, dog park. You can look at a fire pit again, depending on what is appropriate for the area we offer sometimes a business office or, you know, a facility that has a gym. It just depends every complex, different as to who you’re appealing to. And what are the amenities they’re looking at and what are the amenities you’re looking at in comparison to your competing properties in the sub market? And so even to people like, Oh my God, well, the other places have a pool and we don’t have a pool. We’ll look at 80% of the people don’t even use the pool. Right. They live there, but don’t use the pool. Now, if we have a pool, praise, God, it’s great. We make the most out of it.

But again, we wouldn’t spend, you know, $50,000, $70,000 to put a pool in. Cause you just don’t get the bang for the buck on it. But what we can do is to make, you know, a horseshoe pit, one of them, you know, corn tournament areas, playground, fire, pit, barbecue area. These are things that people will use and we can make it where it’s a viable product. And again, so maybe we don’t have a pool. The other guy is offering units at $1200 and we’re at $1150, right. That doesn’t seem like much to you, but $50 difference to somebody that’s on a tight budget, living paycheck to paycheck month to month. That makes a huge difference. And so for us, they’re getting a fresh quality, clean exterior, all these other nice little amenities, no pool, but yet they’re $50 cheaper. So they take it and they love it.

Right. And so that’s how you gotta know this stuff, right? You can’t just be guessing at it. There’s a lot of people out there realistically that, you know, act like they’re a guru expert kind of thing. And quite frankly, they don’t know Jack crap. Right. They’re just winging it and trying to get, learn from this person to learn from that person. And it’s like, experience is a great teacher, but you know, you don’t want them to learn on your dime. Right. So now as it moves to the interiors, what we have to do there is to, again, not over improve the property, right? So many times what we do is we go in, we evaluate the condition of the cabinetry and the property. Is it solid? Okay. So in many cases you can replace the door, faces, resurface, and paint. The cabinets, put on new door faces and they look like brand new cabinets.

And so that’s an option there. Others were able to repaint sand and repaint the cabinet doors and or doors, excuse me, cabinets themselves. And that’s an option, but always two, we’re looking at replacing the lighting with new, fresh nickel lighting, doing a two-tone paint package, putting in a pho wood floors with the, you know, click plank type vinyl floors, or roll vinyl, depending on the market and the area or square vinyl, depending on what it is. Again, all of it looks like the brand new, you know, modern wood floors that you’d put in your own, you know, 200k or 400k or $600,000 home. It looks brand new and finished like that. The other thing is that, you know, we’re looking at putting fans in the bedrooms, you know, adding different little touches to the amenities, depending on the layout of the property. You know, if we’re able to cut open a pass through, into the kitchen, we do that, you know, any type of thing that gives it a better appeal, better flow right now, again, in many instances, you’re not able to do that, but you are able to do all those upgrades and put in, you know, new countertop.

And again, a lot of times, if we have a solid, good quality countertop, we’re able to paint the countertop with a foe, granted appearance and do that in a manner that’s quite cost effective, you know, 50 to $75 depending. And then again, yes, you will have to touch it up on the turns, but again, let’s say for example, you put in a new countertop that costs whatever $400, and I can do the repainting of it for $65, right? I mean, heck if I do, you know, four turns over four years and I’ve spent an extra $20 each time, I’m still only in it for like 150 bucks compared to the four, four 50 out of the gate. So I’m ahead of the game. So you have to be able to look at these things in a clear and concise manner. Now, again, same thing. You have to have vendors that you work with.

And so now we go in and we develop here’s the game plan for this property. Now we have a national game plan, but it is like, so our one bedroom, two bedroom and three bedroom property is going to cost X amount of dollars. So typically we’re about like $3,800, four grand, $4,500. And that includes doing all the stuff, you know, retouching the cabinets. Now again, if you’ve got to replace the cabinets, there’s an extra cost. Or if you’ve got to redo the door faces and putting new door faces in, there’s a bit of an extra cost. So, but again, what we do is we establish and assess upfront what’s necessary for all of the units. So you’ve got a clear picture of what T what’s needed for all the units. And then now you have typically two to three vendors, quality vendors. You come in, you get agreed upon pricing.

So again, we’re like, here’s what it is. Here’s the work that needs to be done. Here’s the pricing structure. So notice the difference there. We’re not saying, Hey, what would you charge us, Johnny? Good Lord. Would you charge me 10,000 a unit? I mean, and there’s companies out there that’ll do it. They’re like, Hey, we are the big turn key provider. And we can blow through 80 units at a time and blah, blah, blah. And it’s, you know, we can, we can do it for $8,500 a unit, right? And it’s like, now that may work on some type of, you know, blown out, super vacant property and stuff like that. But again, like the difference between paying 40 508,000 is huge, right? It’s, it’s huge. And so you have to develop, and I’m gonna talk in shoddy work. I’m talking quality vendors that you develop a relationship with and they know that they’re going to get more business with you.

That’s the key. Right? And so then our guys know that like, Hey, they’re not only going to do work on this property, but we’ve got one, two, three, four more, you know, that they’re going to be able to do work on you say, well, Randy, I don’t have that many more, but are you going to buy more good Lord? I mean that like buy in, one’s not enough. Right? You got to, you got to develop economies of scale. You’ve gotta, you know, that that helps you diversify. It helps you to expand. It helps you to get cheaper cost of labor across multiple properties. It helps you to get national contracts. Like we have to get cheaper pricing on supplies and materials and all like that. So that’s what you gotta do. So now with, with that, you’re now going in, in, you’re able to begin to execute those renovation plans.

And typically within five days you can get a unit renovated, right? I mean, again, depending on the scope of it, it’s just the normal renovation like that. If you’ve got to replace the cabinets in full, you know, it takes a little extra, you know, coordination, or if there’s some other items that need additional special attention, it can take a little extra time. But again, you’re setting a standard of here’s the timeframe. So now your onsite manager and the regional manager, or whoever yourself, if you’re the one overseeing it, you have a standard and the vendor knows the standard. And now everybody’s working by a standard, not just, you know, kind of Willy nilly. And then we have a goal. Typically, most lenders want to spend through the renovation money within a year. But again, realistically, if you’re doing it in a methodical approach, like we do, you’re maximizing the cashflow by keeping occupancy high, you’re doing the renovations on the turn.

And so that makes the project less risky for us as the owner, our investors, and also importantly too, for the lender. So the lender is always like, yeah, no problem. We’ll give you, you know, get the outside stuff done in the first 12 months. And then we’ll give you another 12 months to finish the interior renovations because, you know, let’s say by month 12, we’ve already renovated, you know, 35 units or something like that. 36, 40 units out of the hundred. And then now we will renovate another 30 to 35 units on the remaining 12 months now for us, we don’t typically, and again, it depends on strategy, but if we’re going to sell the property, we’ll typically leave, you know, maybe 40 out of the hundred units as more like classic clus. And you say, well, Randy, why would that be? What’s the reason?

Because again, by the time we get to the back 40, the project is over all been transformed over that 18 months. So now you’ve got a higher caliber of tenant profile that’s in there, demographically, you’ve got better quality people that enjoy living there and, you know, good quality community. You’ve got a rent base on the units that is in line with the market. And so now let’s say if you were renting, you know, those renovated units for nine 50, maybe it is your classic plus unit is now renting for nine 25. Right? And so the difference there is in the classic plus, maybe it is that you didn’t have to spend $4,500. You only spent, you know, $1,500 or $2,000. And so there’s a difference there, and that Delta is important, but also more importantly than if you’re going to sell the property, there’s still another 40 units there where the next buyer can renovate those units, bring them up to another level and continue the process of improving the property.

There’s kind of a quote, you’ve left meat on the bone so that it gives you more options when you’re selling. Because then now when you’re selling the property, you can sell it to a core plus buyer. You could sell it to a value, add buyer, there’s multiple strategies of exit, right? And so I want to encourage you to really take a look at these things and develop a systematic approach, you know, even to we use Dropbox. So all of our team members are connected. We have specific strategic folders, including the renovation and a process, even within the renovation to document the pictures of ongoing progress, to put all of the bids in, you know, we have a tracking form that we use to track the progress of the renovation. We also have implemented Podio and the Gantt chart on larger products that we’re using the Gantt chart in the calendar to really track the main renovations.

And, you know, so again, all of it requires effort, but then when you do it now you’ve got a system for really being a master of construction. Right. Cause some people like really they’re like, you know, forgive me. They’re like a blind jackass, right? I mean, they’re just whatever happens. And it happens. And, you know, we ended up buying, buying properties from people like that, where they, they set out with good intentions, right. And they’re probably good people, but they didn’t have a methodical, clear approach. They didn’t have the right team members. And the result of it is that, that they get, you know, kind of screwed up. I mean, I’ve seen that where they didn’t vet the contractor as well. They’ve had shotty work done. I mean, heck I’ve seen stuff where we had to go in where they redid the foundation, work on three buildings in terms of structural beams.

Like all of it was crap. We had to go in, we told the guy, look, Hey, I’m sorry that you spent 65, $70,000 on this, but it’s all garbage and we’ve got to replace it. And that hurts them in the sale because we can’t pay you. We got to take that out of the price. You know? So again, you know, got to make sure that you’re on point when you’re doing this. Cause again, if you’re overseeing a 300, 500, $700,000 renovation budget, you need to be sure that you’re clear and executing correctly so that you get the result because the biggest bang for the buck or one of the biggest bang for the buck comes from doing the renovation. That’s where you’re creating value. You’re, it’s like what we would call forced appreciation. I know going in like, this is the beauty of it, right.

We bought a complex in Georgia. I think we paid 7 million in change for it. Right. And it was like seven, maybe seven, seven. It appraised as is for 8.1. Right? So again, right out of the gate, we got like $400,000 of value in equity. So that’s amazing in and of itself, praise God. So that, that, that should motivate you to want to invest in apartments there in and of itself, right. Day one, you’ve got that kind of equity, but this here is the beauty of it. Right? Our renovation plan is included to the independent appraisers. So this is not somebody on my payroll. This is an independent, arbitrary third party. That’s looking at what we’re going to do and doing it to give the report to the bank. Right. And the bank’s gonna loan us, you know, whatever, call it 5 million bucks. Right. So they’re like, we want this to be damn sure.

Correct. Right. There’s no doubt about that. And then here’s the thing, the property appraised as completed for like 11.1 million. So that’s a pathway to like 3 million in equity. Cause again, we’re going to spend, you know, call it 500,000. So if we’re, you know, in four, seven, seven and five is eight two, and then it’s appraised for 11 one that’s, you know, right. At 3 million of equity day, one contingent on completing the renovation plan and the overall plan. Right? So again, it’s not as subject to the winds of the stock market or what’s going on in the economy. It’s like, we’ve got to renovate the, the, the plan we’ve got to execute the plan, manage the construction, manage the re the leasing and renewals. And then the result is the property is now worth 11.1 or $2 million. That’s the beauty of investing in apartments. And that’s also the importance of construction.

So look, if you don’t become a master of operations in the construction arena, you’re going to be hurting. And so hopefully this has benefited. You was a blessing. I want to encourage you to go on to iTunes. And if you’ve enjoyed our program, give it a five star review, give it a quality comment and share the program with others. We really want this to be a blessing and a benefit to other people as well. So I really appreciate you being a part of our community. And I love to hear your feedback. Thanks for listening to another episode of the real estate preacher podcast. I hope today that you learned something that you can immediately apply in your life or business, make sure that you check us out on iTunes or at therealestatepreacher.com for more information, if you want to find out more about partnering together with me personally, on real estate deals, including apartment complexes, go to the real estate, preacher.com and click on the invest with Randy link. I look forward to talking with you personally, have a blessed and victorious week for this is the week God has ordained for you.