Apartments are often the first big step most real estate investors make when they’re ready to graduate from single-family homes. What you may not know is that in some ways, apartment investing can be more simple than single family real estate investing.
In this episode, Apartment Investor of the Year winner Brad Sumrok shares his secrets for successful apartment investing.
Discussing how you can bring value to the table even when you have no dollars:
- Your multi-family apartment investing wisdom machine, Robert Helms
- His do the math and the math will tell you what to do co-host, Russell Gray
- Apartment Investor of the Year winner, Brad Sumrok
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Robert Helms: Welcome to the Real Estate Guys radio program. Thank you for tuning into the show. This week, we’re talking apartments. Multi-family investing in real estate – what’s it take? How do you make the jump from single family to multi-family, and should you?
Lots to cover, this week in Dallas, Texas. Let’s say hello to our financial strategist and co-host, Russell Gray.
Russell Gray: Hey, Robert.
Robert Helms: Always fun to come to Dallas!
Russell Gray: It is, I love Dallas.
Robert Helms: Yeah, fun town, lots going on here. In fact, a few weeks back, on our predictions for the year (which isn’t our predictions, actually, but just us citing different lots of different sources), you may remember that one of the reports showed that the number one market across many, many sectors, poised for 2016 according to all the respondents of the survey, was Dallas, Texas.
So we said, “You know what we’ve got to do? Get in a plane and come here!” So we have a show here. Actually, we just got to Dallas, so we’re going to spend some time visiting some of the folks that we know here, and next week on the show, we’ll do a market update about this marketplace. So stay tuned for that.
Single Family vs. Multi-Family Apartment Investing
Today, really what we’re talking about is, based from a question we got from a listener, which had to do with single family houses versus multi-family.
Russell Gray: Yeah, I think when everybody thinks of real estate investing, the most simple way to begin is in residential, right? We all understand residential real estate. Most of us grew up in homes, have owned homes, maybe have rented homes or apartments. We get it.
The easiest thing to do is buy a single family home, because it’s the thing that we tend to gravitate to and understand. And you can make the argument that over the last few years, it’s been a great investment for rental. But apartments have been super strong, as well.
And so, if you’ve ever played the game of Monopoly, you know, the name of the game is you run around and collect those little green houses, and when you’ve got enough of them, then you move up to a big, red multi-family, or a hotel, you know, the big red hotel they talk about in Monopoly. Because you can get more income for your purchase price, right? It just provides better cash flow.
So, multi-family is kind of the first, big step that a lot of people take going to the next level of real estate investing.
Robert Helms: In fact, on our summit a few years back, we did a panel discussion on this very thing: how to go from little green houses to red hotels. And on our panel was Ken McElroy, whose first investment property ever was a little two bedroom.
And he was on the panel, and of course today, there are thousands and thousands of doors that Kenny and Ross control. Kim Kiyosaki was on the panel. She started with a little two bedroom unit.
My dad, Bob, the godfather of real estate, was on the panel. And of course, he started with a little two bedroom unit. Myself – I started with a duplex; each side had two bedrooms, so I’m kind of an over-achiever.
And then of course we had Tom Wheelwright, as a CPA talking about the product types.
And the reason I bring up whatever we started with is that, that was the path that all these super successful investors had taken. They started with a little green house.
And so, how do you get from that? Or do you even need to start there to get to apartments? That’s what we’re going to talk about today. And how apartment investing differs.
When I rent a single family house, probably the biggest difference between that and a multi-unit is the possibility of use. The vast majority of single family houses in most countries are occupied by people who live there; that’s their use.
Now, we talked about forced equity a few weeks back, and we talked about the idea of a conversion – and there certainly places where what were formally single family houses today are doctor offices or other offices, because of the way the development of a town has grown up over time. But the idea of multi-family is that it was built with only one purpose – to rent out units.
It’s very hard to buy an owner-occupied 20 unit building. Because most people are not going to do that. Now, one to four is a financing category that would allow for someone to live in a property. And it’s possible; you could live in a unit, like I did in my duplex, and rent out the other unit. But for the most part, multi-family is a different animal, because it has only one exit strategy; that is, you’re selling to another investor.
Russell Gray: To a large degree, buying multi-family, where you’re only dealing with investors, is actually a little bit safer, and here’s why. When you go to purchase a multi-family property, you’re bidding against other investors. These are people who tend not to overpay, based on the math, right?
I mean, there’s going to be a variation; if people really want something, you know, they can overbid. Anybody can overbid. But when you’re bidding on a single family home, you’re bidding against owner occupants.
And you’ve got a government that’s creating an environment that’s really trying to stimulate home ownership, and so they give you subsidized loans. They give you high LTV’s.
And when a home owner is looking at a home, they’re not looking at the rental value of the home versus the purchase price. That doesn’t have to make sense to them. They’re looking at their own income and the ability to leverage that through an owner occupied mortgage, which always has a lower interest rate, and then that affects the value.
So when you’re bidding for a single family home that you want to rent out, you could be bidding against an owner occupant who’s willing to bid above what the rental value would justify. So it’s really important that you understand that when you’re bidding on single family homes.
The flip side of it, though, is on your exit. Because when you go to exit a single family home that you bought as a rental property, and you go to sell it, there’s the potential you could get a higher price than the income would justify, because it’s become a hot owner occupied market. You’re probably not going to have that happen with a multi-family property.
Robert Helms: In fact, you might already have your buyer renting it from you. Very common that a renter figures out a way to get to the cash and credit they need over some time period. Things like lease options can be tools for that.
But really when it comes to apartment investing, there are some basic things that are the same as single family houses. People live in your building and pay you rent. That part’s the same.
Where it gets different is in several areas we’re going to concentrate on today. The first has to do with the location. Single family properties are often coveted by location. So, a particular school district or a particular part of town. With multi-family property, there are those distinctions, but they may not be as clear cut.
Classes of Properties: A, B, and C Class Apartment Investing
And one of the nomenclatures that we use for multi-family is A, B, C class properties. So you hear people say, “Oh, I bought a B class apartment building.” What is that? Does the apartment counsel come out and grade your building? No. Here’s what it means.
A Class Apartment Investing
A class property: a multi-family property, is generally the newest, nicest, best quality property you’ll see in multi-family. These are the big, fancy apartment buildings in the best parts of towns often, with the greatest amenities. They have pools. They have elevators. It’s high demand rent.
That’s A class. Now A class can be great because of the value of the asset, and because of the surety of the rent. The challenge with A class tends to be they don’t perform as well.
Russell Gray: Right, well it comes down to people paying more for the quality. Quality things cost more. And they may not necessarily rent for a proportionate amount more. But the owner would be willing to take on that, because they’re going to get a better quality demographic. They’re going to get a better quality facility in terms of longevity and condition. They’re going to be in a better neighborhood that will continue to demand above average sales price, right? And so these are investors who are willing to take a smaller yield for less hassle.
Robert Helms: All things being equal, A class is the least amount of return (ROI) on a property, and they tend to be big.
So who buys these things? Usually not you and me. A class apartment buyers are pension funds, insurance companies, real estate investment trusts – big behemoths of companies and groups of folks who go and buy these buildings and just hold these assets for a real long time.
Russell Gray: And they also because of their size and experience, they have the ability to operate on better margins. Because they’re able to operate more efficiently. They have economies of scale that you know, a mom and pop operator just doesn’t have. And often they have a low cost of capital, and sometimes – many times, they go in without any financing. Right?
So they’re just looking for raw return on investment. They pay cash for the property, and then they just look at the net operating income as a yield on their capital. And they’re very, very happy. You can imagine in an environment right now, where we’re getting yields on treasuries, you know, 1%, 2%, 2 1/4 %, whatever’s considered pretty good. If you can get 4% or 5%, or 6% or 7% yield on a property like that, that’s very attractive.
B Class Apartment Investing
Robert Helms: Now once an A class property kind of falls out of favor, it’s a little bit older – maybe 20 or 25 years old, and it’s not the newest, nicest, shiniest – that becomes a B class property.
B class properties today are typically one or two stories. They maybe don’t have the amenity set. They’re nice places to live, but they vary in the degrees of quality, because if I own a B class apartment building, and I continually keep up the work on it, it could be just as valid as an A class today.
Meanwhile, there’s lots of B class properties that have fallen out of favor, lazy landlord’s syndrome, the coverage of the debt is easily [met] by the current tenant, so we don’t have to do much work to change that. And so, there’s opportunity for investors at the B class.
We often talk about the model that Ken McElroy uses for MC companies, and wrote the book, The ABC’s of Real Estate Investing and The ABC’s of Property Management. Kenny – this is what he does. He finds undervalued, B class apartment assets and increases their value. So that’s a B class apartment building.
C Class Apartment Investing
C class is a more specific definition. It’s a property that’s deemed to be at its highest and best interim use, but not its current use. So that’s a whole bunch of words. Let me explain that. The appraisal community goes out and looks at highest and best use. The problem an appraiser is trying to solve (and that’s what appraisers do) is the valuation problem that’s posed by a property, and what is its highest and best use?
The extreme example is I go to an appraiser with a raw piece of land, and say, “What’s the highest and best use for that?” They’re going to look at the area and they’re going to give you some ideas. It’s not the same as a company that you would hire for that information, but they’ll tell you that, and part of its valuation.
So a property that it’s highest and best interim use according to the appraiser means that it works fine the way it is now, but what really it should be done the highest and best use for the property is to scrape it. Knock it down, rebuild it. But the interim part is this: that might not be financially viable today. That may not make economic sense. It may not be functionally obsolete yet, but it’s on its way there. So, slap a coat of paint on, put some new carpet, rent that thing out, and it’s going to work.
So those are C class apartments. Lots of money to be made in C class, but what tends to happen is C class buildings were often built in the 60’s and 70’s, and in tougher parts of town, and over time they’ve developed a reputation.
Russell Gray: Yeah and maybe when they were built, they were nice parts of town, but parts of town shift. You know, we go out and do the Memphis field trip. They talk about the white flight, right? And this is just a term they used to talk about how everybody from downtown moved westward out into the farther suburbs, you know.
And then the downtown got a little bit more blighted. Of course, it’s been starting to revitalize, but, you know, when you have those demographic shifts, sometimes your building. You can have a B property, and take really good care of it, but what’s going on in the neighborhood around you, you don’t really have a lot of control over, and it’s sliding down the scale, you know. B minus, and pretty soon C plus, and then C.
And you’re not able to attract because of the shopping, because of the schools, because of other amenities in the area, or the demographic – you’re just not able to attract the kind of tenants that are going to pay the kind of rents you need to have to be at a certain level. And so you end up with properties that fall into disrepair, and then they attract a different demographic. And then you look at the cash flows, and you say, “Well gee, I can buy this property so cheap!” That’s because nobody’s bidding on it, relative to the rents that are coming in.
And on paper, it looks fabulous! But you have to really factor in when you’re down at that level, a much higher rate of expense, because you’re going to have more turn, you’re going to have more collection problems, you’re going to have other issues from a management standpoint.
Now with that said, there are people who are absolute specialists in dealing in that demographic, and in that particular product class, and they can make it work. It’s not for the faint of heart. It is not for the inexperienced, but there can certainly be money made there.
So, A, B, C – those are the different categories.
Robert Helms: Alright. And you know what? C class you can make a fortune in, but you better know how to operate that. It’s like the difference between being able to drive a car and driving a tractor trailer. It takes a different level of license, expertise, practice – all of that. But a lot of folks love C class.
I spent the early part of my real estate career in C class, got to love C class. Today, happy not to do as much C class. But folks are great at it, and you’ve got to decide. So that’s one of the distinctions of property.
The other primary difference when it comes to apartments is financing. And we’re not going to spend more than 60 seconds on this. But the categories of loans available for 1-4 unit properties is completely different than the lenders and the types of loans available for 5 units and above when it comes to multi-families.
So, great resource for that is going to the Real Estate Guys archives and look for a show that we did with Michael Becker, who is a commercial lender, who lends on multi-family. And you can really get the distinctions between the financing. But financing has a lot to do with multi-family, because it isn’t as easily changeable as single family financing is. So that’s another big difference.
Introducing Brad Sumrok
We’re talking apartments today, and the man you’re going to meet here is going to break a myth long held by real estate investors. But first, let me tell you a little bit about him. In 2012, he was named apartment owner of the year by the National Apartment Association, which means he’s pretty good at what he does. Let’s say hello to Brad Sumrok. Hey Brad!
Brad Sumrok: How you doing Robert?
Robert Helms: Great, great. Thanks for taking time today to talk to us about apartments.
Brad Sumrok: I’m excited to be here.
Robert Helms: We’re excited to hear your story, because most folks think you have to start with houses. You buy a house, you buy another house, you buy another house, and then pretty soon, one day, you’re going to graduate up to apartment investing, and yet, your very first was an apartment building. Tell us about that.
More Units Are Actually Easier To Manage
Brad Sumrok: That’s right, well I used to think that too. I thought I would buy a rental house, and then a duplex, and then a 4-plex, and then an 8-plex. But my very first deal back in 2002 was a 32 unit building, and then I actually went bigger. And it’s actually easier as you go bigger, which is sort of counter-intuitive for a lot of people.
Robert Helms: Well, it is, a huge paradigm to break. “Well, wait a minute, more units is easier?” Explain that.
Brad Sumrok: Well, after I had about 1,000 units, I actually went out and bought one rental house. And with the rental house, I have to do the property management, I had to meet the tenant to sign the leases, I had to collect the rent. The tenant didn’t pay me and there was an eviction. And I actually had to go and do an eviction which I didn’t know how to do, because when I owned apartments I had a management company and a property manager who did all that for me. So, it was actually easier for me, believe it or not, to manage 1,000 units than it was 1 rental house.
Brad Sumrok’s Background Before Apartment Investing
Robert Helms: That is such a great story! So let’s talk about how you got into the business. Cause you kind of have a corporate background. Talk about where you were, and what made you gravitate to real estate.
Brad Sumrok: Well, I grew up middle class, in Pittsburgh, and I was taught to study hard and get good grades. My dad never finished engineering school. He had three years of engineering school.
My dad’s boss was an engineer, and made good money. And their family went on nice vacations, and we didn’t. So I decided I wanted to be an engineer when I grew up. Through the encouragement of my parents, I studied hard, got good grades, didn’t figure out until after I became an engineer that I didn’t really like engineering –
Robert Helms: Whoops!
Brad Sumrok: Went back and got an MBA, because that’s what society and that’s what they taught me to do; that’s what we do, right? You want to move up in the corporate world, you go back for more school, for more training.
And after I got an MBA, I actually made more money, but it didn’t teach me any business skills, or how to be an entrepreneur, or even give me the mindset or desire to be an entrepreneur. So I was an employee. I made good money.
You know, I would see these ads in the newspaper about going to real estate seminars, and learning how to get financial freedom. And I thought they were kind of hokey, and I didn’t want to go.
But the thing is, I read this book that a lot of people know about, and the book is “Rich Dad, Poor Dad,” and that book changed my life. That whole paradigm shift of being a business owner, being an investor, ESBI, the cash flow quadrant. And that mindset shift for me was huge.
And so that opened my mind. It enabled me to go to a seminar, and invest in specialized education, not like the education you get in school, where you learn to become an employee. You learn to become an investor, you learn to become a business owner, and that’s how I got started.
Robert Helms: Well that’s interesting because you were able to invest part time, still with a job, still building up your portfolio, but pretty quickly, you were able to replicate your income from your job. So talk about how fast that can happen.
Brad Sumrok: Well I help people retire in 5 years or less. Now, I did it in 3, and I’m my first success story. So, now I have students who are doing it anywhere from 2 to 5 years, and some people are like, “Well, Brad Sumrok, I love my job.”
And I’m like, “Well, you don’t have to quit your job. You could just expand your means, and have more income, more freedom, more security.” But many of my students were like me. They feel like they’re in the rat race. They make good money. They can’t just quit; they have too many bills to pay.
And the other thing I love about apartments is that it just takes too many single family rentals. I mean, look. If you’re making $80,000 / $100,000 / $125,000 a year, how many single family rentals does it take to replace your income so that you can walk away from your job?
Robert Helms: A lot.
Brad Sumrok: So when I learned that, I figured I needed like 40 or 50 houses. And then I’m thinking, you know, they teach these formulas. You know, if you have to have 50 houses, then you need to make 500 offers, and analyze 5,000 deals, and I’m just thinking, “God, that just seems like so much work! I could buy one building, have all my units under one roof, hire professional management, and I don’t have to quit my job!”
So that’s exactly what I did. And that’s exactly what people that I train do. So I would say it’s a 2-5 year process.
Robert Helms: Yeah
Brad Sumrok: It’s a 2-5 year process.
Robert Helms: So what are the things that you need to learn if you already know a little bit about real estate investing? I know there’s a lot more as you get into apartments, right? I started in the apartment space as well, and it’s a lot. So, how do you break that down and make people understand – students, potential students, people listening on the air? “Hey, there’s a lot to learn, but it can be learned.”
Brad Sumrok: Well, it’s like any other recipe. You know, and what I tell my students is if you have the ability to follow a simple set of instructions, then anybody can do this.
Robert Helms: Yeah.
The Limiting Belief That Funding Is Hard To Find
Brad Sumrok: And it could be from: I can teach people how to analyze deals, how to find deals.
And then the question is, “Well, where do I get the money?” And so one of the things we do is we teach a syndication model where people can raise money from other people. So a lot of people, that’s the other paradigm shift, is people think, “Ok, Brad Sumrok, I love the economies of scale from apartments. I love having all my doors under one roof. I love the fact that I don’t have to buy 40 or 50 of these to retire. But now where am I going to get the money?”
And so many people have the limiting belief that money is hard to find, and I can just say that, if you find a good deal that provides good returns, which to me is double digit, average annualized returns, and double your money in 5 years or double your investor’s money in 5 years, people will invest with you. And then you’ve just got to find where to go to find those people.
Three Different Ways To Invest In Apartments
Robert Helms: Well in fact you talked today specifically about the three different ways you can invest in apartments because there’s not just one way. You could certainly buy an apartment building for your own account, like you did your first time out. Or, a lot of folks today get that apartments are better because of the economies of scale, because I can be diverse across multiple marketplaces, but a way to do that is to invest passively in one of these syndications you’re talking about.
Brad Sumrok: Yeah, so passive apartment investing is awesome because you know, you have the opportunity to make great returns: double digit average annualized returns with truthfully little to no work. And the work that you need to do is as a passive – is you need to be a sophisticated or an accredited investor, because that makes you SEC compliant, which is important.
Robert Helms: Very important. And then the third, of course, is if you wanted to be that very syndicator, and I know that as you have increased your portfolio, that’s a lot of what you do. You’ll put deals together where you’ve got your own money in, but you’ve also raised money from other folks.
Brad Sumrok: Yeah, and being a sponsor is a great way to even fast track you know, that early retirement. You know, I put money in my deals. I teach my students to put their own skin in the game. You add more credibility. But you also can make more money than simply the return of your capital investment, because sponsors are doing the work, and they are, you know, investing more in their education. They are spending more time. They have more responsibility.
So for the people that want to (and this is not a full time commitment to be a sponsor, by the way; I’ve sponsored many deals when I had a full time job) – being a sponsor is not passive. It’s not a completely passive investment, and you need to let people know that. But being a sponsor is you not only make a return on your money, but you can command an additional form of compensation, whether it’s an asset management fee, or additional equity in the deal, or something like that for the expertise and time and effort that you put into the equation.
Robert Helms: Well, I think especially in apartment investing, you see it as eventuality. A lot of folks get to the point where they’re kind of deal junkies. Right? They like looking at a lot of deals.
But at the same time, once I’ve got 3 or 4 or 5 buildings, and my cash flow’s kind of good, but maybe I’ve run out of my personal investment capital, why not bring other people on board? Because the nature of the size of the deals, you usually do need several million dollars as a down payment on some of these deals.
Brad Sumrok: Exactly. And there’s everything right with buying your own deal with your own money, except that you are limited with your own capital.
So, some of my students start off that way. They might buy a building that’s the husband and wife could afford with their own assets, their own balance sheet. And it might be like a 10, 20, or 30 unit building, or maybe even a 50 or 60 unit building, depending on their own individual means. But then they’re stuck.
And so prior to meeting me, they would think, “Well, we’re stuck here. We’re going to wait 5 years, sell our building.” They come to my training, and then they realize that no, they’re not stuck anymore. They can leverage that experience. They have a proven track record. They can go out and raise money from other people, and go out and buy more deals.
And look, they’re helping themselves. They’re helping their investors, and they’re transforming their communities that they own. So it’s a feel good business all the way around.
Choosing a Market that Makes Sense
Robert Helms: So, speaking of communities, let’s talk about geography, right? Apartments are in a lot of places. How do you find markets that seem to make better sense for apartment investing than maybe other markets?
Brad Sumrok: Well, you know, I’ve personally researched a lot of markets, Robert, but there’s no way I could research them all. So I came up with a recipe, just like buying an apartment building, there’s a recipe; there’s a proven, step by step process. And it’s the same with finding a market with apartment investing. So some of the things I look for, is first of all, is it a landlord and business friendly environment? If the tenant doesn’t pay, they can’t stay. And there are certain cities, or states, or municipalities that it’s just really hard to evict somebody that doesn’t pay.
Robert Helms: Absolutely.
Brad Sumrok: So there are other markets like Texas and Colorado and Florida – are just three – they’re not the only three – but those are three that are fairly easy to get somebody out if they don’t pay. And as a business owner that’s important. For those that want to be charitable, they can do that with their own money, but not with their investor’s money, right?
Robert Helms: Well, this is critical, because you don’t necessarily think about that. People think, “Well, I want to invest where I live, or in an area that seems strong.” But tenant landlord law varies greatly between jurisdictions. So understanding that is huge.
And then, the business friendly nature, right? Because here’s the deal. If you have leverage, you need to make that payment even if your tenant isn’t making their rent.
Brad Sumrok: That’s correct. And other things that I look for in the apartment investing recipe: Has there been job growth? And is there continued, projected job growth. The same with population growth. So, if we see you know, high population growth, or positive population growth, positive job growth, business friendly, landlord friendly environment.
And I also like to look at the pricing relativity formula – you know, if a single family home costs a million dollars for a 4-2-2, in maybe a certain place in California, and then you could come to Texas or Oklahoma or Indiana and buy that same house for $200,000, that’s also a good indicator of where you know I believe the sweet spot is for multi-family.
Buying deals that are going to make you a double digit cash on cash. Cause see, you could buy deals in some of these expensive areas, and you’re really buying for appreciation, or the hope of appreciation. But I don’t buy based on the hope of appreciation. We buy based on cash flow and a proven, predictable capital gain based on realistic underwriting.
Specializing In a Particular Class
Robert Helms: We’re talking with Brad Sumrok today, about investing in multi-family. It’s not as hard as you might think. In fact, as Brad Sumrok demonstrates, it’s not as hard as you might think. In fact, as Brad Sumrok demonstrates, sometimes it’s easier to invest in multi-family.
Brad, let’s talk about kind of the nature of buildings, right? You hear people talk about what A class – that’s some of the nicer, top of the line buildings – B class, C class. Is there an area that you specialize in with apartment investing, or does that matter?
Brad Sumrok: Well, there is. And to me, the sweet spot again, the goal – my goal – and what I teach others is that you’re looking for double digit cash on cash returns. So there’s nothing wrong with buying a property, but that’s what the REITs buy, and if you invest in a REIT, you know, you’re going to get a single digit return. So, single digit returns are better than no returns, but they’re not going to help you retire in 5 years or less, ok. And remember the rule of 72. I’m sure a lot of people know that.
So you want to maximize your rate of return. So, the C class are generally 1970’s, 1980’s, maybe 1960’s property. And they’re occupied by a working class demographic. And so that is a sweet spot, where most of the REITs and the big companies are not competing, and they’re not buying that market. They’re buying the A’s and the B’s. Ok, and so the individual investors like us, you know, the people that can pull a little bit of money together, or go out with their own money and buy a building, you know, you could start with 10 units with your own money, or you could do 300 units with an apartment investing syndication. And that’s the sweet spot. So that’s the class C.
I’ve progressed into buying B’s just because they look nice, and you know, you can show your friends your property and be proud of them. But they make great returns, too.
But the B’s you really want to make sure that you always want to make sure you’re buying it right whether it’s a B or a C. And a B is just you know a property that’s a little bit newer and a little bit nicer. And it also has a little bit higher quality demographic. And by higher quality, I mean, you know, education levels, income levels.
So the A’s are the professional class and that’s you know, we don’t buy those. You know, the rates of return are too low, and you’re competing with huge hedge funds and Wall Street, and companies that own hundreds of thousands of units.
So, the little guy, you know, which is what I do and people that I help – that’s our sweet spot – are the C’s, and maybe the B’s.
Optimal Range to Look For
Robert Helms: And let’s talk about deal size. Cause you talked about a 32 unit property, and you also showed us some couple of hundred units. What’s kind of like the biggest property you have, smallest? What’s kind of the range people are looking at today in multi-family apartment investing?
Brad Sumrok: I started with 32 with my first one and went up. In 2015 alone, my students did 25 apartment complexes. The smallest was 10 units, and the price was $300,000. The largest was 305 units, and the price was about $14 million.
The truth is, my students, most of them start with no experience, or maybe they have single family experience, and they decided multi-family apartment investing was the next step, and they did somehow graduate. But most of them after they hear an event like this or maybe a training seminar, they realize that they can get into this, and they don’t have to start with single family.
So, yeah, between 10 and 300 units. A good size starter property might be 60-70 units, and why 60-70? It’s because to me, that’s the minimum size where you can really get a manager or a maintenance person or a management company, and that actually makes your life easier. It’s easier to do 60 than it is to do say 30, and even though 32 is the first one I did, and I did well with it, it would have been easier to buy 60.
Robert Helms: Interesting, another paradigm. You’d think 10 units is easier than 60 – other way around, right? Efficiency, economies of scale, vacancy being spread out before more units, all that kind of stuff.
Brad Sumrok: That’s correct.
Who Can Benefit From Brad Sumrok’s Apartment Investing Training
Robert Helms: Now let’s talk about your students. Who comes to you, and who’s kind of your ideal person that comes and says, “You know what? I want more. I want to put away money through real estate investing.” Who’s kind of the Brad Sumrok student?
Brad Sumrok: Well the Brad Sumrok student is somebody that, you know, like me. I had a college degree. I made decent money. I wasn’t rich. I wasn’t poor.
Ok, this is not no money, no credit, no problem. I need to say that. But if you have decent credit, if you have a little bit of money, you don’t need tons of money. You don’t need all the money to do it yourself.
But say a professional class person, not necessarily needing a college degree, but maybe someone that makes in the high 5 figures, or low 6 figure income, has decent credit – that’s my ideal student. Somebody who’s been investing in conventional investments and they feel frustrated. Somebody that – what I used to do, Robert. I used to put my money in my 401k, and pray when I opened up the account statement every month that it went up.
Those are the people that come to my training, because they want to make better returns. They want to get out of the rat race. They want to make a positive return on their investment and they want to have more control over their investment. Multi-family apartment investing offers that.
Robert Helms: Absolutely. Well let’s talk about the training. You every so often get together a group of folks. 300 last time. Tell us about the training that you do. You’ve got one coming up Dallas, Texas in March.
Brad Sumrok: That’s right. So it’s March 12 & 13, and it’s a weekend training, and I do my own training events. And I teach the whole event. So this is not a multi-speaker event. I teach the whole event. I’ve been doing this for 14 years. I know enough, Robert, to walk people through the entire process.
Robert Helms: Right.
Brad Sumrok: Now obviously when you’re buying a deal I’m going to refer you to service providers with proven track records. At my events, I do them three times a year, generally in March, July, November. The next one is in March 2016.
We actually do a bus tour as well on Sunday morning – a half day. We put everybody on a coach bus, and we will show you – I will show you properties that either I own, or one of my students have recently purchased. So there’s nothing like seeing and feeling, and I might even say with a smile, smelling these properties. And they don’t smell bad, by the way. But there’s nothing like the experience of actually getting out there in the field to actually see the deal, and then it’s complimented with in class training.
Potential Mistakes in the Multi-Family Business
Robert Helms: Alright, good stuff. So before you’re done today, we’re going to show you how you can get signed up for Brad’s training. Now you’ve mentored a lot of folks, talked to a lot of people. What are some of the mistakes you see people make when they’re eager to get into apartment investing, but they miss the turn.
Brad Sumrok: Well, I had a mentor when I started, so I didn’t make a whole lot of mistakes, but I see people making mistakes, and one of them is just trying to do it yourself. And whether you have a mentor or not, honestly it sounds self-serving but I think having a mentor is important.
You know, you want to leverage other people’s experience. And one of the things I teach in my training is, leverage is important. Leveraging not only other people’s money to fund your deals, but what about other people’s experiences.
You know, I don’t go to 20 banks. I go to a mortgage broker that knows 20 banks. I don’t call 20 attorneys. I go to one or two that I know that have a proven track record in real estate. You don’t want to have the attorney who did your personal will be your real estate attorney.
And a lot of people do that. They use their friends. They use their family. They use their single family realtor to help them find apartments. And that’s a mistake, I believe, because you’re not really leveraging somebody that has what I call a level of mastery in multi-family. So you want to build a team with people that have multi-family apartment investing experience.
Where You See Multi-Family Going in the Future
Robert Helms: You know a couple weeks back, Brad, we did our predictions of the year, which isn’t us predicting. It’s going to all these different sources of folks, taking a look at the beginning of the year, and saying “Alright, this year’s going to look good, bad, or indifferent for real estate.”
One of the concerns in multi-family is just the cap rates have been squeezed down a little bit. Yet, this is a long term asset. We have more people renting than owning today. So, give us kind of the big picture of multi-family apartment investing and what you see in the coming years.
Brad Sumrok: Well, I’ve been fortunate that I’ve been in this business since 2002. And I’ve seen the market go up, and I’ve made a lot of money. And I’ve been in the market when the market went down in 2008, and I made a lot of money, truthfully. I didn’t go out of business, and I’m not one of these people who’s like, “Oh, I was young and I made tons of money, and I lost it all, and now I’m going to teach you all my mistakes.”
Robert Helms: Right.
Brad Sumrok: I’m like, “Yeah, that’s great, but wouldn’t you rather talk to somebody that didn’t lose all their money in 2008, and 2009, and 2010.” To me, it’s all about having conservative and realistic underwriting.
You don’t want to underwrite a deal which is a model of a deal based on you know, say, in DFW have 8% rent growth today. Well, you’d be crazy to project that out over a five year period. So I look at historical growth rates, and I model the property based on historical growth, and historical occupancy, and not what’s actually happening today. And my experience is, when you do that, and if you do go into a down turn, which I can’t tell you when it’s going to happen –
Robert Helms: Unfortunately, you won’t learn that at the training, when it’s going to happen.
Brad Sumrok: Yeah, and if I knew that I don’t know if I’d be here, I’d be doing something… But the point is, is that conservative underwriting will get you through a down turn. You know, we’ve had apartment investing deals where we’ve bought, at the last market peak in 2008, we made money, but we held them a little longer than we projected. We held them for 7 years, and I like to get in and get out within 5, for example. But you know, there were some deals that we held a little longer, and fortunately, because we had long term financing at a fixed rate, we were able to weather that down turn.
Robert Helms: Well in fact, financing is one of the pros of this particular niche, because it’s pretty good, and it continues to be affordable.
Brad Sumrok: Financing I will say is still awesome. I mean, we’ve just done some deals personally, that I’ve been involved with under 5%, fixed rate, for 12 years. You have the ability to go back to the lender and pull out equity as the value goes up several times, amortized over 30 years, 80% of the price, the rehab, and some of the closing costs. And then non-recourse, by the way – imagine having no personal liability on a $22 million loan. Or if you’re a beginner on a $2 million loan.
Robert Helms: Well, we sure appreciate your time today, and the passion for teaching what you do. That’s good stuff, my friend.
Brad Sumrok: Awesome. I was glad to be here, and it was a lot of fun.
Apartment Investing Show Recap
Robert Helms: Boy, I feel richer just talking to Brad Sumrok. What a nice guy.
Russell Gray: You know, one of the things that I love – and there’s many, many things I love about being the co-host of the Real Estate Guys Radio Show, but getting a chance to get around people that are just at a high level of practice in whatever it is they do. We get a chance to get around subject matter experts that are really, really good at whatever their particular niche is.
And of course, in this case, Brad, we’ve heard about, we’ve been following, we’ve attended some of his events, and just really impressed with the detail of knowledge you know, this guy’s got a background as an engineer, detailed oriented, but he loves to teach. And he’s just the real deal.
You know, he practices what he teaches, and he teaches things that are actually making a difference in the lives of people. You know, we attended a conference where Brad was speaking, and we got a chance to visit his booth, and he had several of his students actually working – volunteering their time for free, to give back, because they felt like they had received so much value from Brad. And you’ve just got to love a guy that has that kind of a following.
Robert Helms: Yeah, clearly he’s passionate about it. I mean, we spent a lot of time off mic – more than we spent on the mic. And the guy’s passionate for it. He’s got some really, really, great, practical stuff.
So he’s got this training coming up for two days. And part of me is like, “Well, how can it take two days to teach apartments?” But then, many of the ideas on apartment investing that he gave were just seat knowledge, meaning, here’s a guy that’s been through every part of the process, from researching the markets, to looking for providers and brokers for the right ones, to weeding out between all the information that you might get in the packages you get, to making offers and negotiating, to walking the units and understanding the physicality of apartments, and he’s rent rolls, and third party management.
He also, as he mentioned, after he owned 1,000 apartment units, bought a single family house.
Russell Gray: Well, this is one of my favorite things, because for so many people, the assumption is, “Hey, I’m going to start with a few single family homes, and then I’m going to move up to apartment investing.”
And probably before meeting Brad, I would have said, “Yeah, that’s the way to do it.” And then you meet him, and you’re like, “Hmmm, well maybe not. Maybe it’s possible to go directly to the top. I kind of like that.”
You know, the old game, “Chutes and Ladders,” if you rolled right, you kind of shot up right up to the top. I always wanted to roll and land on that spot. And to hear Brad say that not only that’s what he did, but he’s been able to teach his students how to do that, that’s impressive.
Robert Helms: Well, this will give you a little more insight into Brad, because the reason he bought a single family rental house, after being successful in partnerships and on his own buying multi-family, why would you buy a single family house? And here’s why. He’d been teaching apartment investing for a couple of different groups. He would occasionally come and talk about apartment investing and what he did.
And he was asked to lead a course on single family investing. And he thought, “Well, I’ve been an investor a long time, and I’ve done that, but I don’t really understand single family. I mean, I’ve lived in a single family house, right?” So he literally went out and bought a rental property, so that he felt he could stand in front of the room and talk about single family homes.
Russell Gray: Well, you learn by doing. I mean, that’s for sure, right? But I mean, that again, to me – very impressive. You know, a guy that is really taking a lot of pride and making sure that he’s walking his talk.
Robert Helms: You know, it’s interesting, we talk about real estate syndication, which Brad has done a lot of, as a way that you can do more deals than your wallet allows. Well, for Brad, even though he does syndicate some deals, and that’s one way, the other way he does it is by teaching. I mean this guy gets as much of a kick watching his students go out and do this, as his own portfolio it seems like.
Russell Gray: Yeah, well, I can relate to that. You and I’ve been teaching together, for what?
Robert Helms: Seems like forever!
Russell Gray: Seems like for – I think it’s been 14 years. We’ve been together for 14 years now. And 10 years doing our monthly mentoring clubs, and the seminars we were doing, and all of that, and it became apparent to us that the hunger for knowledge was so great that it was going to exceed our abilities, so rather than just teach out of our own knowledge base, you know, that’s where we started reaching out and looking for guys like Brad, Kenny McElroy, other people you know, Gene Guarino, people that are doing very specific niches, and doing them really, really well.
And asking them, please come share with our audience because we’ve got people out there who want to be at your level. And we can get them started. We can get them enticed, but we can’t take them to where you can take them. And so, it’s really fun now to go out and find these people.
I’m learning every day, and I think that’s why I never get tired of doing this. And I think, you know, I’ve learned as a teacher, I learn by teaching. When I sit down and do financial strategy or teach sales (those are kind of my two areas of expertise), when I teach that to people, I learn. I get more clear and more focused in my thinking.
And I see that in Brad. I see that Brad is the kind of guy that really enjoys not only sharing and watching the light bulb going off about apartment investing for students, but he also likes what’s happening inside himself. You get sharper. You get more clear. You get more precise in what you’re doing. It’s just a ton of fun. And we love hanging around guys that are experts at what they do, and even more so when they love to teach it.
Robert Helms: So, if you’re interested in multi-family apartment investing, obviously you should consider coming out to his course. The only thing that’s crazy about this course is it’s so inexpensive. I mean, he literally could charge a lot more than he does, and maybe that’s just because he doesn’t need the money. Whatever it is, he’s got a great course coming out, 2 day course March 12th & 13th. Get all the details on realestateguysradio.com under events.
A couple of closing thoughts on apartment investing, right? The difference. Making the jump. Hopefully at least Brad’s given you the concept, that you know, “I can do this, that it’s possible.” He talked about a couple of really interesting things.
The whole idea that it might be easier to own 60 units than 20 units – just think about that as you’re making this mental jump to be an apartment owner. A smaller apartment building of 10, 15, or 20 units, is as much work as maybe one that has 60, 70, 80 units.
So, as you’re thinking about it, and this also creates the opportunity for a sweet spot, as you’re looking at buying an apartment. The 500, 600, 700 unit – guys like Brad are buying those. You’re probably not starting there.
But there is this sweet spot of 20 to 50 to 100 units where there aren’t as many competitors. The big dogs aren’t playing. The institutions aren’t buying those properties. And yet, they’re big enough that they fit the loan parameters available. So there can be a real sweet spot there.
Russell Gray: I think one of the things, (and it really has to do with psychology, and just some practicality, right?) when I used to teach at the GRI program for the California Association of Realtors, I’d get a lot of realtors coming into the class. I was teaching finance.
And you know, I’d poll them, and I’d ask them, you know, what’s your niche? Where are you starting? And I was looking for the realtors who were interested in selling investment property, right? I’d get a lot of people, “Well, I want to do that somewhere down the road, but right now I’m starting with single family homes.”
My conclusion was I could have 70 people in the class, and 65 of them were going to specialize in single family homes. I said, “Do you understand you’re going in the crowded door? Everybody is going into single family homes, because they think it’s easier. But it’s not easier; it’s harder, because it’s so crowded. If you would just expand your thinking, and specialize your training, you could go into the investment niche, and you’d have it largely to yourself.”
This is a passion your dad has had since forever. You know, this comes up a lot when we talk to people who are in this space. They realize, why aren’t more people doing this? And I think a lot of times it’s because psychologically we limit ourselves.
Sell in the Place You Feel Worthy
Got a chance to talk to Tom Hopkins once, and we asked him for a piece of advice, and I believe he did this the very first time we interviewed him on the show. And he says, you have to sell in the place where you feel worthy.
If you feel like, “Hey, apartment buildings are too big for me; I couldn’t do it.” Then you’re probably not there. But I’d also encourage you to think like Brad, and realize, “Hey, you know what? Maybe I could do apartment investing. And if I could do it, let me put my education into really learning how to do it, and then go really try to do it.” Because, your point, it is a sweet spot.
When you’re in that mid-range of apartment investing, you’re not competing with all the mom and pop investors that are starting in single family homes because it’s “easy.” And you’re not competing with the giant REITs who can’t be bothered with the 60 units. They won’t look at anything less than 120 or 150 or even 200 units, right? So there’s a place where you can actually go in and compete, that isn’t as crowded, and it could in some ways actually be easier, with the right education.
Robert Helms: Now in addition to Brad’s training class, which you’ll find on our website, he’s prepared a great little report for our listeners. If you’re interested in learning more from Mr. Sumrok, just send an email to Sumrok, that’s S-u-m-r-o-k, [email protected]
One last caveat, and that’s this. We didn’t talk a lot about financing because of the time, but many times apartment lenders have a minimum. So folks go, “You know, I found this great 8 unit apartment in this really inexpensive place. I can buy it for $225,000.”
Excellent chance you won’t find a loan on that property, because apartment lenders have some minimum – often a half a million or a million dollars. Again, get with a great lender before you buy any property, so you know how leverage can work on that property.
Big thanks to Brad for his time, and for also his appearance at the Secrets of Successful Syndication a couple weeks back. Next week on the program, we’ll be talking about the Dallas market. So we have between now and next week to go figure that out. And we’ll bring that to you next week.
Until then, go out and make some equity happen.
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