We packed the house for our NorCal Apartment Investor Network multifamily panel this week where three Silicon Valley locals shared real-life stories of how they got started with out-of-state apartment investing. JC Castillo of the Multifamily Property Group recently interviewed all three panelists for an insightful look into what has made them successful investors in today's market.
Larry Landis is a full time 30-year semiconductor engineering professional who is strictly a passive investor. Based in San Jose, Larry has amassed a sizable investment portfolio with ownership interests in nearly 500 multifamily units in the DFW submarket.
Menon Ramakrisna is a high-tech entrepreneur turned full time apartment investor, based in Santa Clara, California. He is a passive investor in 1000 multifamily units, and an active investor in 350 more in the Atlanta and DFW submarkets.
Steve Smith is a passive and active investor in 1600+ multifamily units over 9 properties in Northern California, New Mexico and Texas. Based in San Francisco, he has an 18-year career in real estate brokerage and lending and has funded over $1B in residential mortgage loans.
Q1: What was your background prior to multifamily investing?
Larry: In my mid-50s now, I’ve been trying to build a nest egg over several decades through different mechanisms. Like a lot of people in tech companies in the Bay Area, I was taking the money I accumulated through my company’s stock plans, selling that, and buying other stocks and bonds. At some point in the early 2000s I decided I’d try my hand at real estate. The market looked hot, people were flipping houses. My brother-in-law is a realtor in the Phoenix area; he turned me on to opportunities in Arizona. I bought a house with the intent of flipping it. Instead, I turned it into a rental and decided to manage it on my own from California. As the market continued up I bought another house, this time for the sole purpose of renting it. Ten years later, I had finally sold both of the houses. Neither resulted in any equity play and I didn’t make much cash flow during that period, either.
Menon: I worked at various Silicon Valley tech companies, and ran a few of my own startups. I sold one startup but didn’t make a huge profit. I then returned to being a regular tech employee. Before long, I realized I still wanted to do something of my own but I didn’t feel like heading another startup. I focused on a new life goal: achieving financial freedom. That’s when I started investing in single family real estate. My first house deal was pretty successful. I handled it all remotely, while working my day job.
Steve: Prior to multifamily investing, which I do full-time now, I had a career in residential real estate lending, starting as a loan originator. I eventually owned my own mortgage company for three years, and recently sold to my partners.
Q2: Why did you choose to invest in multifamily?
Larry: It always crossed my mind that if I have only one property, and it’s vacant for a couple of months, that could wipe out my cash flow for the year. Whereas, if I had five units, any temporary vacancies would balance out. I realized multifamily was a way to keep the cash flow equation working better but having access to the capital needed wasn’t something I knew how to do. That’s when I learned about the Multifamily Property Group model, which made sense to me.
Menon: Each single family home is its own project, every time. I had to keep finding new projects. Some people are successful at that but I gravitated to multifamily where, you find a good deal and it keeps giving you good returns.
Steve: I soon learned that multifamily was more scalable and easier to manage than single family. Also, the debt you’re able to get on multifamily properties is a big advantage. Fannie Mae and Freddie Mac only allow ten single family mortgages on your credit report. Beyond that, there is a wall in terms of getting any more property debt. You’re faced with pulling cash out of other properties. We had to look at other ways to grow bigger and faster. Multifamily was a good way to do that. With single family, and other smaller properties, there are more moving parts, making it difficult to manage and grow. For example, ten single family homes means ten insurance policies, ten roofs, ten heaters; all these different parts to manage. With multifamily, you have 150-200 units under a single roof, one insurance policy, one property tax bill. It’s quite a bit easier.
Q3: Why do you invest out of state?
Larry: California investors tend to focus on equity because we are used to seeing the market continue to go up. It doesn’t go up forever, though. When it does fall, it crashes hard. It’s not too difficult to create a spreadsheet with a few basic assumptions; you realize fairly quickly you can do better with cash flow in areas outside the coastal U.S. You might not do as good with equity in other areas, but that’s not really my goal. At this point in my life, thinking about a retirement plan—doing out of state multifamily makes more sense.
Menon: I already had a pretty good mentor but someone recommended Brad Sumrok’s event, Rat Race 2 Retirement, and I was blown away. I decided to switch mentors, which was not easy, but I think that was totally worth it. Brad teaches us to pick landlord-friendly states. California is not one. That doesn’t mean you can’t invest here; there are models that are successful—I know plenty of people who are successful here—but you have to follow one model. You can’t do it hodgepodge. Also, Cap Rates are low here in California. But landlord friendliness is the main thing. I’ve heard horror stories of tenants that stick around up to a year without paying rent. I love my tenants but you can’t afford that in this business.
Steve: Part of my criteria as an investor is to achieve solid cash-on-cash returns, as well having an opportunity to get capital appreciation. Being from California—it’s beautiful here and there are a lot of nice properties—but CAP Rates are so low; it’s difficult to achieve those goals. I also look for business- and landlord-friendly environments, which basically knocks California out of consideration altogether. The Dallas-Fort Worth market meets all of my criteria.
Q4: What type of investor are you?
Larry: As a full-time professional, with only so many hours in the day, I am a purely passive investor. For people, like me, who are busy and don’t want to deal with the unpredictable interruptions of property management, turnkey is a great way to go. With active investments, if a tenant has a plumbing leak, that has to be dealt with right away. It can be very inconvenient, especially if it’s out of state. You might have to hop on a plane at a moment’s notice. Turnkey deals, on the other hand, leave all that work to someone else.
Menon: I’m mainly a syndicator; tapping into private equity, and bringing other people up, helping them find financial success. But I’m also a passive investor because that is a no-brainer to me. Zero time and you get phenomenal returns, especially if you know who to invest with.
Steve: I would say I’m a hybrid investor. I started out as a passive investor, to get a feel for the process. Within several months, thanks to what I learned from the sponsors and from Brad’s group, I syndicated my first deal. That was a 152-unit, Class B apartment in Lake Highlands, a suburb of Dallas. Since we closed on that, in May of 2017, I passively invested in over 2000 doors, and personally purchased another 76 units in Fort Worth.
Q5: Any words of wisdom for others looking to follow your success?
Larry: If you go to a brokerage, don’t expect much advice on real estate investing. They will give you some formulas; a pie chart on how much Large Cap, how much growth, how much in bonds—based on your age and expected retirement. Those are all great ways to invest but they’re not going to tell you to take X amount and put it into real estate. Study it and figure out what makes sense for you. Real estate investing is a great strategy to get retirement cash flow that will reliably replace your professional salary and not leave you worried about having enough social security or other means of income.
Menon: Mindset is important. Most people think very small. I’m thinking very big. Most of us are not able to think like that between the daily routine of a job. Work on your blind spots; we all have them. Surround yourself with people who are telling you the truth. Find a mentor. It will save you both time and money.
Steve: Start off by educating yourself. Don’t rely on others to determine if an investment is suitable for you. There are a lot of ways you can be successful in this business but there are also pitfalls that can be very costly. I learned nearly everything I know about multifamily investment from Brad Sumrok, with Apartment Investment Mastery, and Paul Peebles, at Old Capital Lending.
About Multifamily Property Group
Multifamily Property Group (MPG) is a Silicon Valley based, vertically integrated, private equity real estate company focused on acquiring, repositioning and operating value-add multifamily properties in select high growth US markets. MPG currently owns and operates a significant portfolio of Class B & C assets in the Dallas-Fort Worth Metroplex.
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About Apartment Investor Network
Apartment Investor Network (AIN) is a California based real estate networking group focused exclusively on apartment investing. Our mission is to help investors get plugged into some of the hottest out-of-state multifamily real estate markets in the nation. AIN is proudly sponsored by the Multifamily Property Group, Old Capital Podcast and Brad Sumrok Apartment Investor Mastery.