The multifamily space has always been a prime space to look at. Since the middle of the recession, apartments have been booming, and many real estate investors have since tried to make the most of this opportunity. Joining Lisa Hylton on today’s show is James Kandasamy, the Principal – Director of Acquisition and Investor Relations for the Achieve Investment Group, who deep dives into a 330% investment return. James’ expertise is finding value in multifamily opportunities. He shares how he got started investing in multifamily, as well as some of the key things he applies when executing a business plan for particular properties. This episode will bring a ton of value to you as you think about diving deeper into syndications and investing passively.
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A Deep Dive Into A 330% Investment Return With James Kandasamy
My guest is James Kandasamy. He has over five years in the multifamily space with $130 million across nine assets and 1,700 units. Welcome to the show, James. How are you?
Lisa, welcome. Thanks for welcoming me to the show and I’m happy to be here. I’m well.
I met James here in LA. He came out to do a meetup in the Marina Del Rey area. I was fascinated by his work in terms of what he was doing in the multifamily space. I signed up to learn more about his program as well as how he executes and does deals, underwriting, etc. It’s been an eye-opening process. This episode is going to do a deep dive into syndications. We’re going to talk about James’ experience on closing and going full cycle on a sale that he did. To get started, James can you share with my audience how you got started investing in real estate?
I’m an Electrical Engineer with an MBA. I used to work in corporate life for almost 22 years before I started into a full-time real estate investor. Even when I was having my W-2 job, I started buying single-family rentals and the way I got started is we like to solve problems and I thought I can solve the world’s biggest puzzle, which is the stock market and how difficult would it be. Everybody’s playing that game. I tried and tried. Every time I try to invest in the stock market, I lost money. It’s not a very technical thing. It’s a place with a lot of emotions. I tried until the end. I did all kinds of analysis to beat the stock market. I bought a lot of technical analysis books and tried all that. In the end, I can never control my fear and greed of price going up and down. It’s so volatile the stock market.
After 3 or 4 years trying that out and always looking at my phone every few seconds because I like to see what’s happening to my investment, I gave up on it because I read an article where they said 98% of individual investors never make money in the stock market, just the big guys are the one who’s making money. I realized that because the stock always goes up and down throughout the day. If you’re a newbie or a new guy you’re going to get crushed, but unless you are in a long-term plan thing. people make money in the long-term plan. I’m not one of that. It’s not suited for me. I heard someone else talking about buying rental and I did some analysis. By just buying one rental, they can make 9% cash-on-cash. That was very interesting. Nine percent or eight percent is good. I started buying single-family homes. In 2013, we bought 13 single-family homes, 11 of them were rental, 2 of them were flips. We promise not to do flips anymore. It’s too stressful. It’s too much work for too little money. Rental is a lot steadier.
Were all these thirteen in Texas, like in San Antonio or Austin?
It’s all in Texas. Texas is a great market. We buy the deals directly. A lot of time from the sellers directly at that time. We get a good deal. After buying that single-family homes, we went to multifamily, which is my first 45 units and now own a bunch.
How long were you playing in the single-family space?
Over those two years, you bought about thirteen single-family homes. What piqued your interest in multifamily?
I know about multifamily, but I can never make sense out of it because cash on cash seems to have a lot return. In a single-family, you get more cash-on-cash and you own everything. You own the whole house. There are a lot of scalability issues with single-family. Every month, I have some insurance expiring and I have to struggle to go and change the insurance. It’s not easy to review insurance. I don’t know why. It’s the old age industry, but they have not figured out how to simplify renewing. I don’t even do anything unless they say renew. That renewal, sign it then scan and they want red ink and all kinds of things. Time-wise, you don’t make money.Multifamily, especially the value at play, makes a lot of sense. Click To Tweet
The scaling itself from a single-family after ten, first of all, you hit the loan limitation. You can buy more than ten, but you have to do a lot of stances to do it. Your wife owns another ten and you have to go to a commercial loan. I said, “I’m not going to do this,” but I realize multifamily especially the value at play makes a lot of sense. That’s what we’re supposed to do the multifamily and not cash on cash. The management side of it, a professional property manager that can install it, multifamily to get that time back to yourself. All these factors, scalability in multifamily, and the non-scalability of the single-family caused me to think that we should go to multifamily.
At this point, I’d like to jump into the deal that you went full cycle on, which was the Hutchins Palm. For my audience, I did a separate show about me going out and doing the due diligence. Even though we did do underwriting on this deal too, which was also very fascinating in the time it was up for sale. We went out and did the due diligence process. Can you give us a little background on Hutchins Palm such as where is it located, the units, the class of the property and the neighborhood?
Hutchins Palms is a 1985-built property. It’s 45 units. It’s located in South San Antonio. It’s in front of two schools. It’s a good location. The roads are not heavily traveled, but it is heavily traveled during school are released and start days. That was our first deal. We bought it directly from the sellers at a good cost basis, even though it was at the market rate, we bought in terms of cap rate. We know there’s a lot of upside in it because of the rents were.
How did you go about buying it directly from the seller? How did that relationship go?
In 2015, the market was so hot. It’s similar to right now. Nobody can say the market was easier the last time. The market has always been hard. I thought of going direct to the seller. This deal was bought from the text blast that I send out to maybe 500 sellers. This is one of the deals, which I got a response from and be able to close on it.
For the 500 sellers that you text blasted to ultimately get this deal, would you say that generally when you do those text blasts, how many sellers generally respond?
It will be like 2% or 3%, but that’s the normal response because you are soliciting directly. We started this a few years ago. Not many people use this technique. Now there’s a lot of people using it, maybe because I’m going to every podcast and telling how I do it, but still there’s a lot of other factors apart from the technique. It’s all persistence. What language do you use? How do you approach them? What’s your skill level? Whenever a seller talks to you saying that they come back to you and say, “I want you to look at this deal,” if you do not know what they’re doing, they’ll catch it very quickly. They’ll turn away especially these are multimillion-dollar deals that we’re doing.
When you decided to buy this property, what was the initial business plan that you set out for this granted it was a high-level value add, but break down into some pieces here?
The business plan has been always like to bump up the rent by almost $150 per unit. We were looking at cash-on-cash at that time. I didn’t even calculate my IRR or exit cap rate and all that because I didn’t know about all that when I started. He said, “Look at cash-on-cash.” We got one-year IO. I know there’s a lot of upside in this deal. I took a conventional bank loan. I don’t want to go to this agency loan, which is not going to tie up your debt for a long time. I went to a conventional bank loan so that I can refinance it once I bring it up. I said that’s where I learned from a single-family. It’s called the BRRRR method: Buy, Renovate, Rent, Refinance and Repeat. I wanted to do that in multifamily. That’s exactly what we did. We got a loan where we can refi after a few years. We were looking at 8% to 10% cash on cash. Bump up the rent by $150, reduce expenses and increase income. We were able to do both, increasing income and reducing expenses.
As you think about the ways in which you sought to decrease expenses, what were some of the key levers or key drivers that you saw were areas that could effectively decrease or manage expenses?
This is very interesting because a lot of times, for a third-party property management company, they don’t do all that because there’s a lot of work to decrease expenses. The key thing that I realized in the expenses is renegotiating all the contracts. Even I remember trash itself, but we were able to reduce $150 per month just by renegotiating. Sometimes this contract would have been put in maybe 5, 6 years ago and everybody forgot about it. It’s a lot of work to go and renegotiate for 45 units. A lot of these big third-party property management company doesn’t even want to negotiate. That’s too much work for too little money for them. For me, for a newbie at that time, I want to negotiate everything.
We negotiated trash. We negotiated landscape services. We negotiated pest control. I believe by renegotiating on day one itself, we saved almost $350 or $500 taken off per month expense. If we divide that by cap rate, that’s a lot of money that you are saving. The services are the same, but you have to pick up the phone and renegotiate all contracts. That was one of them. The other thing is we saw the water bills are pretty high. There were quite a number of leaks in the building. This is pretty common in any multifamily, especially that’s being managed by a third party and has been with the same owner for a long time. The owners made a lot of money already.
The 10% cashflow is already good for them. They’re maybe making 20% cashflow. They don’t push the third-party property management to go and look at all this. It’s like an ATM for them. You coming into the deal, you’re going to look at, “There are leaks. Let me go and fix it.” Even though the water is paid by the tenant, we still want them to give more money for the rent rather than paying money for water because water doesn’t come from their pocket or doesn’t come out of my pocket. It goes to whoever is providing the water. We’re able to reduce the water from $3,000 a month water bill for that property to almost $1,500. It’s almost 50% off within eight months just by fixing leaks. At the same time, you also increase rent. Renters are going to look at the total number of bills. What are they going to pay? You can increase the rent by that amount that you save so they don’t feel the pinch.
You were executing the BRRRR. At some point, you were doing renovations. For the renovations, were you renovating apartments with tenants in, or were you waiting until the tenants turn over and leave to then do the renovations on their apartments?
We always wait for them to leave for the lease to expire because that’s a better strategy. That’s a slow and steady strategy in asking everybody to leave and start from scratch. It’s too risky because you may take a long time to recover the operation. At the same time, all your expenses are you’re going to be burdened by you. If you go down like 60%, 70% occupancy, it can be pretty bad for you to cover. We did it slow and steady, but our occupancy did drop from 90% to almost 78% within six months because there’s a new sheriff in town and people leave and they come back. We get a much better tenant base.
What do you think were some of the primary drivers that caused the drop in occupancy?
When someone’s managing it for a long time and this is a smaller property. The third-party property management company don’t put their best managers in it. The owners don’t care. They’re already making a lot of money. A lot of inefficiencies. When we go in, we said, “No, we want only good residents, people need to pay on time. Delinquency, we want to go almost zero.” We put a lot of rules. It’s a shock in the system. The new owner was trying to be bossy. They may not like it. They naturally will leave because now they’re looking for somewhere else where they give you flexibility. They don’t file an eviction if you don’t pay and all that.
You’re dealing with Class B and C where people are living paycheck to paycheck. We, as a landlord, we have to make sure that we do justice to our investment and make sure that we manage the property to the highest level of standards. On the expense side, we also saw a lot of common areas like electricity, all the lights were turned on all the time. That cost your common area electric which hits your NOI as well to be pretty high. We changed it to what’s called the Photocell. It’s a $10 solution for each building, $100 for 10 buildings. We’re able to reduce the common area light being on all the time. It’s those simple things, the inefficiencies in a lot of property management companies, and a lot of buildings.
As a passive investor going into some of these deals and listening to sponsors who are saying they’re going to execute a value-add strategy. They’re probably going to talk about some of the things that you’ve shared. What are some of the things passive investors should think about as they’re deciding to deploy capital into deals, especially at this time in the market?
The primary thing is the operator. Who is the operator? Make sure the person who is presenting the deal to them is the guy who’s doing the work or at least the primary guy was doing the work. A lot of times, you have a lot of middlemen, which they are not the backbone of the whole deal. First of all, make sure the operator is skilled and knows what they’re doing. I was the first-timer at that time, 45 units, but we have eleven single-family homes, which shows our skills to turn around. Even with eleven single-family homes, we’re able to capture almost $400,000 equity in two years. We’re able to buy and refi. That shows some skills. Look for that leadership skills, business skills, and real estate experience especially for a first-timer.
There’s nothing wrong with being a first-timer, but they need to come with some skill behind that. Something that can be trusted with. Operators are amazing. It’s like 90% of the whole equation, whether the passive investors you look for. The other 10% is you look at the deal and look at the market. Whether the deal is something that the assumptions that are being made on the Excel spreadsheet make sense or not, not the final numbers. The final numbers can be tweaked in 1,000 ways. The assumptions of what the sponsor is telling you. I’m assuming these many growths. Make sure it’s reasonable because all of that can be tweaked. The Excel spreadsheet will calculate whatever we are putting in. It’s garbage in garbage out. The key thing is 90% is the operator and their skills.
Going back to this property, were there any surprises or any unexpected situations after purchase and how did you handle them?
There are a lot of surprises after purchase. The surprise was the rehab cost was slightly more. I’ve put in $1,500 per unit. We want to change vinyl. We want to change the smaller fixtures. It sounds to be cheap, but there’s a lot of hidden costs turning around a unit. The sequencing of the contractors. The contractors leaving the job that is not done. Half of that, you already paid. Contractor management was one of the biggest things that we learned on this deal. We have since now learned how to work with them, but still there are a lot of things that it can cost your rehab budget to go out of whack.Ensure that the person presenting the deal to you is the guy who's doing the work. Click To Tweet
What would you say are the top maybe 2 or 3 things that you have gleaned from that experience? Being in that market, coming out there and doing the due diligence, I see that you’re active in other deals, bigger construction, more staff. You’ve learned a lot from that experience that you’ve now brought to these other jobs.
The biggest learning in terms of contract management is making sure that you have multiple crews in the beginning especially if you don’t have credible contractors that you are working with. If you’re working with someone for the first time, don’t pay them all the money. Pay them a very small amount if they need it. At the same time, have multiple crews working desk so they can tie up who’s the best. Later you can let go of some crews. They’re all contractors. We did have three crews working at the same time because we were trying to renovate this property during Christmas time.
We’re driving every day during that Christmas week from Austin to San Antonio looking at this deal. The amount of shock that the residents have when this new management comes in here. We learned that we have to be able to handle that differently. At least able to slow them down or calm them down, but they have been with the same property manager or property management company for the past ten years. When someone new comes in and putting in all of the systems, it’s a lot of explanation and a lot of systems that you need to pull in.
Connected to all of that, what would you say how mindset has played in your continued development of your business, your perspective, and mindset?
In general, perspective and mindset are big. Even transitioning from single-family to multifamily, I remember very clearly, June of 2015 is when I said, “I’m going to do multifamily from now on.” We already have like eleven rentals. After that, I didn’t do any deal. I said, “The next deal is multifamily.” It took us almost six months for us to find out as multifamily. It was hard. People sometimes say it’s easy to find a deal in 2015 or 2013. There’s no such thing. Deals have always been hard to find.
What made it hard to find, in your opinion, as you were starting at that time?
It’s the market and finding deals. It’s similar to right now. It’s hard to find deals. Deals are not easy to find. In 2013, 2014, it was hard. I have to think differently to find so that’s why I started doing direct to sellers at that time, at least for my first deal. After that, we started working with brokers and all that, but usually, the first deal is always hard to get for the first one.
To wrap up on this deal somewhat, how did this deal perform? How long did you end up holding it for? How did it perform for you and your investors?
Exceptionally well, home run, grand slam, you can name whatever. Let me give you the numbers. We bought it for $35,000 per door. After twelve months, we refinanced 117%. That means we put all the money. We’ve put in $430,000 into it. We took out $530,000. After refi proceeds within twelve months so within twelve months, we have a full building. I don’t know what you’re going to name that. We were having 7% to 9% cashflow after that, but I’m basing it off with what we’ve been putting in the beginning. After four years, we’ve sold that deal at $64,000, $65,000 a door. We chose like a few months back and our investors made a total of almost 330% within four years. You can’t even say a home run or a grand slam for it. There’s no name for it. You can find that money comes from the air. We’re working hard. My passive investor was truly passive. They didn’t even do any work.
How many investors went in on that deal because that was your very first one?
It was only four investors. I thank them because they trust me with their money for the first deal. I was always subscribed within 24 hours for my first deal. The deal was so good. They trusted me.
Moving on from that, as you think about continuing to scale your business, you’re taking the experiences that you’ve learned. What would you say are some of the key processes that you guys have sought to put in place as you continue to build your business?
Key processes are having due diligence checklist, a lot of systems, process, asset management, property management, managing delinquency, managing make-readies, managing filing time, all that’s very key in property management. For my investor side, we are putting our investment management software. We have a much bigger presence now with my podcast, my website and my content. It’s all about educating your investors and adding value to them. These are some of the things that we are putting as systems and processes.
Can you talk a little bit about transitioning from employee to full-time investor? Over this time, as you started this podcast, you’re many years in Corporate America. How did that transition go for you? At what point did you decide to now leave your full-time job?
It’s hard especially when you have three kids to feed, they’re all going to school and we have a family. My wife helped out in the beginning. When we started, she was doing the operation and property management I used to work. We have to drive on the weekend and start building that ancillary income on real estate. Even when I was looking, I’d like to do a lot of startup department where a lot of problems and go solve it. After that, I get bored with things being the same. As I build this real estate business on the side, we have tried a lot of other businesses.
My wife and I have tried a lot of businesses, nothing works as good as real estate. I’ve always had an entrepreneurial spirit in myself and my wife as well. She likes real estate. Combining this both, we know the real estate will be good. We made good money on real estate. We almost make 2x, 3x of what we were making in our W-2 job. We’re buying bigger deals. I realized that to be fair to me and my investors, I have to leave my W-2 job. You have to give a lot of attention to this investment. Some people giving you money and you’re managing them full-time. My wife, Shanti, was doing a good job, but we got so big and we need all the help on the ground.
Moving from that transitioning, it moves very well into building a business with your partner. As you and Shanti have an admirable partnership, because I’ve been there, I’ve seen how you guys work together, what advice you would give to other couples interested in investing in real estate together and building that business?
It’s hard to work with couples. We just have this unique ability. She’s good at something and I’m good at something. Combining those two, we’ve become a strong team. We try not to step on each other toes. It’s hard especially when you’re living together. You have to try that as best as you can. Sometimes when I step on her toe, she rarely steps on my toe but I stepped a lot on her toe. I always tell her, “I’m trying to help out.” It’s hard because we have grown so big. There are so many moving parts. We have a family to raise and all that. We try not to bring the issues to the house. A lot of times we do. Make sure that you have a boundary set within you and your partner especially your spouse on who’s supposed to focus on what and trying not to step on each other’s toes.
Do your children get any exposure to your business at all?
They do. Once in a while, we do take them on a road trip where we show them what we bought. It’s a very high level. We’re trying to pique their interest. Whether they’re going to do it or not, I do not know, but at least tell them what we do.
Lastly, your thoughts on a potential recession. At the time, I thought about interviewing you, we were not dealing with the Coronavirus at that point in time. What are your thoughts as we continue to move into the more uncertain waters in the economy as you continue to think about investing further in real estate?
I know the recession is coming. We don’t know when is that. Coronavirus may not be the trigger for a recession in real estate, but it’s going to impact our economy. A lot of travels are being canceled or events are being canceled. People don’t travel. The recession is going to be coming maybe 2021, 2022, but I don’t think that will be due to Coronavirus. Coronavirus is probably a short-term thing. Something else will trigger it. I don’t know what is that. As long as you buy your deals right. Don’t overpay and over-leverage, you should be good.There's nothing wrong being a first-timer, but operators need to come with some skill behind them. Click To Tweet
Thank you so much for coming on, James. I appreciate it. If my audience would like to learn more about you, where are the best places that they can go to check you out?
My website would be the best place. It’s called AchieveInvestmentGroup.com. I have my podcast called Achieve Wealth Through Value Add Real Estate Investing. If you look, “Achieve Wealth,” you should be able to find that. It’s one of the top 24 podcasts for real estate investing for 2009, which is published by RadioPublic. They’re an independent party. I have a Facebook group, Multifamily Investors Group. If you type into your search bar, MultifamilyInvestors.group, you’ll come directly to my Facebook group as well. I’m pretty active there. You can find me on LinkedIn. I have my mentoring program, which is Achieve-Academy.net. You can find out about mentoring on how you can get started, how you can underwrite and how can you raise money, how you do asset management and property management. I’d call it as A-Z Multifamily Mentoring Program.
Thank you so much again. I appreciate it, James, for coming on.
I’m so happy to be on your show, Lisa. You asked good questions. I’m happy about that.
Thank you so much, James, for coming on the show. I appreciate it. I hope you were able to glean a lot of good information from James. Here are some of my insights. First, as he was getting started investing in multifamily, one of the things he did was doing a text blast. He would do texts to about 500 sellers. He noted that the response rate was between 2% to 3%. As people think about getting in touch with owners, who are selling their properties, know that it’s okay. Some owners might very well not respond, but the response rate here was 2% to 3%. Nonetheless, he was able to secure a deal. He also talked about some of the key things when he was executing a business plan for this particular property.
He talked about how his plan was seeing increased rents by about $150 a unit and to execute a cash-on-cash return anywhere between 8% to 10%. With that, his plan was to do the BRRRR method, which is Buy, Rehab, Rent, Refinance, and then Repeat. His plan to do that was informed from his prior investing and buying single-family homes of which he did thirteen of them over two years. He was doing that BRRRR over all those different single-family homes. He was like, “Let’s do it on big multifamily.” With that, on this particular deal that we chatted about and the episode he had four investors and he thanked them for trusting him and believing in him as he tried to execute his first deal, which he did amazing.
He talked about the performance of how that deal performed exceptionally well. It was like 300% return for investors. The other insight he noted is that within six months of buying the property, his occupancy went from 90% to 78%. He focused on removing tenants who were not paying on time, removing tenants who were delinquent, and then filing evictions when they didn’t pay. Put in more stringent rules because ultimately you want to increase and make the place much better for the tenants. You’re also protecting your investors’ money so you’re doing both. Hence, you want to attract a better quality of tenant pool from there. After those six months, they were able to then renovate the units that ultimately turned and be able to get better quality tenants.
Tenants who were paying on time and were not delinquent in their rents. The other item that he noted that they included as a part of their business plan was looking at common area electric. Any lights that were in the common areas, that were on all the time. They focused on instituting like sensor-type lights that would come on and off. That way we are conserving on electricity. When he talked about advice for passive investors who are interested in investing in syndications, he noted that 90% of the equation is the operator. Getting to know that operator is super important, knowing who is the operator on all the deals that are brought to you, regardless of who has brought them.
Number two, you want to examine to understand the skills that the operator brings. He also mentioned on his first deal, it’s not as though he came with big multifamily experience. He didn’t, but he came with skills that were relevant. He was doing buy and holds. He was executing BRRRR strategies on smaller properties. From that is how he sought to demonstrate the relevance of his skillset. He noted that passive investor is key to understanding the assumptions that are being made in the deal. Some of those assumptions are what are some of the rent increases that they’re planning on executing on. Any assumptions that they are making, you want to understand and know them.
Generally, the rent increases, population increases that could potentially enable them to execute the business strategy. Lastly, some of the last things that I thought were also very insightful from this as well as talking about working with your spouse. I know that he and his wife together worked to build this business. From the outside, it seems like an amazing partnership. He talked about how both of them tried a lot of businesses. The entrepreneurial spirit being willing to get out there, try different things and do different things. Ultimately, he noted that she’s good at somethings and he’s good at somethings and together they seek to swim in their lanes, so to speak. Granted sometimes he noted that he will step on her toes, but they try to stay in their paths to get stuff done.
Overall, I thought it was an amazing episode. Lots of good information. James is awesome. I’ve known him as I’ve taken a class from him as well as have gone out personally to do due diligence on this property that we chatted about in this episode. I hope that this has brought a ton of value to you, as you think about diving deeper into syndications and investing passively, and helps to provide you with some education surrounding that choice. Until next time, you can find all of his information at www.LisaHylton.com. In the event that you wish to reach out to him, you can do so. Until next time, keep leveling up.
- James Kandasamy
- Achieve Wealth Through Value Add Real Estate Investing
- MultifamilyInvestors.group – Facebook
- LinkedIn – James Kandasamy
About James Kandasamy
James KandasamyPrincipal – Director of Acquisition, and Investor Relations Over 5 years of experience in real estate with more than 3 years in multifamily acquisitions and asset management. Expertise in finding value in Multifamily opportunities. Identified, underwrote and oversaw the acquisition process of over $130m of quality multifamily investments (9 Assets) Ran the execution of each business plan in the portfolio. Average IRR in a portfolio of more than 20%
Bachelor of Science in Electrical Engineering(Hons) from Science University of Malaysia and MBA from the University of South Adelaide (Australia).