Shaking Trees

One of the first things we do in a market is create our buy list. This is a compiled spreadsheet with every property in our target neighborhood(s) that fits our criteria and includes details on the ownership, their entry price, where the entity is domiciled, permit records, etc. This is a process we carry out while working extensively with brokers in the area- we share these lists with our brokers to see if there's any personal relationships/angles.

Without taking an initiative, we’re playing a waiting game on the MLS and ultimately sitting on our hands until that needle in the haystack comes through. Would much prefer to open myself up to as many interactions as possible and see where those lead.

For us- these properties need to be sub-institutional apartment buildings, located in supply constrained (whether that’s geography, historic districts, arduous permitting landscapes, etc.) markets.

Once we have our generalized list, we dig a little deeper. Is there a single owner or entity with multiple properties? What's the background behind the ownership? Are there any generational owners? What did they initially pay for the property? What’s the scope of the work that is needed (we can execute strategies ranging from core to value add so our range is wider here)? Based on their other projects, are they potentially looking to move assets off their balance sheet?

Typically, you’ll have the most room to wiggle with generational ownership groups/people who have owned the asset for many many years. They often don’t need to exit at a certain price per sq. ft (they’re walking away happy regardless) and don’t optimize operations (self manage, can be late to make repairs, don’t have necessary cap ex budgets, etc). These are all angles to add value.

From here, find ways to get in contact with them (the shaking trees part-leverage your broker(s) as needed). No need to be too direct, you’re just contacting a fellow property owner in your neighborhood.

Point the conversation to them then tell them about yourself, your company (we buy cool apartment buildings in cool areas and steward them well over the course of many years), and your other developments in the area. From here, we have a sense of familiarity and they know you can operate in this market.

Depending on the context (sometimes it’s fine to say on the first call, other times it’s better to wait for the next interaction- feel it out), indicate that you’d interested in buying the property should they ever consider selling.

The response may be, "Absolutely not. But, my friend Jimmy is looking to sell some portions of his portfolio" or "Not looking to sell, but I do operate my own roofing company should you ever need estimates." You never know where the conversation will take you.

From here, it’s a game of back and forth but at least you’re in the door and in conversation with somebody who is likely very interesting and successful.

Get the Feel

One of the first things I do when scouting a city/market is to locate the people that actually make the "cool" areas cool.

The person that crafted the organic blueberry shrub for your $25 drink likely doesn't live in the area they work. Most of the time, they're accessing the same caliber of drinks and food but aren't paying the same rates.

From my experience in New Orleans, the young entrepreneurs, bartenders, servers, bar backs, hostesses, performers, musicians, you name it, don't live in the areas that are widely known as "cool" (yet).

Instead, they're concentrated in a handful of neighborhoods, which are cheaper by nature, inclusive, and provide a communal feel for those within it. Their current job is likely just a way to pay the bills while they pursue that other passion. Whether that's music, cooking, a start-up- you get it. 

These are also the areas where these entrepreneurs/creatives can take their first leap.

Whether that's opening the coffee shop of their dreams or a vintage clothing store, the owners in these areas are willing to take a bet on a first time operator and provide cheaper rates (naturally, bc of less desirable real estate).

The creative mind behind the really cool cocktail menu or venue is also molding the neighborhood in which they live, year over year (just like the other residents). 

Over time, these areas can become hubs for incredible cuisine, art, nightlife, and ultimately become widely known as "cool."

The fun part is finding these neighborhoods during the transitional period (careful not to be "too" early), witnessing the creative forces carve out what they hope to see within it, and contributing to the progress through strategic investments that will serve the community for years to come.

Once they're "cool", pricing power will naturally come into the equation and the next generation of these creatives will find another area to ultimately make their own.

Very much of the Richard Florida school of thought but a natural process I continue to seek out and track within our target markets.

The Broken Arrow Holding Thesis

-Be cognizant of current/new/proposed property laws (rent restrictions, overlay districts, short-term rental laws, etc.) Even if the laws don't affect you directly, they might have down stream effects. Gather every input you can. 

-Invest in supply-constrained markets with existing demand. Doesn't matter how nice the units are- if they're in the wrong location, they won't get leased. This is where you need to be an expert in your market.

-Thorough check of property title, permits, variances, easements, etc with the help of legal. Make sure you're not inheriting a property where un-permitted work took place.

-Strong emphasis on conservative underwriting (don't forecast things you have no control over). Be able to withstand a 30% decrease in rents.

-Source the narrative behind the seller(s). Who are they, why are they selling, what else do they own, how do they operate these properties (do they keep rents low to prevent turnover, do they maintain them, quality of tenants, etc). If they own a bunch of other properties, try to make a new friend.

-For renovations: ensure your proposed renovations are allowed from a legal standpoint (get with your architect/GC/lawyer). Get your contractors into the building during the inspection period to point out any major issues, review inspection reports, and provide estimates.

-For renovations: Get in front of any scheduling deadlines, make sure all permit/application information is tight and has been reviewed by qualified parties (if that's legal, architect, GC, etc) to prevent back and forth with city officials. Have your lawyer/architect follow-up with permitting offices as needed.

-Execute construction that renders a unique product. Utilize quality finishes, materials, appliances, you name it. Do everything the right way and don't cut corners during this period. The final product is a reflection of you, your firm, and will ultimately be somebody's home- act accordingly. 

-Always keep significant reserves in operating accounts (this is subjective and depends on the deal).

-Retain the best leasing agents/property managers in the market. Fees are well worth it if they're filling units in short periods of time.

-Continually shop around insurance policies and any other recurring overhead costs. Keep overhead tight.

-Focus on asset classes with low obsolescence risk.

-Buy cool buildings in cool areas and hold them forever.