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Cash Flow Champs

Cash Flow Champs Real Estate Podcast

CJ Yamada hails from Japan. He is residing in Las Vegas, where he runs his own solar business. Over the past 2.5 years, he has delved into commercial real estate, serving as a General Partner for a senior housing business in Wisconsin, overseeing 79 units. Currently, he is also in the process of securing a contract for a new development consisting of 98 units, further expanding his real estate portfolio.

What You’re Going to Learn:

  • Experience with Government Subsidies
  • Finding Tenants for the Assisted Living Space
  • The Role of Property Management Company
  • The Valuation of The Business
  • Barriers to Entry in Assisted Living

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Show Highlights

Experience with Government Subsidies

Experience with Government Subsidies

Prashant Kumar- We want to know from the horse’s mouth what unique background you have in real estate and how you plan to pursue it further.

CJ Yamada- Thank you for the great introduction. I still own my solar business, mainly conducting business in California, Nevada, and Arizona. It’s going great. I started looking for another investment opportunity to divert the cash from my solar business and let it work for me instead of me working for capital. Like many others, I chose real estate, specifically multifamily. I started listening to different podcasts, reading books, joining masterminds, attending meetups, educating myself, and expanding my network. My first deal was as an LP in Texas, and last year my partners and I closed a 49-unit senior housing project in Wisconsin. Wisconsin offers excellent government subsidies for senior housing businesses, with 99% of the income coming from these subsidies. Due to a 9% increase in Social Security last year, we received the same increase with the same tenants and building, just with different paperwork. I find that amazing. Since the income is government-sourced, it’s a recession-proof and inflation-proof business. As a result, I decided to invest my capital and bring in capital from friends and family as a syndicator. As you mentioned, we are currently closing an 80-unit deal this week, and we just put a 90-unit deal under contract. Hopefully, we can increase our scale and provide the best service for senior citizens and investors.

Prashant Kumar- That’s super awesome, CJ. I would love to learn more about the government subsidy. There was a lot of interest in this space during our recent virtual summit, even though it focused on multifamily. I feel like we should have our own virtual summit on assisted living. Can you tell us more about your experience with government subsidies?

CJ Yamada- The government subsidy is part of the Medicare network program, and it’s lower than private pay, where customers pay out of pocket. However, it’s not a low-income program. It’s more like an insurance program. We have a much higher demand for senior citizen care compared to the supply of senior housing businesses. We see it as a great opportunity. I would recommend your listeners to check their own state regulations. For example, in Las Vegas, Nevada, where I am, many people move here to retire. With 80 million baby boomers getting older, there is a significant need. I often hear the phrase “old and cold.” However, Nevada has a strong economy that doesn’t require government subsidies, so it’s not available here. Wisconsin and Oregon, on the other hand, have good government subsidies, and if you do a good job, the business can be quite profitable.

Prashant Kumar- So you’re saying that Wisconsin and Oregon are the places where it is possible to receive government subsidies for assisted living businesses?

CJ Yamada- Yes, that’s correct. In fact, I spoke with one of my brokers in Oregon just yesterday.

Finding Tenants for the Assisted Living Space

Finding Tenants for the Assisted Living Space

Prashant Kumar- Okay. In addition to these two states, do you have any insights into other states that are also providing subsidies for assisted living space?

CJ Yamada- I’m not sure off the top of my head. I should have done more research.

Prashant Kumar- And what is the process? Can you explain the process to our listeners in terms of applying for the subsidy and finding tenants for the space you’re creating?

CJ Yamada- Sure. Several agencies handle these government subsidies. In the case of Wisconsin, it’s called MCO, which stands for Managed Care Organization. They act as intermediaries between the government, local government, and senior housing businesses to ensure that they receive the appropriate payments and provide the required services.

Prashant Kumar- So these MCOs are like brokers, in a way?

CJ Yamada- No, I would say they are more like agencies.

Prashant Kumar- Ah, I see. And they are the ones who refer tenants or guests for your space?

CJ Yamada- That’s correct. They act as a middle party between the government service providers and the customers.

Prashant Kumar- Got it. And how difficult is it? Can you elaborate a bit more on the challenges?

CJ Yamada- Yes, I would say it’s difficult, especially when it comes to the initial purchase. There is still more demand than supply in the senior housing business. Once you acquire a business in real estate that already has cash flow from these agencies and a legitimate license, there’s not much you need to do other than maintain the license and update the business. However, I haven’t even thought about starting our own senior housing business from scratch, building and obtaining a license, and everything that comes with it. That’s not something we do. We prefer to take over existing businesses that are already running and generating cash flow. With that experience, it’s not that difficult.

Prashant Kumar- I understand. So what are the typical cap rates you get when you buy a business, and what value-add do you provide?

CJ Yamada- The cap rates can vary greatly, similar to buying multifamily or any other business. It can be more than 10% or around 5%, depending on the seller, timing, and the specific situation. The highest cap rate I’ve seen is around 12%.

Prashant Kumar- That’s impressive. Do you implement any value-add strategies in the business?

CJ Yamada- Yes, although not as much as in traditional multifamily housing. The challenging part of the senior housing business is the high expense ratio. Ideally, it should be around 60% to 70%. However, we have come across many small mom-and-pop businesses running at 80% or 90%, and they can still generate cash flow if managed properly. Our main value-add strategy is cost reduction. When we visit mid-sized senior housing facilities owned by individuals in their 60s and 70s, we often see receipts and invoices scattered on their desks, and their most advanced technology is an Excel sheet on a computer. This is a good sign for us because it indicates there is room for us to optimize expenses while maintaining the same income from the tenants. By reducing expenses, we generate extra cash flow and profit. So, cost reduction is typically our primary value-add strategy.

Prashant Kumar- I see. How does implementing technology help in reducing costs in terms of operational aspects such as food, clothing, and payroll?

CJ Yamada- There are two things I can think of right now. First, the biggest expense is definitely labor. Since it’s not just an apartment, there needs to be at least one nurse present, even in a small building. The number of nurses required depends on the category and the specific business we are acquiring may need a few nurses available 24/7. Labor is the biggest cost. One way to optimize it is by using software instead of traditional shift organization methods on paper or Excel sheets. By implementing software for hourly shift management, we can visualize and optimize labor expenses. For example, if a nurse takes 50-70 minutes of overtime every day, and we have three or four nurses in three or four buildings, the expenses can easily reach six digits. Our goal is to ensure that nurses work efficiently and get paid for the necessary hours while avoiding unnecessary expenses that can be minimized through available technology. That’s the first aspect. The second aspect is scalability. When you have 20 units of senior housing compared to 200 units in the same town or market, the scale matters in terms of purchasing food and supplies like toilet paper. That’s why we aim to add similar businesses in the same market to achieve economies of scale.

The Role of Property Management Company

The Role of Property Management Company

Prashant Kumar- So, when you mention that you’re trying to do it, I understand that you’re primarily an investor rather than directly involved in day-to-day operations. Are the operators who run the show the ones responsible for implementing these strategies? Do you get involved in choosing software or cost-cutting decisions, or does your property management company already handle these aspects?

CJ Yamada- Yes, currently I’m speaking more as a specialist. I only have a 30-minute weekly meeting where I receive reports from the management team. We oversee their work, but I don’t have any day-to-day responsibilities.

Prashant Kumar- I see. On this topic, how do the businesses operate? Do they form an LLC where they handle accounts receivable and accounts payable, and you simply review the reports and communicate with them, providing equity or handling the debt service yourself? How does that process work?

CJ Yamada- Exactly as you described. We stabilize the asset and the business after numerous transactions following the closing. It’s not an easy process. We have weekly meetings, and some of our team members have more frequent communication with the management team to ensure things get done. But yes, it’s exactly as you said.

Prashant Kumar- Got it. So the management team is responsible for marketing your property and attracting residents.

CJ Yamada- Yes, and there’s an agency involved in the government pay deal.

Prashant Kumar- So the management team sources the tenants, obtaining them from the MCO organization. But do you also have marketing set up for each of your properties? How difficult is it to find these management companies?

CJ Yamada- It’s easy to find them, but difficult to establish a successful partnership. We go through background checks, cross-references, and customer reviews, and even then, failures can happen. It’s a crucial aspect of the commercial real estate business.

Prashant Kumar- Do these management companies become your partners, or are they fee-based organizations?

CJ Yamada- They are fee-based, we retain ownership of everything.

Prashant Kumar- Okay. What are the typical charges they apply to the bottom line, similar to multifamily properties, around 5% to 18%?

CJ Yamada- It depends on the income and the size of the property.

Prashant Kumar- So, even though you handle payroll, they charge a percentage of the gross income, around 4% or 5%, is that correct?

CJ Yamada- It varies based on income and size.

Prashant Kumar- But these MCOs usually have lower rates compared to private pay.

CJ Yamada- Yes, the 80 units we are currently closing on are a portfolio with 30 units being private pay and 50 units being public pay. They are in the same market but don’t compete because private pay is higher-end. Private pay units have individual bathrooms, extra dishes with each meal, additional support, and high-quality furniture—similar to the difference between a Holiday Inn hotel and a Ritz-Carlton. Different markets exist even within senior housing. So, in terms of income, private pay is more profitable.

Prashant Kumar- Can one facility accept both private pay and government pay?

CJ Yamada- Yes, it’s possible to have a hybrid model.

Prashant Kumar- So, it’s possible to have both private pay and government pay residents in the same facility?

CJ Yamada- Correct.

Prashant Kumar- But with different rates?

CJ Yamada- That’s correct, yes. And different payment sources, from your private pocket or the government.

Prashant Kumar- Got it. How difficult it is? I mean, do you have the delinquencies and stuff in your business? Late payments, things like that? No, that doesn’t happen in this business. Those who come don’t happen. No. So what’s, what’s the difference in terms of private pay? Private let’s say private pay is 4000 or 4500. What is the government subsidy? 

CJ Yamada- I don’t know. On top of my head. Yeah, but more than 10% lower. I remember, I might be wrong. Yeah, 

Prashant Kumar- Got it. How difficult is it to find portfolios or properties like these in different states? That’s my next question. If somebody wants to get in, for our listeners, how do they search for these opportunities?

CJ Yamada- It’s similar to multifamily. Talk to brokers or look for senior housing businesses in your target market and within your desired parameters, such as the number of units, and start reaching out to the owners. It can be challenging to break into the market, just like with any other asset class. But once you’re in, deals will come to you. You won’t have to chase deals.

Prashant Kumar- Okay, so you’re saying that it’s relatively easy to find these deals once you’re established?

CJ Yamada- Yes, once you’re established and known in the industry.

Prashant Kumar- I’ve had a different experience. I see a lot of deals out there, but whether they will work out, I mean, the numbers sometimes don’t add up. For example, some deals have expense ratios of 80% to 90%. When you come across these low-cap rate deals, do you aim to increase the NOI by reducing expenses through implementing technology in the asset, thereby increasing the valuation of the business?

CJ Yamada- Could you repeat that part about increasing income, as I mentioned before?

Prashant Kumar- No, my question is, let’s say you are buying a property at a five-cap rate where the expense ratio is 80%. Is your strategy to purchase it with an 80% expense ratio and then try to decrease expenses by implementing more technology in the asset, in order to increase the NOI and ultimately raise the valuation of the business?

CJ Yamada- Yes, that’s exactly what we do. That’s our strategy, and it’s what we enjoy doing every day. While acquiring a property at a lower market rate is great, in the apartment business, it usually takes about twelve months for turnover. However, when it comes to reducing expenses, we can start from day one.

The Valuation of The Business

The Valuation of The Business

Prashant Kumar- Help me understand. When you’re making a purchase, how many deals do you analyze regularly? Actually, my question is, what is the valuation of the real estate and what is the valuation of the business? How do you go about determining that?

CJ Yamada- Real estate alone doesn’t provide anything. Once you acquire the business, it generates cash flow. So in terms of initial investment, we consider both the real estate and the business. When evaluating the business, we focus on market rents, expense ratios, and any high or unusually low figures. We analyze the numbers and submit a Letter of Intent (LOI). After that, we have to perform a thorough investigation, checking every box in terms of documentation, paperwork, and the physical condition of the property such as the roof, foundations, and floors. It’s pretty much the same process as with multifamily properties.

Prashant Kumar- So, in essence, it’s a multifamily business. From an investor’s standpoint, it’s a rental business. Although the cap rate may be slightly higher, there are more opportunities to reduce expenses by partnering with a proven property management company or asset management company that efficiently manages operations. Is that a fair statement?

CJ Yamada- Yes, absolutely. We actively share information through our blogs and I recently published an ebook. We try to provide as much insight as possible on our website, yamatacapital.com. You can download the ebook and schedule a one-on-one call with me if you have further questions. But yes, what I mentioned earlier reflects what’s happening in my business.

Prashant Kumar- Typically, what returns are investors receiving for the projects you work on? What is the typical offering on your deals?

CJ Yamada- We aim to close deals with a conservative underwriting approach. We strive for double-digit cash returns, not guaranteed, and present a target of a 2X equity multiple. The goal is to achieve a double-digit annualized return and double our investment every five years.

Prashant Kumar- Got it. So investors receive a double-digit cash return. Is it on a quarterly basis?

CJ Yamada- Yes, on a quarterly basis. The overall yearly return is double-digit.

Prashant Kumar- Understood. No guarantees, but that’s the plan you strive for.

Barriers to Entry in Assisted Living

Barriers to Entry in Assisted Living

Prashant Kumar- How are lenders looking?

CJ Yamada- Yeah, the first few deals were smaller, less than 50 units, and we worked with local banks and credit unions. They are familiar with how the senior housing government funding works at the local, state, and county levels. It was a good deal, I would say. Currently, we’re closing a deal with 90 units, which is a good size in terms of both units and borrowing amount. We’re able to work with the HUD program, the government lending program. It’s a positive situation. In this 90-unit deal, we have a HUD government loan on the lending side, and the income side also benefits from state subsidies. Both sides are supported by these big entities, and I’m really happy about it when I invest my money into it.

Prashant Kumar- Got it. What do you think are the barriers to entry for you? What do you consider as barriers to entry in this business for a normal investor who wants to do what you are doing to acquire deals?

CJ Yamada- It’s all about relationships. I would say that initially, I didn’t have any contacts. I’m originally from Japan, and to be honest, I didn’t even know where Wisconsin was before I acquired my first deal. When I landed at Wisconsin Airport for the first time and stopped at a gas station to grab some breakfast, the cashier asked me if I was from somewhere else because I was underdressed. I didn’t even know about the weather or the location. But luckily, I had a partner with enough experience, network, and assets in the local market and even outside of the market. I happened to know him and stayed in touch with his team, and opportunities came from there. I always emphasize the importance of networking. In fact, I actually run the largest multifamily meetup in Las Vegas. If you search for “multifamily meetup in Las Vegas,” you’ll find it. We have 440 members, and it’s one of the fastest-growing meetups in the nation. We always emphasize that your network is your net worth. If I hadn’t made that first call to my current partner two or three years ago, I might not have had any portfolio in Wisconsin. So building relationships is not something you can achieve through a simple Google search or mass email. You have to get to know the person, even if you don’t know who they are.

Prashant Kumar- This is awesome, CJ. You have shared a lot of information, and I apologize for delving deeper into certain topics.

CJ Yamada- No problem. I love it. We wanted to make sure that people get the complete picture. It’s okay to explore deeper aspects if someone wants to know more. That’s how people get to know that you have experience in the area.

Prashant Kumar- And just to add, so far, we’ve mostly done 506(b) deals, which means our investors are within our circles – my money, friends, family, and previous relationships. If you’re interested in knowing more about what we do, feel free to give me a call or set up a call through my website, Yamatocapital.com. That’s awesome.

Prashant Kumar- How open are you to starting business partnerships with new investors? New investors or individuals, who want to do what you are doing? Bringing them up to speed in a new market or maybe in Wisconsin? How open are you to exploring future opportunities?

CJ Yamada- I’m always open to any opportunities, and my niche focus is Wisconsin city housing. But if the partner is legit, honest, have good integrity, and good experience, and we can work together, yeah, I’m open.

Prashant Kumar- That is super awesome, CJ. Thank you so much for your time. It has been so valuable. Folks, do you know how to reach CJ? I keep on calling him CJ. I hope that’s okay.

CJ Yamada- That’s fine. Yeah, that’s my name, that’s me.

Prashant Kumar- So you can reach out to him at yamadacapital.com. And anything else I have missed, CJ, if you want to communicate to the listeners?

CJ Yamada- If you want to be a passive investor, I would say, know who the GPs (General Partners) are before entering the market and deal. Understand their experience, their relationship with you, and their integrity. It’s a people business, so even a good deal can go south depending on who manages it. And if you want to be on the operating side as a GP, as I always say, one contact can change your career. Your network is your net worth. So keep making phone calls, attending meetups, networking seminars, and one opportunity might change your career.

Prashant Kumar- One last question. Do you recommend any senior assisted living-related resources, conferences, or books that might be helpful to our listeners?

CJ Yamada- Actually, that’s what I’m looking for myself – good resources, books, and a mastermind network. But this industry, especially multifamily, is somewhat of a closed environment. Brokers, lenders, and local government agencies aren’t promoting themselves as much as the multifamily sector. So it’s a great question, but off the top of my head, I don’t have any specific recommendations.

Prashant Kumar- CJ, again, thank you so much for your time, and congratulations on having a small baby at home. Thank you so much. Anna, sorry for the noise. It’s music for, you know, how it is. I’m so glad to hear that you have a small baby at home. Thank you so much for your time.

CJ Yamada- All right. Thank you so much. I appreciate you having me.