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Cash Flow Champs

Cash Flow Champs Real Estate Podcast

While working in corporate, Sandhya saw firsthand how people dedicate so much of themselves to work, while simultaneously missing out on crucial opportunities to protect and grow their wealth.
That’s why she loves spreading knowledge about the power of passive investments in multifamily real estate.
You get to leverage her knowledge and experience in management, versatility, and metrics-focused investment decisions, so you too can do what it takes to take control of your financial future and build a legacy for your family.

What You’re Going to Learn:

  • The Importance of Asset Management in Multifamily Syndication
  • Strategies for Enhancing Revenue and Decreasing Expenses in Real Estate
  • Market Direction and Investor Response to New Deals and Capital Calls
  • Valuable Advice and Success Habit of Sandhya

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Show Highlights

The Importance of Asset Management in Multifamily Syndication

The Importance of Asset Management in Multifamily Syndication

Prashant Kumar- What inspired you to get into the apartment business when you were already doing well financially and your kids were happy?

Sandhya Seshadri- I had always been interested in real estate and knew that many millionaires had made their fortunes through it. However, after analyzing the margins in the single-family market, I realized that it wouldn’t be profitable enough for me, especially in Dallas where property appreciation was not as high back in the day as it is now. I found that my margins would only be around $200-$300 per month, which could easily be wiped out by one big repair or a tenant not paying their rent.

Therefore, I turned to multifamily properties which made more sense on a larger scale. The biggest challenge for me was to educate myself and speak confidently to potential investors. I started by investing passively, then partnered with experienced GPS to gain more knowledge and confidence. My first deal was with out-of-state partners who wanted to break into the Texas market, and I was able to add value to their investment by utilizing my knowledge of the local market.

One of my strengths is that I know my market inside and out. Give me an address and I can tell you within five minutes if I’m interested or not. I also know what a reasonable price per door is for a particular vintage of property in today’s market. This knowledge saves me time as I don’t have to screen a lot of deals.

I found my partners through a mentoring program and that’s how I got started on my journey. I knew that going into real estate without any experience was too risky, so having experienced people guide me was crucial. It’s like trying to pilot a plane without ever being a passenger or copilot; it’s too scary.

Paul Senior- Awesome. Well, the experience speaks for itself, without a doubt. So tell us, Sandhya, what is asset management? And why is it important, at a high level, for a syndication team to have a good asset manager on board?

Sandhya Seshadri- Operations or asset management is the most crucial aspect when you close a deal. It’s where the rubber meets the road and you have to execute the business plan. While the projections may look great on the webinar slides, the reality is where it counts. It’s like a wedding – the honeymoon is over and the marriage begins, and you have to make it last for three to five years.

Executing the business plan is critical, and ideally, you would have a property management company fully aligned with your plan right from the beginning. They would agree to all of your numbers, such as rent increases, and sources of other income, and have quotes from insurance and property tax purchase companies. This is especially important in Texas. With these neutral third parties in agreement, it’s time to execute.

We monitor some basic KPIs every month, with the first being your top-line revenue or collections, which is the most important number. That’s the number I give to my onsite PMS each month as a target. “You must collect $120K,” for instance, or whatever that magical number is. I also keep track of the operating expenses, including personnel, admin, and regular maintenance like lawn care, landscaping, utilities, etc.

Your top-line revenue collections, plus other income, minus these operating expenses, is the next most crucial metric – your net operating income (NOI). It’s the number everyone looks at, from your lender and potential buyer to your listing broker. It’s like the total income your family receives as a paycheck and whether it’s enough to cover your mortgage, let alone any other repairs or costs that might arise. We have a target NOI and keep an eye on it.

We also have “below the line” expenses, such as your mortgage and any capital you’re spending. Do you have a budget for that capital? Are you staying within it? Did you plan to do exterior or interior paint? What’s your average cost for an interior that you budgeted for? Did you stay within that budget or go over it? You want to monitor all of this.

Other critical KPIs to track include your occupancy rate, your delinquency rate, and any physical or economic vacancies. You want to make sure your occupancy rate is where it needs to be, and if any bad tenants need to clear out, you want to communicate that. Depending on your lender, they may want to see that 90% occupancy, especially on agency loans.

Ensuring high occupancy and minimizing delinquency is crucial in property management. Physical occupancy refers to the number of doors that are occupied out of the total available, which indicates the percentage of physical occupancy. However, economic occupancy is the percentage of occupied units that pay their rent, and if some units are delinquent, it affects economic occupancy. For example, if out of 90 occupied units, only 85 are paying rent, then the physical occupancy is 90%, while the economic occupancy is only 85%, which translates to a 15% economic vacancy.

To keep track of economic occupancy, it is essential to review the delinquency report weekly to determine why tenants are not paying. Property managers should investigate whether the tenants have the promise to pay or are eligible for assistance, and if not, determine what steps to take, including eviction, to recover the unpaid rent.

If occupancy is a problem, it is necessary to analyze the marketing budget to ensure that it is being spent on the right channels that bring in the most leases. It is vital to review all expenses and spending regularly to identify areas where cost savings can be made. For instance, instead of paying $200 per month for leasing printers, purchasing one printer for each leasing and property manager for $200 each would save money in the long run.

Operating expenses significantly impact NOI (Net Operating Income), and monitoring it closely is necessary. Besides, monitoring the net cash flow, which is calculated after paying off NOI, the mortgage, and any other capital expenses, is essential to ascertain whether the net cash is positive or negative. A positive net cash flow means that the company can distribute the surplus money to investors.

Overall, it is crucial to keep an eye on trends by reviewing performance over three to six months to determine whether the business plan is working towards the same goal. Though some variations may occur from month to month, it is essential to ensure that the team, especially property management, is aligned with the business plan and working together towards the same objectives.

Strategies for Enhancing Revenue and Decreasing Expenses in Real Estate

Strategies for Enhancing Revenue and Decreasing Expenses in Real Estate

Prashant Kumar- At a higher level, we briefly discussed the strategies to improve top-line revenue and reduce operational expenses. Now, I would like to delve deeper into this topic and share some valuable insights with our audience. Specifically, I would like to understand what specific actions you are taking to enhance revenue and decrease expenses.

Given that we have limited control over the debt, it’s crucial to focus on these two key aspects. So, could you share with us the specific steps you are taking on a day-to-day basis when you communicate with your Property Manager (PM) and hold them accountable to the plan?

Please feel free to elaborate and provide some context.

Sandhya Seshadri- Initially, when acquiring properties, it’s important to purchase properties where current rents are significantly lower than comparable properties in the market. One way to do this is by conducting competitive shopping to understand why a similar property can charge higher rents. It could be due to amenities or upgrades, such as providing washer and dryer connections, which are always in demand. Reserved and covered parking is another amenity that residents are willing to pay extra for, so it’s worth considering. Conducting surveys with residents to understand their preferences is also important. By looking at things from the customer’s perspective, you can find ways to add value to their living experience. This is crucial, especially when dealing with residents who have limited income. If your rent is significantly lower than competitors, you may need to raise it, but make sure to give residents enough notice beforehand. Do I need a copier? As one of the examples, I suggested buying instead of renting some of those things. Are my marketing budget and outsourcing expenditures being allocated properly? We only outsource what our maintenance team cannot handle. For instance, we employ an HVAC-certified maintenance person to avoid calling someone else for air conditioning repairs, which can be costly. We also attempt to conduct make-readies in-house, but staffing enough people is difficult. Therefore, if we have ten move-outs and ten make-readies to perform the following month, I inquire if my property management company can lend me personnel for that week, and I am only billed for the extra hours worked that week. Instead of upgrading the entire unit, focus on upgrading elsewhere because outsourcing can cause expenses to increase. My other suggestion is that if your unit is already pre-leased and renting at market rate, and you’re meeting your goals, don’t invest in fancy upgrades. A basic make-ready and a nice paint job can work wonders on a property, as it becomes a potential upgrade for the next buyer to consider.

Do I need a copier? For example, instead of renting, why not just buy some things? Is my marketing budget being spent in the right places? Should I consider outsourcing only those things that my maintenance cannot handle? For instance, we employ an HVAC-certified maintenance person, so we don’t have to call someone else for air conditioning repairs, which can be expensive. Another thing we do is try to do make-readies in-house, but staffing that many people can be difficult. For example, if we know we will have ten move-outs and ten make-readies next month, we ask our property management company to loan us people for that week, and we get charged only the extra hours for that week instead of contracting the entire unit. Whenever you contract things out, the expenses can get out of hand. Instead of upgrading the entire unit, upgrade elsewhere.

The other basic advice I always give is that if your unit is already pre-leased and in high demand, and you are already renting it at market rent, there is no need for fancy upgrades. Stick with a basic make-ready and a nice paint job, which can do wonders for a property if you’re already pre-leased at your market rent. Then, it’s a potential upgrade for the next buyer to do it.

If you did everything at a platinum upgrade, there may not be much upside left for the next buyer in two or three years when you sell it. Keep track of outsourcing your materials directly, maybe from a supplier. For instance, some people buy bulk flooring directly from China. Some of the vertically integrated companies do that, but we also know some direct suppliers, so they can get it to us much cheaper than the typical companies from which our PM outsources it. Some of them can even install it for us. Always get three bids for everything. Whether it’s your lawn and landscape, pest control, valet trash, or just trash, get bids.

Let’s say you’re not billing anything for trash and pest control. If you charge an extra $5 for it, it may not seem like much money, but at $5 times 200 doors, you’re earning $1,000 a month. At $12,000 a year on a five cap, that’s $240K. So little things quickly start adding up. Find the hidden pennies on the couch. Where else can you cut back on your expenses? Go line by line. Is your website necessary, or can you do a Facebook marketplace ad and push your property that way instead of having a fancy website? Where do your leads come from? Track your salaries as well. If you can do your work with few personnel, that’s always going to be a big one.

For example, in one of our properties recently, when we took over, we needed more hands on deck just to get everything turned and the right kind of residents. But once we settled, around the four to five-month mark, we didn’t need a leasing assistant. So we took our property manager, gave her a raise because she had done a fantastic job, and she said she could do without a leasing agent.

If you upgrade everything to platinum, there won’t be as much upside left for the next buyer when you sell it in two or three years. Therefore, you should keep track of your expenses and try to find ways to outsource your materials directly from a supplier. For instance, some people buy bulk flooring directly from China, which is cheaper than outsourcing from a typical company. Always get three bids for everything, even for simple things like valet trash or pest control. These small expenses can add up quickly, and finding ways to cut back on them is crucial.

Examine your expenses line by line and look for hidden pennies on the couch. For example, you might consider whether you need a fancy website or can do a Facebook marketplace ad instead. Track where your leads are coming from and look for ways to reduce your payroll expenses. Sometimes, you can eliminate certain positions if someone else can take over those tasks.

It’s essential to have conversations with your employees and listen to their problems. You can learn a lot from the people who do the job every day, and they can come up with creative ideas to improve efficiency. Consider implementing cameras to monitor lease violations, such as setting trash out in the wrong place or doing vandalism, and charge a fine to discourage residents from doing it again.

Hosting community activities can also help reduce crime and build a stronger community. For example, you can organize an Easter egg hunt, which is relatively inexpensive but can have a positive impact on your residents. Taking money out of your marketing budget for these activities can be beneficial in the long run.

Saving money on payroll is an excellent opportunity, so be sure to look for similar chances. Have conversations with your employees, and listen to them. I make it a point to have lunch with them every couple of months and ask them to tell me everything, all their problems. I tell them that I will solve at least two problems and add the others to my list. The employees doing the job come up with creative ideas, so it’s best to ask them. Another thing that I suggest is using cameras to monitor lease violations like vandalism, trash, or funny business in the laundry room. Take a printout from the camera footage and show it to them as evidence, then charge them accordingly. Every little detail adds up to operational efficiency, and the residents get the message too.

Community activities are also an inexpensive way to build a community and reduce crime. The Easter Bunny and Easter egg hunt are some examples of these activities. This will also help neighbors to know each other and feel comfortable talking about any issues they have.

Retention and renewals are other significant target for us. Good customer service, timely service orders, and maintaining market rent all help with renewals. We focus heavily on renewals as it’s the biggest source of cutting costs. If a resident can’t afford to pay more, but they are arguing over $50, remind them of the cost of turnover, which is around two to three grand.

When trying to cut costs, focus on renewals and think about the ROI every time you spend money. Sometimes, it’s better to keep the tenant rather than argue over a small amount.

Market Direction and Investor Response to New Deals and Capital Calls

Market Direction and Investor Response to New Deals and Capital Calls

Prashant Kumar- These are some fantastic tips you’ve shared about asset management. Moving on from that, I understand you’re also involved in equity raising and similar activities. I’m curious about your thoughts on the direction of the market and how investors are responding to new deals or capital calls, if at all. Could you shed some light on that?

As of April 2023, we’re anticipating a quarter-point increase in May. The question is, if this will be the end of the rate increases or if there will be more to come.

Sandhya Seshadri- This is the million-dollar question. What we are doing is to prepare for the worst. We’re expecting more rate hikes and anticipate they won’t stop until the first quarter of 2024. That’s why I’m looking at what will happen in April 2024, a year from today if the rate hikes continue. Fortunately, all my deals have three-year rate caps on bridge deals, so I’m not in danger as long as the rate cap stops and the rate increases by then. However, if the rates don’t come down after that, we need to look at our worst-case scenarios for every deal and see how we can react to them. Should we sell for a slight loss or break even versus waiting longer and hoping for the best-case scenarios that may not happen?

The best-case scenario we’re currently looking at is if May is the last rate to hike, and there are no more rate hikes for nine months, then the rates might fall. We’re all set for this scenario. But you don’t have to prepare for the best case; you always want to be ready for the worst by penny-pinching, being careful with your spending, doing your rent increases, and having a plan to address delinquency. You need to look at scenarios with two people in your world, your lending broker, and your listing broker. Continuously send them your financials because they will give you a feel for the current situation. They will tell you what you have to do in the next six months to get more proceeds and give you guidelines on what to do with your net rental income, other income, and expenses.

As you hope for the best, it’s best to prepare for the worst. Thankfully, my deals are not in danger of a capital call because our rate caps don’t expire until 2024, and these deals have done well, with a debt service coverage ratio greater than one, meaning my net operating income is enough to cover the mortgage. We speak with the lender broker and the listing broker so that we know when it’s all going to come to a head, and we’re thinking April 2024 is the time to list.

In terms of conversations with investors, I have some who are very much like me, math geeks who love their spreadsheets, and others who say, “Tell me everything is okay.” So I send a monthly report that goes out in writing to investors, explaining why we’re not at risk of a capital call and listing the top five or ten signs that their deal is in distress. The first step is a DSCR of less than one. If the debt service coverage ratio is less than one, the gap must be covered as soon as possible, either by refinancing or selling, because lenders are not going to be lenient on this stuff; they’re going to crack down. Therefore, it’s best to focus on increasing revenue, decreasing expenses periodically, sending financials, and listening to the advice of the two people whose help we’ll need either to refi or sell.

Paul Senior- That’s beautiful, and it gives them a sense of calm. It helps to maintain their communication, and that’s important. What is your team’s current take on this? Are you still actively looking at opportunities that are emerging? Or how are you approaching the current market for business growth?

Sandhya Seshadri- If the deal meets our requirements for location, then we’re satisfied. We don’t compromise on location because it’s a non-negotiable factor. We’re also particular about obtaining a nice fixed-rate agency loan with a prepayment penalty that could be stepped down or is so good that someone would want to assume it. We strive to get five years of interest-only, etc. We have a direct lender who works directly with Freddie or Fannie, so we can lock in that rate early if necessary, as we did on our two deals last year.

To elaborate, the deal must satisfy my specific criteria. I need to find an amazing neighborhood in Dallas because I know this area well since all my properties are within a 30-minute drive from my house. I can’t compromise on this control since I need to be able to drive to the property. If the deal meets my requirements, I’ll jump on it. I won’t be able to sleep at night if a broker sends me a deal that I’m interested in. I’ll do my OD on caffeine and drive by the property at night to get a feel for it. As soon as you give me a zip code, I’ll go drive that night. I can’t wait to drive tonight! If you send me a deal that I love, I’ll be underwriting it tonight, and I’ll make an offer first thing Monday if it’s that good.

My brokers know my criteria because I’ve been in this business for four years. I have four great brokers in my neighborhood that I can walk to, so I have that established connection with them. If something meets my requirements, they know that I’ll pursue it. In conclusion, the deal must fit my criteria; I won’t compromise on it. We’re fighting an uphill battle, and we have to underwrite for rising cap rates in the future, so there is no room for compromise. You want to start with tailwinds and not have any doubts. If you have even one doubt in your head that the deal won’t work, then don’t do it because it’s better to have no deal than to have sleepless nights worrying about a bad deal.

Valuable Advice and Success Habit of Sandhya

Valuable Advice and Success Habit of Sandhya

Prashant Kumar- Sandhya, talking to you feels like getting to know you more and more every day. It’s been a great experience. You share a lot about yourself, from your thoughts and management style to your deal underwriting process. It’s just awesome to see the work you’re doing, including providing free tutoring to kids.

Sandhya Seshadri- Yes, teaching math and financial literacy to kids is a passion of mine. As someone who grew up in India, where math is heavily emphasized, I’m surprised to see so many kids here in the US afraid of it. I believe math is a part of everyday life, and we can learn it by doing simple things like grocery shopping. I even homeschooled my son for a couple of years, and we did activities over the summer to teach him grocery math and other basic financial skills. Not everyone needs to learn calculus or design rockets. Financial literacy is crucial for making ends meet and earning money through simple activities like selling shrimp or running a business. So you need to understand a basic financial table.

Prashant Kumar- Understood. So, the key is to have more income than expenses.

Sandhya Seshadri- Yes, exactly. It’s like when you want to lose weight, your calorie intake should be less than your output.

Prashant Kumar- Okay, moving on to the lightning round. Can you share one piece of advice that has impacted your life, and how do you think it will benefit others?

Sandhya Seshadri- I would say, resistance. You and I can probably relate to this. I grew up in India, where my parents made $50 a month, and I wanted to come to the US for college, which would cost at least $10,000 a year. It seemed like a huge obstacle to overcome, but I did it through assistantships. There’s always a way to achieve your goals. For instance, when I wanted to fly first class, I found a friend who worked for an airline and traveled during off-peak times to get a first-class ticket. America is the land of opportunity and coupons, and I lived on coupons as a student with an $8-a-week food budget. There’s always a way to get there, and you just have to look for it. I even flew my family to Iceland for free.

Prashant Kumar- Share one personal habit that contributes to your success and that you think would help others.

Sandhya Seshadri- So lately, I’ve started believing more and more in the “Unleash the Power Within” concept by Tony Robbins, which means I say, “I’m unstoppable, you can’t stop me. I’ll just find another way around you to go do my thing.” It’s a persistence concept, but the same thing: I’m unstoppable. There’s got to be a way that I can save a deal or improve the NOI, or whatever it may be. If I’m out of ideas, there’s probably somebody who’s got some great ideas. I’m going to keep asking.

Prashant Kumar- How can our listeners reach out to you, Sandhya?

Sandhya Seshadri- I post the most on LinkedIn and Facebook, and my website is engineeredcapital.com. I’ve also written a chapter in the book “Next Level Your Life,” which you can find on Amazon. It tells you a lot more about me and my struggles and how I came to be where I am today.

Prashant Kumar- Is “Next Level Your Life” the book you would recommend?

Sandhya Seshadri- Yes, “Next Level Your Life” is the name of the book, and it’s available on Amazon. It’s got some great authors because of which it became a number one bestseller. I have one chapter in that book, and you’ll be inspired by many of the stories in it.

Paul Senior- Thank you for being on the Cash Flow Champs real estate podcast today, Sandhya. You dropped so much good information for our audience to glean. You have a wealth of knowledge that is just pouring out, and we’re just so thankful to have you here today. I really appreciate you coming on.

Sandhya Seshadri- Thank you very much. I appreciate both of you. This has been a pleasure.

Prashant Kumar- We will see you soon, Sandhya, sometime at one of these conferences. Looking forward to it.