With erratic and unpredictable circumstances in the past couple of years, people aren’t sure where to invest. Today’s guest is here to share why multifamily is the way to go! Reid Bennett is the National Council Chair of Multifamily Properties for SVN. Reid prides himself in understanding the nuances of multiple-unit apartment dwellings and low-income Section 8 and Section 42 communities. He chats with Sam Wilson about the upside of investing in multifamily and offers practical tips along the way. He also gives insight when it comes to trends in apartments vs. condos and where to invest. Tune in to get the advice you need before diving deep into the market.
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Reid Bennett On Multifamily Investing And The Affordability Housing Market
Reid Bennett, CCIM serves as National Council Chair of Multifamily Properties for SVN International and a Senior Vice President for SVN Chicago Commercial. As a licensed managing broker for many years, he focuses primarily on the sale of apartment communities across the Midwest and teams up with members of his council to serve clients across the country in over 150 markets. Reid prides himself on understanding the nuances and analysis of multiple-unit apartment dwellings and low-income Section 8 and Section 42 communities.
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Reid, welcome to the show.
Sam, thanks for having me on. I appreciate it.
The pleasure is mine. Where are you based out of?
I’m based in Chicago.
I’ve had a few guests come on the show from Chicago. The same questions I ask everybody who comes on this show. Reid, can you quickly tell us where did you start, where are you now, and how did you get there?
I started my real estate career here in Chicago in 2001. It was a boutique multifamily-focused investment sales firm. I was the youngest by about 25 years. It was a bunch of dinosaurs that we’re putting out one-page offering memorandums with the numbers. I started in the neighborhoods of Chicago. I would go up and down the streets. I would take pictures. Back in 2001, the digital cameras would hold about 90 photos, if you remember that. I would take about 90 photos. I’d come back in, I’d catalog them all, I would look them up on the assessor’s office and figure out who owns them.
I would take a ZIP code in Chicago and go ZIP code by ZIP code until I had the entire Northwest side of Chicago tracked. Everything I sold from 2001 until probably 2007 was the condo converters. I was 25 years old. I remember thinking every single apartment building in America is going to be converted into a condominium. I believe that. That’s how fast I was going. I had 176 condo converters in the Northwest side of Chicago in my database alone. I started doing that. I didn’t even know how to run income and expenses on a property until after 2007, which is when I went and got my CCIM designation when things shifted because it didn’t matter.
All I was doing was measuring the units with a laser measure, telling the guys, “Here’s how big the kitchens, bathrooms and living rooms. You can convert this dining room into a bedroom and add extra value to the condo units.” That’s all these guys cared about. I remember one particular instance where the lady did not want to disturb any of her tenants so we went into the basement, she looked up and we saw the firewalls. She said, “Here’s where the living room is. Over here is where the dining room is. Here’s where the bedrooms are. You can see the soil stacks. Here’s where the bathrooms are.”
Everything goes in cycles. There’s always up, and there’s always going to be downs.
I remember going out to the car and we wrote a contract on the hood of my car and the guy goes, “Take it back in there.” That’s how hot it was with conversion. I gave it back to her and we’d sign it up right there. Those days are done. After the condo bust happened, I started moving out into the suburban markets to garden-style apartment complexes. I started moving further outside of Chicago across the Midwest and getting involved in not only market-rate but affordable housing. That’s Section 42, the Low-Income Housing Tax Credit, LIHTC deals and project-based Section 8 HAP contracted properties. That’s where we are. Working in both arenas.
I love a lot of things in your story. One is how fast things have changed. Years ago, taking pictures, 90 pictures, trying to compare it to the Assessor’s Office and creating your version of Google Maps one pile at a time. That’s a tedious process. How investor appetite and demand change. The condo conversion thing is that all but dead at this point?
That’s all but dead. A lot of the condos in and around the Chicago market are being purchased and deconverted back into apartments. If you would’ve told me that in 2007, 2008, 2009 that that’s what was going to be happening in 2020 and 2021, I would have bet my house that it wouldn’t happen and that’s what’s happening. Here in Illinois, you only have to have 75% of the condo association approval.
If there’s a 25% holdout, if 75% agree, you can force the 25% to sell at the current market rate price. It’s a strange business. I know I have a number of clients that’s all they do. You have to have a steel stomach to do that. That’s what they’re doing. The properties are more valuable as apartment buildings than as condos, which I still can’t get my brain wrapped around that.
That is interesting how demand and investor sentiment changes. That’s wild and nobody has that crystal ball.
If you would’ve told me in April of 2020 that pricing would have gone up and cap rates would have compressed, I would’ve eat my house as well. I remember that because I host a quarterly National Multifamily Call internally for SVN. I had lenders on and the call was the last Thursday of the month in April of 2020 going into May of 2020. I remember the lenders were saying, “Tell your multifamily owners to expect 25% to 50% collections on May 1st, 2020.” I was trying to put on a smiley face to host that call. I got off of it.
That night I said to my wife, “Should we stop paying our mortgage to get ahead of this? Is this going to be a three-year downturn again?” It amazes me that it’s gone through the roof again. I’m sure you’re seeing the same things when you’re trying to come up with some multifamily deals. The competition is ridiculous.
Who knows where this all shakes out in the end. It’s like the condo conversion story. We don’t know where this leads. In the end, if we repriced assets with all of this money printing and this is the new pricing compared to the old, it’s all relative to the amount of money we’ve gotten the supply. I don’t know from the system who knows but that’s wild. Talk to us about what you guys are seeing from a brokerage perspective on affordable and market rates. Before we dig into that, can you define those terms for us?
Defining all of the affordability components to affordable housing would take another episode entirely for that. When I say market rate, that means regular market apartment housing. When you see your typical apartment unit that anybody from a professional to a student is renting that’d, be a market rate. When you get over to the affordability side, usually if you’re going into Section 42, that’s the Low-Income Housing Tax Credit product that is income-restricted. Typically, it’s about 60% or below the Area Median Income, the AMI. You have to income qualify the tenants.
That was a program created in the ‘80s to provide affordable housing in areas where there aren’t any. The extreme side of affordable housing is the project-based Section 8 or the HAP contract, which is Housing Assistance Payments. That’s where the entire building is under the Section 8 contract. The owner of that building gets one check for all of the tenants rather than voucher systems for those of you familiar with the voucher system out there.
Thanks for taking the time to quickly explain that in what detail you can on a short episode here. Walk us through what you guys are seeing in the market. I know prices are going through the roof. How are you guys finding value as brokers for your buyers?
We track every single existing apartment complex 50 units and above across the Midwest and in various other parts of the country. We also have about five systems that track the rents. A couple of our systems are connected to the USPS system, where it tracks open and operable mailboxes. That’s how they track occupancy on apartment complexes. We utilize a lot of it. We give all this stuff to our clients looking to buy a property or the client who’s looking to sell to help them figure out the value of a certain property.
In this market, it’s been very difficult to pin down values, which is why I’ve seen a couple of people sell their deals off-market. It’s not the market to do that because there are so many different execution strategies for a certain asset. You don’t know where the highest and best price is going to come until you take that out to market. We’re having great success doing calls for offers during this period because we used to try to price everything. That’s setting a target and then people try to hit that target. Some of these deals, if we set that, we don’t know what the value is anymore.
The numbers don’t lie. Just trust the numbers, trust your underwriting, and don’t go outside your comfort zone.
We can come up with the value range with the owner and then say, “Here’s where we reasonably expect offers to come in.” We’d do a black swan evaluation to say, “Here’s where the majority of the offers are going to come in this range. Here’s where the low ballers are going to try to come in and steal it from you. Here’s where we’re looking for the black swan. Their cost of capital is 2% so they’re able to try to undercut everybody else.” We’re also looking at significant hard earnest money deposits on day one. I had a client lose out on a deal in Mississippi. It was a small deal. It was an $8 million deal. Somebody came in with a $2 million hard earnest money deposit on day one and blew him out of the water. It’s been crazy what we’re seeing out there in this market.
How do buyers protect themselves? How can they create value? What are you seeing them do to create value in such a competitive environment?
There are a number of ways and a majority of it comes from the data you have available. There’s a couple of systems that I use that track. It’s connected with the Yardi management software. It can track around the property as long as there are seven or more properties on the Yardi platform. It can give you an aggregate of income and expenses for all of those properties so you can underwrite the deal within that market without even having the exact income and expenses from an owner.
There are systems like that and then we cross-check it with two other systems. If you have that available to you and are very strong in a certain market, you can do that nonrefundable on day one if you know the property and have a pretty good feel for it. The earnest money is refundable if there are environmental issues or title issues. Things like that you have no idea about, that’s the only thing that’ll save you with nonrefundable earnest money that I’ve seen in the contracts.
Talking about the data may be that you guys have at your fingertips. What’s a good strategy for a guy off the street or a small firm up the street to get their hands on that complex of a dataset?
Rather than trying to buy all these systems themselves and spend the hours to do that, I would align you with a broker that’s in that market that specializes in multifamily. I’m happy to share these systems especially when a buyer comes to me and says, “I’m looking at this property. Can you share the information that you have?” Even if I’m not involved in the deal, I’ll share it with them. It’s a relationship that I have.
One of our systems that we use that shows you the differences between studios, ones, twos, three bedrooms with the comp set and tells you exactly where you are as it relates to the competitive set on a per square foot, unit mix or unit price and what all the amenities are with each one of those properties. We’ve identified deals where they were about $0.40 a square foot below the market. Those are the kinds of deals where you see traded at a 4% or 3% cap. You’re like, “How the hell did this guy do this?” It’s because on day one, he’s going to go in there and raise the rent $250 without even putting any value add into it.
He’s going to make it an 8.5% cap after year one. I would look for the regular investor that’s trying to find deals. If you’re familiar with the market driving up and down your market daily, you look for signs of deferred maintenance on the properties. I went to a property in my market that the doors were all open going into the corridors and the shutters were missing. You can see the fascia is coming off.
Simple things that they’re not repairing. The grass is too tall. That’s signs of distress and those would be targets to take a look at. Also, I would look at long-term ownership.
The majority of the brokers are tracking how long the owners have had property. We’ve sold a couple of deals where owners had on them for over 40 years. When you’re in on that basis, you don’t care about pushing rents. Those are the great value add where you’re $100, $200 or $250 under market walking in day one. I also love month-to-month leases. A lot of people are afraid of those. We sold a 142-unit deal that had month-to-month leases. They were all $200 under.
We sold it to the group. The first month they owned it, they signed 118 of the 142 leases at $100 higher. All they did was say, “You can stay month-to-month but we’re raising you $200. If you sign an annual lease, we’ll only raise you $100.” They got everybody else the next month. The following year, they raised them 10%. That went from a $5 million deal to a $12 million deal in two years.
It’s some basic strategy in how they’re going to go about raising rents to more market pricing. That is brilliant. I love some of those things that you’re talking about looking for long-term owners. You are the Multifamily Chair for SVN. How many brokers work underneath you across the US?
They’re not underneath me. Everybody is in their own office but we have about 266 multifamily-focused advisors in the 225 offices around the country. We’re in every single market whether it’s primary, secondary and most of the tertiary markets around the United States. What I’ve enjoyed, especially in this position is I’ve been able to work with a number of my colleagues around the country that are boots on the ground in all these markets.
I can help clients of mine in any market they want to enter whether it be buying, selling or if they need market analysis. We’re able to do that with a lot of my colleagues throughout the country. We have about six deals that we’re working on, about 2,500 units around the country with some of my colleagues that are in different markets from Texas, New York, the Dakotas, Midwest, all over the place.
Learn your lane, stay in your lane, and don’t fall in love with an asset.
When you guys have your quarterly calls, I know you said you host that quarterly call, talk to us about some of the buzz maybe that has had on those calls. Can you give us any insight into maybe some of the things that we wouldn’t expect, the buzz from the street level with all of your brokers?
Everybody is experiencing a similar situation that we are. We have advisors that as they’re putting the OMs together, the Offering Memorandums for the deals, people are calling them and they’re saying, “I’m putting this 150-unit deal together at the OM.” People are saying, “Where is it?” We’re putting deals under contract and so are many of my other colleagues across the country prior to even completing the OMs.
We have 54.5 million of multifamily under contract. We have 45.2 million of LOI and then we’re marketing for 55.7 million. That’s more than a two-year period in my years in the business as far the activity. The activity is crazy. We’re calling it a smash and grab time because you don’t know how long it’s going to last.
How long will it last? Does that give you any concern that at some point, the music will stop and everyone is going to have to find a chair?
After going through 2008, 2009 and 2010, I’m always paranoid of that. There are cycles. Everything goes in cycles. There are always ups and downs. There’s always going to be buys of your life each year as the way I look at it. You’re always going to find a deal of a lifetime every year. If you’re looking hard enough and connecting with enough people whether it’s a 2008, 2009, 2020 market, it doesn’t matter. There are reasons people are selling in every single market and there’s a reason you should buy in every single market.
That’s sound advice because the one line that I never listened to as well is, all the good deals are gone like, “I don’t buy that.” You can always find the deal of your life in any particular year. The more intriguing part of that analysis is that we never know why someone’s selling. Often it’s not the money. We would assume from this side of the table, it’s always the money but you never know why someone is punting the asset that they’re punting.
I would say more often than not it isn’t the money. It’s some other reason in their life. When I first got into the business, I would call everybody in a certain ZIP code of Chicago. I met with this gentleman. He was probably 72 years old and it was his only apartment building in Chicago. He said, “I’m never selling this asset.” Six months later, I saw a hit Co-Star that it closed. I called him up. I said, “You told me not too long ago, you’ll never sell.” He said, “I wasn’t but I got prostate cancer. I wanted to spend the rest of my years with my grandkids as much as possible.” You never know. Partnership disputes are my favorite as well. First off because they’re going to sell the assets and second off, now I have two clients.
What do you see on that front? Let’s chase that rabbit hole for a second. What do you think are some of the more prominent reasons that partnerships are falling apart in the real estate space?
There are a number of ways to run, especially multifamily assets. Most of the time, partners aren’t going to agree. We’re working on a portfolio of assets with a group. There are three partners involved. Two of them wanted to refinance, pull all their equity out, which to me, I love that concept. If you have zero equity into a deal and it’s generating you the returns that were at or better than what you were, you bought the deal. Why wouldn’t you do that and keep going?
The one group said, “I don’t want to put another mortgage on this.” That was a reason for them to dissolve. They ended up buying each other out. There are a number of reasons. Some people want to add value, continue adding value. Some people want to take the cash flow and milk the property. Like anything else. Partners for life when you’re married, things come up that are different than when you started. No different than business.
A lot of times, we want to investigate those what went wrong scenarios so we can learn from them. In the end, maybe there’s no way to ever mitigate all of those potential ways that deals go sideways.
If you don’t have a partnership agreement that everybody signs at the beginning, that would be one red flag with a partnership. Where everybody has specific roles and they know what their roles are. I’ve seen a number of groups haphazardly put deals together. Some guys have the management end. Some guys have the capital raise ends. Along the lines, people start saying, “I’m doing all the work here on the management side.” The person is saying, “I raised all the money for you.” There are no egos in multifamily at all. Speaking of that, I have a client that says, “I could never sell my deal direct to a buyer because my ego is so big. I would screw it up. That’s why I need you to take what I’m saying, soften it up and deliver it.”
That’s an honest soul. I appreciate that honesty. That’s fantastic. When you think about the multifamily space, we’ve talked about market rate deals, affordable rate deals or affordable deals. We’ve talked about the fear of where we are in the market cycle and what you guys see happening. Is there anything else inside of multifamily that you would say that is a timely piece of information that you wish other people were thinking more about?
People are focused on inflation coming up. I had a conversation with an owner that said, “Would you consider taking a look at a crazy price for your deal?” I can’t find anything. Everything I get involved in, there are five other offers that are way above mine. I said, “Do you want to take advantage of this market on the flip side and sell your 120-unit deal?” He said, “No. I’m waiting for inflation to hit. My deal is going to be worth way more.” People have to be mindful of that. Inflation is coming a lot faster than wages are increasing in this country. That’s concerning.
Can you walk us through why that is concerning?
Inflation is coming a lot faster than wages are increasing in this country.
Simplistically, you’re talking about the cost of a gallon of milk. We’ve seen what happened with lumber and copper for the construction. All these things are going up but wages are not. It’s cause for concern because it’s going to be outpricing everything. It’s positive for the multifamily space because it’s widening the gap for homeownership and forcing people to remain renters. We’re a renter nation. People are not interested in buying homes, especially from the downturn of 2008, 2009 and 2010.
A lot of the Gen Xers and Millennials saw their parents lose their house in the downturn. They’re saying, “Why would I do this?” especially if they want to be mobile. If you want to go from Chicago to San Francisco to New York, wherever you want, you don’t want to put your condo on the market and wait for that to happen. They want to be nimble and be able to rent. To me, that’s a much smarter thing to do because you still have to come up with a 5%, 10% to 20% down payment for a home. Why not take that money and invest it with you guys in a multifamily deal and rent?
Rent where you want to rent. I guess one thought with that is if inflation does happen, wages remain the same. Then that means there’s even less money available for people to pay towards rent, which if there’s less money for people to pay towards rent, that means there’s less NOI necessarily on the bottom line. If these are traded as a multiple of NOI then maybe the asset prices of your multifamily holdings don’t go up.
You can only stretch the rental rates so much until the market starts pushing back saying, “I can’t afford it. I’m going to move out further and move out of the core into the suburban markets. I’m going to move out of the suburban markets into tertiary markets because I can’t afford this anymore,” especially with the fact that people don’t necessarily need to be in an office anymore in the core markets. We see a lot of people that were downtown and high rises in Chicago move out to the Chicago suburbs. They get a lot more space. They get an extra bedroom for less money. If we continue to see this, that’s going to be interesting for the higher price multifamily assets in the country.
It’s certainly an interesting time that we’re living through and the blueprint for this certainly has not been printed. Few questions here for you, Reid, before we jump off the show. If you were to help our readers avoid one mistake in real estate, what would it be and how would you avoid it?
The mistake would be don’t fall in love with an asset. We’ve had guys fall in love with assets and so then they end up stretching and coming back. Don’t do it. The numbers don’t lie. Trust the numbers and your underwriting. Don’t go outside your comfort zone. The other thing is don’t go outside the asset class that you know. Another reason why I think multifamily has been ridiculous as far as the cap rate compression and increase in value is a lot of the retail and office buyers stopped buying those asset classes and jumped into multifamily without understanding.
That’s going to be where a lot of those groups are going to be caught, not understanding the product. We know multifamily owners that have tried to get into the office space and lost their hat in the office space or tried to get into retail or tried to get into single tenant net lease deals and didn’t understand the lease term. Learn and stay in your lane and don’t fall in love with a deal.
Next question for you, when it comes to investing in the world, what’s one thing you’re doing to make the world a better place?
I just started coaching multifamily advisors. It’s been nice to give back after being in the business for many years, learning the ups and downs and what to do and not to do and to provide that back. Every year we go to the food depository and volunteer around Christmas time for them. Those are a couple of things we’re doing.
Both professional and personal give back. That’s super cool. Reid, if our readers want to get in touch with you, what is the best way to do that?
You can reach me on my cell, which is (773) 251-7342 or my email, which is Reid.Bennett@svn.com.
Reid, thank you so much for your time. I do appreciate it.
Absolutely, Sam. Thank you.
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About Reid Bennett
Reid Bennett, CCIM serves as National Council Chair of Multifamily Properties for SVN International and a Senior Vice President for SVN – Chicago Commercial. As a licensed managing broker, he focuses primarily on the sale of apartment communities across the Midwest and also teams up with members of his council to serve clients across the country in over 150 markets. Reid prides himself on understanding the nuances and analysis of multiple unit apartment dwellings & low-income Section 8 & Section 42 communities.
