Despite the ravages of COVID-19, multifamily real estate has bounced back, even with the rise in material and labor costs. What can we expect from the real estate space as we recover from the pandemic? In this episode, Sam Wilson sits down and talks to the COO and co-founder of Obsidian Capital, Michael Woodfield. Michael gives his insights about the real estate market and shares how he started in the multifamily space. He also discusses his projections on where the market is going. Tune in for more investment and scaling ideas here.
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Multifamily Real Estate Properties, Value Adds And The State Of The Market With Michael Woodfield
Michael Woodfield is the COO, Partner and Cofounder of Obsidian Capital Company. He got his multifamily experience working for a small firm located in Austin, Texas. Over the course of five years, he oversaw the operations, asset management, construction management of nearly 5,000 apartment units and the renovation of 2,500 multifamily units, totaling $30 million in renovations. Since cofounding up Obsidian Capital, he has participated in the acquisition asset management and renovations of another 1,000 apartment units. Mike, welcome to the show.
Thanks. I appreciate it.
That’s a lot of renovation. I’ve done my fair share of construction but not nearly that amount. Is that something you’re still involved in on a day-to-day basis?
I try and be as involved in it as I possibly can be. We’re buying and acquiring a lot of units. We’re developing a lot and we’re doing ground-up builds but we have three active value add deals going on that we are renovating.
Are you doing this primarily in the Texas markets because I know that the original firm you worked for was in Austin? Where are you guys based out of now?
Our brand new office is here in Cedar Park, Texas, just North of Austin. We are still in the Austin area, Central Texas. Most of our developments are located in and around Austin. However, we do have deals up in Dallas-Fort Worth where more value-add acquisitions that we did a few years back. We picked up another deal over in your neck of the woods, just North of you, over there in Tennessee, up on the border there in Tennessee and Kentucky. We have a bunch of units all over.
Talk to us about renovations, value-add deals, materials, supply shortages and labor shortages. How are you guys working your way around that? How’s that affecting you? How are you making it happen?
It’s affecting everybody and I joke that their excuse for everything right now is all COVID or whatever it might be. You have to figure out what is an excuse, what is actually COVID, supply chain or labor-related? Labor rates have never been higher in the blue-collar force. They’re skyrocketing. I have a friend that owns a landscape company and he’s paying guys $21 to $22 an hour to cut grass. That is the market we’re dealing with and that is increasingly difficult. It’s such a development market. There are so many new builds, construction going on that it’s hard to get subcontractors to come out and complete a task. What comes into play is those deep relationships from the past that you’ve worked with these guys for ten-plus years and you know they’ll get the job done. We’ve relied on that a lot.
What would you say to somebody who doesn’t have a deep network that you guys do?
You can always network with other syndicators or other folks in the market. If someone called me up, I could give a referral to a construction company that could get the job done. I would start there. Start with people that do what you do. Maybe you have some friends in the industry, try and get some referrals. Sit down and have lunch with a contractor or somebody and see if you can’t strike a deal.
You can’t make things perfect, but it’s all about pushing through those obstacles and still getting it done.
We’ve had issues with some of our new builds. The concrete guy doesn’t show up, that pushes back. The framing crews that were supposed to come and lumber was supposed to be dropped. It creates a whole chain reaction. The reason why you get paid is to handle that brain damage and get the job done still. You can’t make things perfect but it’s all about pushing through those obstacles and still getting it done.
Talk to us about the opportunity you see in the new development side of things and maybe even some risks associated with that.
The risk that you see when you’re doing new development, especially now, it’s tough to bank on a budget. Let me give you an example of a budget gone wrong. We had a 50 unit ground-up development that we’re doing here just North of Austin in Leander, Texas. We closed the loan and between the late summer of 2020 and the turning of the year 2021, there is about a 400% increase in lumber. Our GC came back to us and he said, “The site works done. The pads are built up. I’m ready to pour concrete but you’ve got to know that I have increase in electrical, in plumbing and a huge increase on lumber in framing windows and all these things.”
He dumped that on us in January 2021. We had to go back to the lender and say, “This is not our fault. This is what we’re faced with.” The lender wasn’t happy at first but what I did from there was say, “The materials may have gone up but so the rents in the market.” I was able to do a comp study and then I was able to order a new appraisal and showed that the value had increased enough to where the bank would lend us more money to get the job done but that took about four months to do.
It was six weeks waiting on an appraisal then the underwriting at the bank took another six weeks. It was a long process. That’s an example of the risks that you run. If the materials would have gone up but the rents didn’t go up, we would have been pulling from our own pockets to get this deal done and the value wouldn’t have been there. It would have been like, “This still doesn’t make sense.” In this market that’s the risk you take is, “Can you bank on a budget?”
That’s never a fun place for anybody to be. Your timeline got pushed back four months. That’s a long time to wait and then I’m assuming you guys take outside capital as far as syndicating these opportunities. How do you communicate that to your investors?
What we did is we went back to them and the good thing is anybody that watches the news knew that the material had gone up so it wasn’t a surprise to anybody. It’s not we were shielded from the labor or material increase. They weren’t mad. It’s not ideal but what we’ve said is we’re going back to the bank, we’re going to work things out with them and we did. Going back to them, they increased our loan to cost that we were able to borrow on, which was nice because the interest rates had gone down and we signed up on a higher interest rate before and all this stuff. Glenn, I and our other GP partners on that deal had to come out of pocket and we covered the LP portion that we had to come up with.
It was a painful day, $200,000 plus a day for Glenn and I to get the deal done. It was a good email to send out to say, “We’re committed to this deal and we are so committed that we put up everybody’s portion of what would be a capital call.” Fortunately, we’re in a position where we could do that. If we weren’t, we would have had to go back and ask for more money. That’s tough to do and it’s not a great look. That’s how we worked it out and we’re moving forward.
That’s a very valid point and I love your thinking there of going, “If materials have gone up, values hopefully have as well, which means if anybody is still on this side of the soil then they probably know that the values in Austin are continuing to climb.” What are some compelling reasons as to why you guys are still doing value-add deals?
In 2015 and 2014, it was pretty simple. You could find a good deal everywhere you looked, especially in these core markets like Dallas-Fort Worth and Austin. You were buying stuff at $40,000, $50,000 and $60,000 a door. It was easy to find a good deal and then the appreciation discourages you. If you bought in 2015 and sold in 2020, you made a killing. Now, as we see cap rates compress and the price per door is going above where we’ve ever seen them before, it becomes riskier.
When you’re buying on a 4% cap in a tertiary market, it does not make a lot of sense. You’re banking so much on raising those rents and stabilizing at a higher cap rate. It’s risky. We buy fewer deals is the point I’m trying to get to you. Rather than buying ten value-add deals, you’re maybe buying 2 or 3. That may not be what other folks are doing but we’re trying to not only preserve capital but we’re also trying to make people money still. We’re doing a lot of off-market acquisitions and such and not so many broker deals or on-market deals.
When you compare value-add deals to new development, is there any price difference anymore?
There is. Existing acquisitions are more expensive than new build construction. Where we got to was we’re looking at deals in Cedar Park in Austin and they are trading at $210,000, $215,000 and $220,000 a door and we can build them for $175,000 a door all-in. Someone looking at that might say, “I don’t want to go through the risk or take the brain damage of doing development,” which I understand. It is a lot of risk and a lot of brain damage that you take doing one of those projects but if you can see the deal through, you do build and then get that thing occupied, you create the value. A lot of these deals still have a lot of meat on the bone, even with the higher prices, materials and labor. That’s why we’re doing it. There’s still so much value there.
It seems like maybe the only compelling reason I would think value add makes sense, one is if you can buy it below-market prices. Also because you could buy the in-place cashflow versus the associated risk of we’re going to pay $215,000 a door and you’re building for $175,000. You got a $40,000 spread there, but we’re willing to pay that extra spread because once we buy it, we know that it’s already producing an income.
It’s tough to build a team and get the people on the bus and in the right seat, but you have to work through that constantly.
Anything that produces income, it’s less risk. On a new build construction, there isn’t a cap rate and there’s no NOI. You are banking that you can rent those things out and you have data to support that but you don’t know and neither does anybody else. The bank guesses. They give you an interest rate based on that guess. It’s all risk assessment. The markets that we’re building and constructing, they’re all huge growth markets next to core markets.
Our business model is not to build an Austin or Nashville, that type of thing but to build on the outskirt towns. Go to Clarksville, Tennessee or go to Leander, Taylor and some of these markets are in Austin and build there because you’re still seeing huge growth but the land is not. It’s expensive and you’re able to build at a reasonable price per door still.
How many projects are you guys building now?
We have 81 units in Taylor, Texas. We have 84 units in Leander and another 50-unit project in Leander. We finished building our corporate office here in Cedar Park and we have a 156-unit deal on Liberty Hill, which is Northwest here, that we’re going to be building in 2022.
What’s it been like building your team and your company?
We have a unique model that we follow. We like to keep employees and turn them into partners at some point. We like long-term people we can count on and rely on. Usually, the way we operate is we start out with an internship. This is a 90-day internship, apprenticeship or whatever you want to call it. We get to know each other and you get to prove yourself. If you do, we like each other and we work well with each other then we’ll make an offer letter. Sometimes those offer letters will have ties to the acquisition fees and maybe even some time to GP percentage of ownership that they could get in a deal or a disposition fee when we sell them.
We try and make it to where these people want to work hard and they view that the deal as their own. We’ve seen the most success that way. That’s how we build our team and everybody is falling into their roles well but like just anything, it’s tough to build a team. It’s tough to get the people on the bus and in the right seat. We’re constantly trying to work through that but we’re doing a good job.
When it comes to figuring out that algorithm for, “Maybe you’ll get a part of the GP, you’ll get a disposition fee and maybe take part of the ACT fee.” Was that an iterative process? I dig into this because these are things that people that are growing their businesses have to think about.
How do we structure it? It‘s something that is ebb and flowing. We memorialize everything in a document. We do a memorandum of understanding with everybody so that way, it doesn’t float. You promise something to someone one day and you’ve completely forgotten the next month and then they’re like, “You promised me this.” You’re like, “I’m sorry.” We make sure everything is documented in writing so that both them and we can bank on that. We refer to that all the time.
As far as coming up with the structure of how this would work, Glenn and I ultimately had to decide what we wanted to part ways with and how much these folks could take off our plate if they were connected to the acquisition directly. It worked out well. They take a lot off our plates. In asset management specifically, it’s one of those things where it’s reoccurring every month. We’re doing a lot of the same things, reporting and such. These are all-time suckers. Having the people there to take care of a lot of the data entry or the reporting for you and you’re overseeing what they’re doing is very helpful.
We’ll circle back on this before we wrap up with the final four. Where do you see this market headed? I know you don’t have a crystal ball. Where are we going?
I was at a multifamily conference in 2017 and I remember one of the experts who’s from Chicago. He said, “If this were a baseball game, we would be in extra-innings as far as the recession goes.” We probably should have had a recession when COVID hit. If the government didn’t pump so much money into the economy, we would have had one and a big one. I think that we’re on broken legs already and we don’t know it. Where this market goes? Depending on where you’re at, it could be bad in the future or it could be not so bad. I look at Austin or Nashville, the growth that we’re seeing in this market in jobs and high-paying jobs are strong. It might be stronger than anywhere in the country.
The reason why I keep focusing here and putting money here is because of any market, I have faith in this market. I live here so I know it well and all the jobs coming here. I think it’s specific to the market you’re in. If you live in the Midwest, it’s different than if you live in one of the coastal towns versus Texas or up north in Michigan. It all depends. The labor is scary and people aren’t working. I don’t have a crystal ball and I’m just along for the ride.
You’re along for the ride but it sounds like you’re positioning yourself in such a way that you’re going to try to be on the best ride the amusement park has to offer.
Multifamily is a great investment in my mind long-term because you see people in their twenties who don’t want the American dream that you and I grew up with, which was, buy a house, the white picket fence, a dog, a wife and 3 or 4 kids. They want to travel, have experiences, get married and start families way later if they do it all. They want less responsibility. They don’t want to mow a lawn on a Saturday or things like that. I think apartments will become more appealing to that generation of folks and I’m banking on that.
There are a couple of questions for you here to wrap up. If you could help our readers avoid one mistake in real estate, what would it be? How would you avoid it?
Don’t lie to yourself when you’re underwriting a deal. You can make numbers look anyway on a spreadsheet you want them to so make sure they’re good honest numbers. If it’s not a good deal, walk away.
When it comes to investing in the world, what’s one thing you’re doing to make the world a better place?
I’m in a youth group at my church. I help them every Tuesday night. As corny as it sounds, the youth is the future and you got to try and help them through some crazy times, which they’re facing some now. My investment is in my kids and in the youth that I’m around at church and trying to help them become better people and not make the mistakes that I did.
That is true, necessary and good for you for having the patience. I don’t know how old the youth group is but if they’re in the junior high range, God bless you. If our readers want to get in touch with you, what is the best way to do that?
Head to our website, ObsidianCapitalCo.com. There’s an investor tab there that you can click on and create an account. You’ll get all of our offering memorandums and a phone call from one of us here to talk. If you don’t want to do that, email me at Mike@ObsidianCapitalCo.com.
Mike, thanks so much. I do appreciate it.
Thank you.
Important Links:
- Obsidian Capital Company
- Mike@ObsidianCapitalCo.com
- https://www.LinkedIn.com/in/mike-woodfield-b6a28681/
- https://www.Facebook.com/mike.woodfield
- https://www.Instagram.com/mikefwoodfield/
About Michael Woodfield
Mike got his multifamily experience from working for a small firm located in Austin, Texas. Over the course of 5 years, Mike oversaw the operations, asset management, and construction management of nearly 5,000 apartment units totaling $300,000,000 in total assets under ownership. During that time, Mike oversaw the renovation of 2,500 multifamily units totaling $30,000,000 in improvements which created millions in value-add.
Since co-founding Obsidian Capital, Mike has participated in the acquisition, asset management, and renovations of 1000 apartment units.
Mike has a BA in Public Relations from Utah State University, experience in executing turnarounds for underperforming assets, and over seven years of operation and marketing experience across multiple industries.
