Dustin Miles: My First Apartment Syndication

The first time I started offering on multifamily apartment assets was back in 2013. I am in the Dallas – Fort Worth (DFW) area and things were starting to pick up in 2012-2013 from the Great Recession. Most of the assets at that time had not been rehabbed or had interior upgrades, so it was a great time for finding value add opportunities. If an asset did have interior upgrades, it was typically 50% or less of the total units with minor upgrades. Most of the assets around that time were also trading for low $20k's to $30k/door.

Before talking about how my first apartment syndication went down, let’s talk about why I got into multifamily investing:

1. Cash flow

2. Financial Freedom

3. Generational Wealth

4. Tax Benefits

5. Hedge Against Inflation

It’s nothing novel, I think that’s why most people start businesses or their side hustle.

Let’s get back to the apartment syndication! Back in 2013 I was on the hunt, underwriting deals and touring assets left and right. I think it’s important to get a lot of exposure, especially early on, to understand what you like and don’t like. Initially, I preferred to be in the B/C type of areas. When I started out, almost all of the assets in the B/C category had no sort of upgrade program. The cap rate spread between B/C and an A product was substantial, and A class assets were typically reserved for your institutional players.

We’ll talk about it more in another post, but we have transitioned over to A/B assets, particularly the late 1990’s, early 2000’s product that has not gone through an upgrade program. One of the biggest factors in making the shift to A/B assets are the current spreads between cap rates for A,B, and C product. As of 2021 in Texas, the cap rate spread between A, B, and C is close to non-existent, not to mention most of the B/C assets have sometimes gone through multiple upgrade programs the last 8 – 10 years (in some cases they have been upgraded more so than the newer product).

I prefer assets with a good unit mix – preferably 2 and 3 bedroom. The more rooms you have, the more stuff you have, and the less transient tenants will typically be. Also, if the tenant is in a 2 or 3 bedroom, the likelihood of having a few kids is high. Most parents don’t want to interrupt school, which leads to more stability. This brings up another point, if possible, I like to buy close to schools and churches. These institutions are typically attractive to tenants and provide stability to the immediate area.

Some apartment investors I know prefer individual HVAC over chillers or pitched roofs vs flat, or individual water heaters over boilers. In my experience, I’m ok with flat roofs or pitched roofs. I think I’ve been in 3-4 deals that had flat roofs. We didn’t have much of an issue with them. 1-2 of the assets had chillers. Both of those deals have been really good, but I have heard from some of my apartment investing friends that have not had the best luck with their chiller systems. Most of my deals have had boilers vs individual water heaters and we’ve had very few issues with them. More recently, we made the transition to A/B product so the flat roofs, boilers, and chillers are mostly a moot point.

At the time of my first deal, I was looking for a deal within DFW because I wanted something close enough that I could visit often, while I got my toes wet as a new apartment investor. I was looking for an asset in a decent area, with little deferred maintenance, stabilized, and with some upside. I was looking for a hybrid deal (explained in this article).

I recall visiting the property for the first time. My father grew up fairly close by in a nearby neighborhood. My dad’s first comic store was on Sylvania Avenue roughly four miles down the road, it’s like it was meant to be. The asset was:

- 109 units

- Flat roof with a slight pitch

- Boilers

- Individual HVAC (converted from a chiller by the seller)

I drove it many times before offering. I drove the asset at night, early in the morning, and in the middle of the day. I wanted to make sure it was a safe property and that I felt comfortable with it prior to offering and potentially raising over a million dollars to purchase the asset.

I remember like it was yesterday, we met the property broker at the property to tour the asset before submitting our best and final offer. This was a loan assumption and not as common back then around my peers. There were a lot of factors at play, but I think speaking to the lender ahead of the best and final and doing our due diligence on the loan assumption process helped us ultimately win the deal!

Once we won the deal, we had an agreed upon Letter of Intent (LOI – this is a non-binding agreement) and the Purchase Sales Agreement (PSA – this is a legally binding contract) was signed within 7-10 business days. Once the PSA was signed, we began our due diligence, not only physically, but through the lease audit, contracts, and their financials.

One of the things we look for during the due diligence is the move-in’s and really verify not only the entire tenant base (because at the end of the day you are not only buying a physical asset, but you are buying the ability of the tenant base to honor their lease). Below are

are the rents (non-upgraded) for the asset as of April 2014:

Unit Mix & Market Rents

1/1 - $619

2/1 - $712

3/2 - $789

In the picture below, you can see the leases leading up to the May 2014 close date. As you can see below, there are some concessions compared to the market rents above, but there are also some leases at higher than typical prices. This was the seller showing the buyer they are able to fetch a certain rent bump if the buyer did certain upgrades. The reason for the concessions may have been to increase occupancy. Occupancy was hovering in the low 90’s so I’m sure they wanted to be well above 90% so as to not raise any red flags for the lender (This was a loan assumption. A loan assumption gives the lender an excuse to put the deal under the microscope again.). At the time of this deal, everyone was doing deposits. As of 2021, a lot of property management companies just do an admin fee in place of the deposit. However, below you can see most everyone was putting a deposit in (good sign), and they weren’t higher amounts for the most part. Higher amount deposits would signal a less qualified tenant.

Back to the upgrades, the pitch to the new investor was that you could do the upgrades and get a certain premium. Below is from the OM in 2014. The upgrades the seller did was upgraded appliances, back splash, pulls, and new fixtures throughout. I believe they also did new switches and plugs. On a few of the units, they also replaced the cabinet fronts.

Typical 1 Bedroom - $600/month rent

Typical 1 Bedroom Upgrade - $700/month rent

Here was our plan of attack for the property:

As you can see above, we were planning to upgrade 12 of the one bedroom, 22 of the two bedroom and 8 of the three bedroom (total of 42 units). This would give us upside on the deal and allow the buyer after us to see some potential for upside on rents. It’s always really interesting to look back and reflect on past deals and history in general. Here are some of the prevailing thoughts at the time among some folks in my circle, including myself:

- We can’t upgrade all of the units and need to leave meat on the bone for the next buyer.

- Putting in a back splash to a C product was a novel idea

- Is $40k/unit too much for a 1960’s asset?

- When is the economy going to take another tumble?

We ended up holding onto this asset until 2019. From 2014 to 2016, we had grown the NOI from $412,375 (T3 RI, T12 OI, T12 Expenses) to $514,560 (T3 RI, T12 OI, T12 Expenses). This was an increase of 20% over a 2-year period. This came from a combination of increased rental income and water conservation. The seller made more on the other income so we lost ground there, but the increase in rental income far out-weighted everything else.

As you can see above, while we had a healthy NOI increase, cap rate compression helped us a lot here. In fact, it was half the reason why we were able to pull all of our funds out after 2 years of ownership and still keep a nice cash flowing asset. After refinancing and pulling our cash out of the asset, we were able to cashflow about 8-10% per year off of the initial investment.

Rental Increases

Rental increases across the US from 2013 until ~2019 had been very healthy and frankly not sustainable.

It’s not all about the money….

We did very well with the asset and it proved to be an extremely consistent cash flowing asset over the 5 year hold. I am a capitalist and really enjoy making money, but I also believe in giving back. The way I see it, we had made a lot of money from the tenants and while I believe it’s good business, I felt a duty to give back. That’s why at the properties I am involved with, doing fun events such as:

- Pool parties

- Pizza parties

- Easter egg hunts

- Snow Cone events

- Etc.

I believe these are an easy and fun thing to do for residents. These events typically run $300-500 per month. Our expenses for this particular asset were about $40k-$50k per month towards the end of ownership. At $500/month for a fun event and with expenses at $40k per month, a $500 event equals about 1.25% of the total budget. To put this into perspective, our water bill at this asset in 2016 fluctuated as much as $2500 depending on the month.

We ended up selling the asset in 2019. We put the asset on the market and went through the entire marketing process. The best offer received was from good friends and passive investors in the deal. So, why did we sell? Ultimately, it felt like we were towards the top of the market (boy, was I wrong) and we knew we could exceed our proforma by a long shot. We also held the asset for about 5 years and the asset needed a capital injection to be able to keep up with neighboring assets. We had purchased at a 9.88% cap and C class deals were selling in the 6% cap range in 2019. Cap rates did compress (as of 8/2021). Similar assets are now selling in the 4.5% cap rate range depending on the upside available.

This is a glimpse behind the curtain of my journey and I share this to hopefully inspire others to take that leap of faith and get started on their own journey!


Dustin Miles

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