After planting a seed, you spend each day watering, fertilizing, and nurturing, waiting to reap the fruits of your labor until one day, your efforts pay off, and you taste the ripe fruit of success. The same goes for real estate investing. Planting seeds and nurturing relationships with owners, property managers, or brokers will eventually yield rewards.
George Roberts, head of investor relations at Horizon Multifamily and the host of the weekly networking call "CRE Network - Where Deals are Made," spoke with the Rockval Team about his most recent creative acquisitions.
Roberts explains that "mom and pop" deals have been his bread and butter in this wavering market. While these deals take more time to curate, it is common to see below-market rents, a lack of advertising, and outdated units. Play your cards right, and you can negotiate seller financing a few points below market. However, most of these neglected properties are on the smaller side; it is unlikely to find a more significant deal as far behind on the eight-ball.
Last year Roberts and his partners acquired a 34-unit in Jefferson City, Tennessee. (We recently covered this deal with Greg Scully, a partner on this deal.) Roberts explained that this deal happened because his partner, Tom Kirkpatrick, had been building a relationship with the property manager for over two years. After dozens of phone calls and rejections, the seller finally decided it was time to move on. Can you guess who got the first call?
Roberts pointed out that Tennessee has one of the nation's lowest median-income-to-rent ratios, currently at about 19.6%. In about a year, his team raised rents by 38% for this property on non-renovated units. Many businesses and people have migrated to East Tennessee for the low cost of living and an abundance of attractions such as Dollywood, Gatlinburg, and the Smoky Mountains. Roberts thinks the market has a lot of room to grow, especially when tenants are willing to lease units sight unseen.
The real estate industry's network effect is like none other and maintaining great working relationships is a top priority for firms like Horizon. So not surprisingly, the same seller from the Jefferson City property came to Roberts with another opportunity in Avon Park, Florida, which had been listed for some time but had generated little interest.
The original seller decided to work with Horizon again since the first deal ran smoothly, and Horizon always paid the mortgage on time. In addition, the owner agreed to seller financing a second time (interest only for five years and under market). The consistency of being top of mind was paying off big time, and although this deal isn't a walk in the park, Roberts' creative solutions are paying off.
Avon Park is a small town about an hour and a half south of Orlando and is by no means a vacation destination. The neighborhood and surrounding area might be rough and not all profitable properties must be "glamorous." As an up and coming town, Avon has had a steady inflow of new residents as it is one of Florida's most affordable cities.
One of the major hurdles with this property was credit loss, so Management implemented month-to-month lease structures to combat the issue, allowing for easy removal of problematic tenants. Fortunately, the rental demand in the area is exceptionally high, so filling a vacancy is not an issue.
Another hurdle Roberts has to overcome is security. To combat the issue, the team opted for a city program that staffs a police officer on site for a couple of hours of the day. Additionally, the team is consulting with a design expert to increase overall security and safety. Taking on a project like this is challenging, but the proper execution of management can yield excellent cash flow for passive investors.
Roberts is bullish on Kentucky and Tennessee with solid fundamentals such as low median income to rent ratio and growing populations. "These are places where people are moving. You have an increase in new businesses and steady job growth. Home prices are also going up. So if we do have some major carnage, the places that are not already over-appreciated will hold the line much better. The number one rule for me is don't lose money. Focus on capital preservation," explains Roberts.
Pursuing off-market cash flow gems is not for the faint of heart. These deals can take a long time to come to fruition, two years in this case, but the consistency of Horizon allowed them to stay top of mind. The two years spent building rapport turned into two fantastic deals. Roberts’ unique investment approach enables him to keep an open mind and focus on the goal. Cash flow. He can see through the blemishes and curate his opportunity by implementing a solid yet creative business plan.
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