Red Flags In Properties To Avoid | Tyler Bradford & Zain Jaffer

Many properties look good on the outside but might have many problems on the inside. This episode will go over some red flags that one should be looking for when looking at potential rentals. These could save from dealing with mold, water leaks, electrical and plumbing issues, etc., all of which can cost thousands of dollars.

Barge Properties, a Temple-based company, personifies the genuine ideal of a management company with great capabilities and experience. Their vast knowledge of the Texas real estate market, especially Multifamily, allows them the unique ability to navigate any management issues with ease. Their goal is not to operate your apartment community but instead, team up with you to streamline operations and maximize property value and profitability.

Know more

https://www.bargeproperties.com/

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Red Flags In Properties To Avoid | Tyler Bradford & Zain Jaffer

Tyler, when you walk into units, you're coming in and giving a perspective that the investor may not have, what are some red flags? What things do you catch? What things do you look out for that can kill a deal or seriously impact the financial returns, and also your ability to successfully manage the property?

If I'm looking at a complex, I’m thinking about what will cause a headache and major problems. I'm looking at the systems of the whole structure. Your plumbing, HVAC, electrical, and those sorts of things are very costly, and they can be a very large discomfort to your residents who is your customers. If it's hot and your AC doesn't work, they are very unhappy. It’s the same if it's cold. If their toilets aren't working and plumbing is messed up, it's going to make them very angry. That affects your retention and renewal rate. You might have a pretty property from the exterior and the curb appeal might be nice, but the things you can't see are what can cause problems down the road.

The curb appeal is very important. You start from the outside and work your way into the units. That's easy to cure. It's much easier and less expensive than the main systems of your property, and knowing how to take plugs off and identify what kind of wiring you have, if it is copper or aluminum. Aluminum might cause an issue and it could be an insurance problem. That's an example of something that an investor and owner may not know. Especially if they're new to real estate investing, they might not know some of those pitfalls that you could run into or the gaps in railings that are another insurance issue. That's where having a qualified and experienced property manager or management firm can help during those due diligence periods, and walk through so there aren't as many surprises once you own the property.

There are things you don't think of intuitively. You might be dealing with situations where the seller has cashed out and sold the rights to the laundry facilities to a company for ten years and they've taken a bunch of cash out. The new buyer is then stuck with a contract and that’s it. It is what it is. It’s the same with ISPs and internet providers. These are things that often the inexperienced buyer will deal with, then they make a mistake. If they're lucky and get to buy more properties, they will swear never to do it again. The advantage of having a property manager is that you see properties day in and day out. That's all you do.

The things you can't see are what can really cause problems down the road.

When I first broke into the real estate industry, I was talking to one very experienced investor. Looking at real estate is like looking at a pair of shoes. It's much easier to analyze if this is all you do every day, whereas there are a lot of amateur people who listen to podcasts, mine included, who want to break into real estate because they were living in a high inflation environment. Now, interest rates are low. They're going to slowly change. Yield is hard to find. Multifamily sounds like a panacea. They think they can get rich quick but it's not. They get rich very slowly. People walk into this and make a lot of mistakes.

I agree. In a low interest rate environment like you mentioned, there are a lot of people who think, “I’m looking at these few calculations and this looks like it's going to be great.” If you don't understand the full picture and what it takes, and the little expenses here and there, then you can make a real mistake. Also, not to mention, these are the good times. We're in a good environment. If the market changes, which it's always going to go in cycles unless history stops repeating itself, then there are going to be times when things aren't so good.

Your rental rates aren't going up and occupancy is going down. That's when you have to get efficient and know where you need to cut things and how you can operate well. Otherwise, you're going to find yourself in a pretty tough situation because you thought things were rosy and a good opportunity, but then whenever things aren't so great, it gets pretty tough if you're not prepared for it.

PTVC 166 | Property Red Flags

As a buyer, it's very disheartening when you meet bid after bid and you don't win. Eventually, you fall in love with the deal. You then start to celebrate winning the deal, which is very dangerous. Sometimes, you'll do things without realizing these key assumptions that move the needle on your financial returns. You mentioned a few. You mentioned occupancy, rent growth and rental rates. You also have interest rates that impact your financing situation.

You also have to consider the grand scheme of job growth and how inflation looks. The rent growth is going to be there and ultimately, the cap rates. It's very easy to make a few slight adjustments to your exit cap rate and the interest rate that you think you'll be able to capture on the deal, and the rent growth. Why not add 0.5% growth and while we're at it, why don't we also assume these occupancy numbers? Suddenly, each of those variables can drastically change the return profile. Because you’ve made slight conservative changes in your view, you've made this deal a winner now. Being prudent and conservative is important, especially for those of us who have lived through multiple cycles.

I have personally fallen victim to, “This looks like such a great deal. I want to make it work.” You start to look at the bright side and forget that you live in the real world and things are changing. You have to step back and make more conservative bets. That's where I've learned, especially in the underwriting phase, to determine is this something that I can make a return on and that I want to own? Being more conservative and planning for rougher times, if your numbers still work when planning for that aspect, then they're going to work and your return is going to be good during the good time. I'm trying to find something that will work no matter what.

Always share ideas with each other. A leasing agent could have just as good of an idea as the president of the company.

Real estate is already good for whether it's an economic downturn or not. Think about it, everyone needs shelter. Everyone needs somewhere to live. You might have rent increases and rent growth. You might have downturns but people still need a place to live. They're more and more going to rentals and multifamily apartments because it's getting difficult to own and buy a house. Especially for younger generations, getting the equity required is getting very hard. That's why we've seen more growth in the new development of apartments. They've become a great asset for investors as well.

What I like about you guys is you do things differently from other property management firms. The way you approach things is different. Walk us through some innovations that you've implemented on the business model side of things. You’ve talked about how you might charge for shared laundry facilities and charge a subscription fee, which is a delight to some of our audience. You've also done interesting things with unit mixes. You've segmented some units and made them short-term where you've rented them out to students. You've come up with cool ideas with regards to managing occupancy and turnover in student property. Could you share some innovations and business model changes you've made to a property in the past?

There are certain things we try to do whether it's getting together and having a Monday morning meeting for 30 minutes or trying to always be sharing ideas with each other. This goes all the way down because a make-ready or a leasing agent could have just as good of an idea as the president of the company. It takes teamwork to get these things rolling, but if you have like-minded people who think creatively, that's where you can come up with some cool ideas.

PTVC 166 | Property Red Flags

One of them that you alluded to that has been a big success was thinking about laundry. What do people always have to do? It’s their clothes. If you're like me, it's already a pain to do your laundry if you have it right there in your apartment or your home. Having to take all your dirty clothes down to a laundry facility and either put them on the hood of your car or whatever to get them there is not pleasant. Fumbling around with quarters to put in a machine is a hassle as well.

We started thinking, “What is something that would be good and helpful and provide a benefit?” Goal number one was to buy washers and dryers that we can include in the actual units themselves. That's great because you're getting roughly 10% payback per month on what you paid for the equipment. We have found that people love to pay that extra money, so you’re growing your return very quickly.

Another idea was that these laundry companies and laundry contracts can be very tricky. You get locked in for ten years. They are taking a lot of the revenue and a lot of the fees. It gets so watered down. Where this idea came from is we started thinking, “We can buy these commercial washers and dryers for a laundry facility like anyone else can. How do we make this easier to work with, where we capture all the revenue?” What we came up with was a subscription model. It is similar to how we do most things now, whether it's Netflix, a carwash or whatever it may be. They automatically charge you and you can use them as much as you want.

We found that by charging residents $40 a month that’s included in their rent, they can then do their laundry as much as they want throughout the month. It makes our revenue go up substantially. It's what you talked about. You apply a cap rate to that and the whole value of your property goes up substantially. The only thing that the owner is out is they have to pay for the equipment and appliances upfront, but it's not substantial in the long run compared to the value they're creating. Things like that as well as renting furnished units and applying that 10% of the cost so you get that 10% return has been great.

It can be things that are as simple as buying parking signs for reserved parking and getting an extra $20 a month for a sign you can move around. It sounds small, but you have $20 a month and 40 residents that do that. Apply that cap rate and you're adding value. You're paying $20 to buy the sign and you never have to replace it. It’s little things like that and trying to think outside the box. Some people do them and some don't. Also, looking at some of the things that are happening in the technology world, a lot of these financial startups and things that can increase resident retention or cashback. It’s cool to see some of those things start to come out and ways to integrate that and make these properties more valuable.

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How Investor Value Is Changing in Short-Term Rentals - YouTube

What the Future of Property Management Looks Like-with Krickett Alexander - YouTube

The Struggles of the Rental Market for Both Renters and Landlords - YouTube

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About Zain Jaffer

Zain Jaffer is an accomplished executive, investor, and entrepreneur. He started his first company at the age of 14 and later moved to the US as an immigrant to found Vungle, after securing $25M from tech giants including Google & AOL in 2011. Vungle recently sold for $780m.

His achievements have garnered international recognition and acclaim; he is the recipient of prestigious awards such as "Forbes 30 Under 30", "Inc. Magazine's 35 Under 35," and the "SF Business Times Tech & Innovation Award." He is regularly featured in major business & tech publications such as The Wall Street Journal, VentureBeat, and TechCrunch.