WIN193. The Syndication Blueprint (Part 3 of 4): The Stabilization Phase with Chris Shepard & Sean Poggi

AJ: Welcome to the Westside Investors Network (WIN) your community of investing knowledge for growth. This is the real estate professionals investing podcast for real estate professionals by real estate professionals. This show is focused on the next step in your career, investing. Thank you for listening. And please, if you like our content, rate us on your podcast provider.

Just a quick disclaimer, the views and opinions expressed in this podcast are for educational purposes only and should not be construed as an offer to buy or sell any shares or securities, make or consider any investments or take any other action.

Sean: Welcome back. We're kicking it off here and you had a chance to spend time with us talking about some stages within the life cycle of our syndication deals. And we went through two of them, and we hope to spend time talking about another one right now, specifically when an asset is stabilized.

Chris: Exactly. How do you operate a property once your value add plan is complete? Yeah. Or you run out of CapEx funds?

Sean: One of the two. Maybe you build up more. But yeah, let's jump right in and talk about that. And I think the first thing is kind of defining when it's stabilized. How do you know when an asset is stabilized and have entered the stabilization or the stabilized phase of the lifecycle?

Well, for

Chris: some properties, it's like starky, like it's just obvious, you know, when you acquire a property with bridge debt, and then you refinance, at that point, property is stabilized enough to get a permanent loan. So I would say that is a pretty basic immediate shift to a stabilized property. Now, you may have some CapEx projects that are still in the pipeline, but once you're 95% occupied and you're getting the market rent that you can get, I think that that is a good benchmark. So maybe just one where you can get permanent debt on a property that is a level of stabilization. You may not be achieving the market rents that you underwrote.

There still might be gains to get. But yeah, that's one way to look at it. Another way, go ahead, Sean.

Sean: Well, I was gonna say, yeah, for example, we have a property which, you know, stabilized, we've secured debt on it, but it's still 100 percent occupied and, you know, below market rents. So, we're gonna, there's more we want to do for it, but technically it's stabilized at this point.

Chris: And I mean, you're just managing the P and L. Yeah. And trying to keep your expenses low and maximizing your revenue, all while keeping tenant satisfaction high and keeping that renewal rate as good as you possibly can get it. Yeah. Yeah.

If there's one thing that will kill a stabilized property, can you guess it? Vacancy. A bunch of turnover.

Sean: Yeah, vacancy, turnover, all the things. Yeah, expenses start to add up. Yeah. So let's talk about that within, well, let's

Chris: finish the question. So like one area is when you've got property stabilized, when it can get permanent debt. I would say a more complete definition for a stabilized property, at least for Uptown syndication is when you've completed your value add plan. When you've gone in and done what you said you're going to do. And essentially, you're returning any extra CapEx funds to investors or you spent all your CapEx funds and essentially now you're just operating the P and L with and yes, there are some CapEx items that you have to fund out of cash flow, like new appliances or just things that break, a broken window.

We're just talking about replacing front doors. Sometimes you gotta do that. So we have reserves built into our budgets when we underwrite for those CapEx items.

Sean: So yeah. Thank you for the definition. I think that's great. And of time is a thing that occurs within this space as well. And so sometimes you have under market rent still when you enter the stabilized phase, like how do you go about that growth within the stabilized phase of market rents after the value add has been provided to the property?

Chris: Yeah, well, I mean, generally part of the value add plan is going to be sending rent increases and possibly switching the property from where the owner pays water and sewer to where we're getting rubs. We're doing the ratio utility billing system. And so there's kind of like a gradual natural transition to property. It's not like you acquire a property and then six months later, now it's stabilized if that's how long your construction plan is. Your construction plan can be done, but then the management of the property will gradually get you to the rents that you underwrote or as close as you can get to them.

Sean: Yeah. Yeah, and depending on where the property was purchased, the rents can be all over the place. I mean, I've experienced it personally where property we purchased here is probably wasn't managed well. And so there's a huge opportunity and a large variance in terms of rents while another one may not necessarily have that going forward. The opportunities are different based on the property and you see the plans look different too.

Chris: Yeah, and a lot of times as tenants move and move out, then we're able to get into the unit and get it up to market rent, whether it's a classic unit or if we're going to be renovating it. Those are opportunities. Yes, like with turnover, there is extra cost, but there's also, sometimes there's opportunity. So, all right. Question for you, Sean.

Managing stabilized assets is probably about half of your job, with the other half being managing CapEx projects and value add. So when you are looking at a property, what are some of the lead measures that you're tracking to ensure that it's trending in the right direction on its stabilized condition?

Sean: Yeah, I mean, we talked about it a little bit in terms of vacancy and turnovers. Those are substantial impacts to a property within the stabilized. Yeah, because they're big costs. Yeah, big costs. So, know, things that I want to take a look at are what does renewal rate look like?

Some things we also track are how long tenants have been at the property. But as we do have vacancy, we're really leaning into the leasing plan and the turnover plan for that when we do have vacancy, because we really don't want that vacancy to last for a long period of time. So things that we can control or how quickly we're reaching out to leads at new that come on in, as we have new opportunities to find them a home. But then also within our turnover, we mentioned that's a large cost. So the quicker we can get that done and have that available for our leasing team, the lower the impact to the property, as we try to maintain it being stabilized and reduce the vacancy and increase the occupancy at the property.

So it's something that is a lag measure, think, is that occupancy, but the work that we do on the front end in terms of working with our leasing team, making sure turnovers are moving quickly, addressing items for preexisting tenants and keeping them happy at the property are things that lead to the stabilized asset being stabilized continuing forward.

Chris: Yeah, performing at a high level. Yeah. Okay. So you mentioned reducing the amount of time of turnover. What does that process look like for you?

Sean: Yeah, something that we specifically do is getting an idea of what a unit looks like prior to move out is really helpful within that. If you have an idea if it's going to need a lot of work or some of these properties, we actually haven't seen the units for a while because people have been living in the units for a long period of time. Getting an idea of what it looks like prior to move out helps plan the level of work that's going to be done at the property. So something that I'm specifically focused on is how we get to understand what the property looks like prior to move out so that we can provide a scope of work to our turnover team prior to them actually seeing the unit and having it available to them. Because we can order some materials, let them know that we want to do flooring in a whole unit because we want to provide a value add to that specific unit and improve the overall property is super helpful for our turnover team so that they can move quickly to complete that turnover and honestly have the materials and idea of what the plan is going into that turnover.

Because I find as we get to a turnover and those questions are needing to be answered, if they haven't already been answered, that pushes back the turnover timing and it impacts our leasing team being able to lease the property, which as we talked about vacancy and overall occupancy is really the main goal within the stabilized phase of the syndication life cycle. So those are some key areas that focus on. We also focus on renewals. So this strategy on renewals is really key to hopefully maintaining people at the property because we want people to stay there for a while and a lot of times they enjoy their experience and we want them to continue enjoying that experience. However, with markets changing and you mentioned sometimes under market rent, there may be rent increases.

So it's that balance of providing strategy to our leasing team on how much we're increasing rents and have we provided a value add to those tenants for them to want to stay and continue renting from us. And some things that go into a factor for tenants is maintenance. Like how quickly, when if they have maintenance requests, are we able to respond to them?

Chris: Yeah, for tenant satisfaction.

Sean: For tenant satisfaction, because that's going to impact their desire to renew as well. Like, hey, I've lived here. When something goes wrong, how quickly can we address that? So those are a lot of factors that Yeah, I heard a bunch of stuff in there.

Chris: Yeah. Okay, so I've got a handful of questions. So let's dive in. You mentioned the amount of time that a tenant stays at a property.

Sean: You

Chris: and I looked at our best performing stabilized assets. And I guess one of the things that we found is that the longer tenants stay at a property, the better it performs. So that was one, I guess, key insight that we had. And I feel like it's something valuable to share.

Sean: Yeah. And I think it's impacted like our renewal strategy to a slight degree, like thinking about it differently, especially within the market that we're in. Yeah, for sure.

Chris: But diving back to turnovers, so you mentioned the pre move out inspection and that pre move out inspection, I feel like can be pretty valuable. When a pre move out inspection, what are the potential outcomes? You mentioned, Okay, we've got one that's got a big remodel. We need to order materials, like plan a big job out, but what are the other outcomes that can happen at a pre move out inspection and what can that lead to and then how can that affect the amount of days vacant that a property or that a unit will be when those outcomes occur.

Ad1: And now here's a word from our sponsor. Get things done while you're on the move. Learn more about working with a virtual assistant through off-site professionals. It's a great way to get all the things done that you need to get done. Have freedom in your time and streamline your life by automating your business.

Stop spending time on the tasks that you can delegate and start spending more time on your superpower. Call us today at (503) 446-3177 or visit our website at off-siteprofessionals.com.

Ad2: Uptown Uptown Syndication is now offering a syndication coaching program for you to take your real estate portfolio to the next level. This is your opportunity to have experienced syndicators, AJ and Chris Shepherd, coach you on your way to controlling your real estate investing future. Our coaching program will provide you with the tools and framework needed to begin syndicating real estate in your target market. Go to uptownsyndication.com today to learn more.

Ad3: Hey. Let me ask you. What if tax season was actually exciting? I know. Sounds crazy.

But not when you've got the right playbook. At mymoneyworksforme.com, we put together the pro tax strategies playbook that real estate professionals use that you may not know about. You'll learn how to crush taxes with depreciation and rep status, how to stack smart write offs from the Augusta rule to vehicles, and the ultimate wealth hack, ten thirty one exchanges and vacation rentals. It's free. It's powerful.

And it's waiting for you at mymoneyworksforme.com because your money should work as hard as you do.

Sean: Yeah, and maybe I'll take it back even further to pre move out inspection to like when someone decides to move out. I'll touch on that as well, because when someone decides to move out, sometimes there's something we can do to understand from that tenant like that's impacting their experience and maybe change that. So maybe it is around something that is wrong at their unit. Sometimes we found out that there's maintenance concerns that people have at time of move out. And it's like, well, we didn't know about any of these concerns.

Let's talk about that, figure out how we can resolve it. Because sometimes that when someone says they're going to move out, we can address their concerns and maybe keep them as a tenant, which I think is key.

Chris: Which is valuable for sure.

Sean: Yeah. But let's say we do get to the, you know, if they're moving out, it's happening, we look to understand one, when are they going to actually be physically out of the unit? That is helpful for, I think, the tenant to share with us because sometimes they may be out sooner than expected and then we can potentially get a jump on that turnover. But also we kind of get the logistics involved, like where our keys going to be, we'll set you up with a lockbox or do you want to drop them off at the office? Kind of go through some of those logistics that can be sometimes challenging.

Like when you get to a unit, if you can't get into it, the turnover can't physically start.

Chris: Well, yeah, but let's go back to, okay, we've just done the pre move out inspection. Like there's a few different roads that you can go on based what the unit looks like. Yeah.

Sean: Yeah. And so get some details on the logistics, but then we get the actual pre move out inspection. We get to see what the unit looks like. We kind of have different turn grades on what the unit looks like. And they can range from, hey, unit is in great condition and this is how we want this unit to look at this property.

We kind of are able to share with our turnover team that the scope of work is going to be like there's no major upgrades needed. There's another grade of turnover where we're going to want to do some more work like, hey, this carpet is ten years old. Let's remove that. And we want to do LVP within this aspect of the unit. We want to provide some improvements for this property and for this specific unit for the next tenant to enjoy even longer.

Chris: Touch up painting, etcetera.

Sean: You new paint is.

Chris: Maybe it's a full paint. Yeah. Yeah. Yeah. So that's that's our grade C.

Previously, we talked about the A level. Yep. And then

Sean: then it's my favorite is the F turnover. When there's a lot of work, sometimes there's stuff left in the unit for you to get rid of as well. And typically this is when there's been very long term tenant at the property or someone who hasn't necessarily been sometimes not necessarily term or eviction or they have not been very cooperative within the leasing process, shall we say. And we're going need to do a substantial amount of work, which is going to be, when I mean substantial, I mean, it's pretty much everything, floors,

Chris: cabinets, potentially, I hear dollar signs and a sinking. And that's true.

Sean: Net operating income. That is true. But, you know, sometimes that's the right thing to do for the property and to provide a value add. And I actually sometimes see those as great opportunities to improve the property as if unit is.

Chris: To set a benchmark for high market rent.

Sean: And when you get a unit that is pretty damaged, it makes more sense to really go in there and provide a value add to that unit for the next tenant. Because if you're already getting in there ripping out walls and floors and needing to redo cabinets anyways,

Chris: might as well go for new appliances, fixtures.

Sean: Yeah, do the whole thing now. Now those are tough because as you can imagine, there's a lot of work there which typically increases the time. So for these three kind of turn grades, the time on them varies. I do love seeing a turnover come through where there's not a lot of work. It's looking great.

Chris: It's kitchen cleaners out there and well, you know, and you tell the leasing team, hey, let's release this.

Sean: Yeah, they get very excited about that. I get very excited. You know, when it's a seat turnover, there's some more decisions that need to be made there.

Chris: Actually, two days ago, we had a unit and Thomas, our turnover inspector, was like, I've never seen such a pristine unit. And then we had an extra set of applications, and literally we just transferred them over to that unit. And they said yes and signed a lease. And it was just like

Sean: as we said, vacancy is a big challenge within a stabilized asset. So reducing the amount of vacancy or time period of vacancy is hugely beneficial to the P and L for the property. Love to see that, but again, those F turnovers that require a lot of work sometimes end up in the long run to more positively impact that asset going forward. But they are tough to swallow when they occur and when you get first eyes on that property, because you know there's a lot of work ahead of you to get that improved. But if we think about it in the long term, when we get ready to sell that asset, we know that we have done a lot of great work in this specific unit, potentially at other units at the property and have provided that value add to the property.

Yeah, yeah. Yeah. So to get those timelines for all three grades as short as possible is something that I continue to work on and figure out, but really allows to us being successful with these various assets. But I think it brings us to the leasing phase, because once you have an asset or a unit ready for lease, then it's getting at least out, which I think within this market, maybe we take a moment to talk about that because that's been a challenging space It as

Chris: seems like some properties run out quickly and others are more difficult.

Sean: Yes. They give a specific challenge, which has been a challenge since I started here, and it is very different per location. Like sometimes this specific kind of asset and property brings a lot of people in and interested at that property. However, there's other properties, maybe it's the surrounding and maybe it's the amenities at the property are impacting tenants. But there's one property we're still figuring out what is that unlock.

I feel like we've got a lot of great leasing practices at all of our properties, but we're continuing to innovate and figure out leasing at one of our properties, which is, you know, one that we definitely want to see high occupancy at. And maybe it's the unit mix. There's a lot of different unit mix at the property provides challenge because

Chris: Maybe it's just bigger concessions.

Sean: Yeah. Yeah, we've tried a lot of different things, but we also have kind of the macroeconomic challenges of just vacancy in Oregon in general. And sometimes specific pockets have been hit harder than others. And the leasing market just looks a little bit different in the last few years than it did previous to. Well, one

Chris: of the stats that I got, I don't know, a couple of months ago was that there of affordable housing or income restricted housing, there is 10% vacancy. And so those properties are offering three or four months of free rent concessions, and that is extremely difficult to compete with if you are providing workforce housing. So yeah, it's of, it's like, okay, do we And the question is, is that what we're facing? Because I know that's out there, but eventually those new units should get absorbed. But, I I was looking online just at available Class A units.

And it seems like there's a lot of Class A units still available and they're offering three or four months of concessions. And so that just makes it really tough to convince a tenant to move when that's the case. Yeah,

Sean: it's definitely our leasing team has a tough challenge in front of them right now to get these units leased, but that's going back to focusing on what we can control. That's what we really task our leasing team with

Chris: and see. That first impression of the property, whether it's when they see it online or when they see it in person. That first impression needs to be a positive one.

Sean: And we look to get in touch with them quickly, too. Try to get that follow-up because when you're looking for a new place, you typically look all at once. Browsing multiple properties at once and quick communication is going to lead to success in that space. So with all the competition and concessions, as you mentioned, I think it's a very competitive market out And

Chris: getting them to see the property in person, because the days of getting the phone call and the person moving from California and they need to sign a lease sight unseen are sort of about ten years behind us. Yeah,

Sean: Yeah, well, I know we hope within this space that we want everyone to have an opportunity to find a place to live, but we want people to find a place to live with us more often. And I think we'll continue to work on providing great opportunities for people in the Portland Metro Area to live and create compelling reason through the property management that we have. So keep tackling that challenge.

Chris: Why don't we just quickly summarize what we think the keys are to successful managing a stabilized asset from an asset management perspective?

Sean: Yeah, let's go through each of them. From leasing, it's having a leasing team that is focusing on quick response to tenants and a compelling offer for them to come visit our property. We find when people come visit and get to see a unit, there's higher Conversion. Conversion for That application, yep. Turnover, reducing the turnover time, having the scope of work and an idea of what is going be done within a turnover

Chris: As quickly as possible.

Sean: As quickly as possible to reduce vacancy is huge. Within maintenance, getting those maintenance and work orders done quickly to provide increased tenant satisfaction. And then also, I think finally, I just mentioned the having people available to get in touch with as tenants reach out. We have a great customer service team, which also helps within follow-up, which is not, I'm able to provide some direction to, but they just do a phenomenal job staying in touch with the tenants and getting back to folks within a timely manner. I would say those are some four key areas.

Then it's as things come up continue to improve the aesthetics of a property and continue to provide a better place for people to live every day is I think the other key focus. Talk about it like everything 1% better each and every day. I mean, put that together over a year.

Chris: Yeah, it's a thousand percent improvement in one year. Yeah. I am really impressed with the focus on the lead measures. At no point did you mention net operating income or revenue. Those all lag the lead measures you just mentioned.

I'll throw one thing in there. And the gross potential rent is a key. I also like gross potential revenue too. I'll throw that in there just in terms of converting tenants to RUBS. As you improve the value of the property, implementing RUBS and sending out rent increases, is part of, yes.

But the other thing too is you don't necessarily have to do that, And we'll get into the discussion next time about disposing of an asset. And a lot of times, selling the upside is a great thing to do. Once you put all the rent increases in, the appeared opportunity is a little bit lower. So once you're to the point where it's like, Okay, now all we have to do is send the rent increases, that may be the time to sell the property.

Sean: Yeah, more to come. And we will definitely talk about net operating income in that phase.

Chris: Yes, we will. Thanks for time. Appreciate it. So fun.

AJ: Thank you for listening to this episode of the Real Estate Professionals Investing Podcast on WIN, your community of investing knowledge for growth. We hope that this episode has increased your knowledge and added value to your path to freedom. If you would, please take a second to rate us so that we can get more great investors to interview. If you or someone that you know wants to be on, please visit westsideinvestors.com and fill out our form to be on the show.

Chris: Thank you again, and enjoy your day.