I recently hosted an Ask Me Anything in my private real estate community, which you can find out more about at sweatystartup.com/rec. Here’s a recap of the questions and answers:
Q: For deal flow, what outreach strategy works best to contact property owners? Letters, cold calls, emails, or all of the above?
A: We try to do all that, but most of our deals have originated from cold calling. It sounds crazy, too simple, and not fun, but it works. Do your best to talk the owner into selling to you while figuring out the value of their property. 100-125X monthly revenue is a reasonable asking price to start digging in and getting a sense of property tax, insurance, competitors, occupancy, etc.
Q: What dollar amount was your first raise and how did you structure it?
A: My first raise was a unique deal since I knew nothing about private equity. We raised $500K outside of our own capital from friends and family. The deal was unlevered, so investors got equity in the same proportion as their investment. We paid on the bank debt out of our own wallets. I wouldn’t do it that way now, I’d probably structure a 7-8% preferred return and a 35% promote.
Q: Are you a buyer in this market? With rates increasing and prices not moving, is it best to stay on the sidelines for a while?
A: We are always buying. My goal is to build a scalable, sustainable, long-term real estate company, and we need to be able to buy in any market. We’ve reduced our risk, lowering leverage down to 50% and being pickier about what we buy.
We’re passing on 99% of deals because the asking price has not come down to reflect the change in the macroenvironment, people are still buying at yesterday’s price hoping rates will fall soon. But we have deals under contract and about to close, and we’re spending a lot of money on deal flow and underwriting a ton of deals to keep things moving.
Q: What’s the best method to find boots-on-the-ground workers to sweep units and manage properties?
A: We have properties across states and hundreds of miles apart from each other, and hire individual contractors part-time to take on unit maintenance. We pay $20-40 per hour, depending on the task and skill level. We’ve had success with Craigslist ads, Facebook ads, emailing customers, and even calling Mexican restaurants saying that we’re looking for workers and paying $X per hour.
Q: When you have so many projects, how do you manage investor updates for those who have stake in multiple properties?
A: We’d be a mess without Juniper Square. We have four employees on our capital raising and management team that are in charge of distributions, tax returns, and answering investor questions. We pay Juniper Square less than $10K per year, and without them we’d need way more than our four heads working on it. The value is incredible, and it’s the only way to organize 250 investors.
Q: How are you changing your underwriting to adjust to market conditions?
A: We’re underwriting a 6.5% interest rate now, just a few months ago that was 3.75%. We underwrite a 6% loan at refinancing and a 6-cap exit instead of a 5-cap. Cash-on-cash year one return is getting crushed by interest rates, but investors are hanging on.
Q: Is your acquisition team based in the US or abroad? How did you find them?
A: We hire American workers for our acquisition team, and they’re some of the highest paid at the company. We’ve had great luck with international employees, but we need strong confidence and strong rapport when cold calling owners who have little time to waste. We’ve found them through our network of family and friends and even on Twitter.
P.S. Record a voice memo for any question you have about small business or real estate and email it to [email protected] and I’ll answer it on the show
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