Dave Sherbal has over twenty-five years of investment experience in all types of real estate, with a specialty in multifamily real estate investments. He has been involved in all phases in the life cycle of an investment, and he joins us to discuss how he got started in real estate investing, asset management best practices, the current multifamily market, and much more.
Connect with Dave at https://c2gam.com/
To join the DJE Investor list and see upcoming projects, go to https://djetexas.com/access
For multifamily investment coaching & mentoring, visit https://www.apartmenteducators.com
Podcast: Play in new window | Download
Subscribe: Email
Transcript
Devin:
Dave, welcome. How are you?
Dave:
Doing fabulous. Yourself?
Devin:
Yeah, doing great. Thank you for joining us today. I’m excited to dive in here. Let’s kind of kick it off with a little bit of background. What is your background and how did it lead you to real estate and what you’re doing today?
Dave:
I kind of fell into real estate about 30 years ago. I was in public accounting. I was doing audits in the late eighties. Firm I was working for did a joint venture with a real estate workout gentlemen, ROTC contracts. Regular banks were taking back deals in the late eighties. So nobody else in the accounting firm wanted to work for the person because they didn’t see a clear path to partnership, as far as being in public accounting. A guy had a similar background to me, who was from the Northeast, was the CPA, and he made the jump into real estate. So he treated me like a younger brother, took me on, taught me a lot about real estate and the different classes. And I went from there and I’ve been doing real estate since the late eighties, early nineties.
Devin:
Excellent. What was your first project that you got involved in?
Dave:
My first project was a unflagged hourly motel in King of Prussia, Pennsylvania.
Devin:
And was this like a deeply distressed deal? Was the bank taking it back, or was it pretty clean? What did that look like?
Dave:
We took over a publicly traded company that owned a mixed bag of real estate. The banks took it over, got them listed and we took the operations from up in Boston, brought it down to Miami. And over the next six years we worked out their portfolio of assets. So we had some hotels, we had motels and some apartments. Lots of office, bunch of multifamily notes, and just kind of worked out for the unsecured creditors. Which were Bankers Trust, Chase Manhattan for Chicago. And it was a great experience picking up real estate in a downmarket and trying to create value.
Devin:
Right. So that’s a pretty big basket in a very diverse portfolio there. Was that just a train wreck in terms of management and connecting the dots? I mean, was it disparate third-party management on all this stuff?
Dave:
The portfolio was spread across the US. We had a golf and tennis resort in St. Simons Island, their clubhouse had just burned down. We had a deal out in California, a hotel that had some issues. It was all different real estate service providers and we put on the ones we thought can help us get the most value out of the deals. We gave them a game plan that we thought would work. And the bankers were our board of directors. And it was a good understanding of working with banks, working with every type of real estate category, and working with everything that was kind of in the toilet and being creative on creating value.
Devin:
Right. Yeah. That’s a huge endeavor, no doubt. I’m sure it took a village to make all that happen.
Dave:
It really wasn’t that many people, but for me, it was a learning experience because I had a mentor, he had done the path. He had worked on, for companies that had done workouts in the past. So it was a good segue from auditing where you’re finding and pining on the financials and where they hide stuff, not, to going into this where I relied on my background of going through books and records, source documents, to find ways of being more efficient on the expenses and being creative on generating more revenue.
Devin:
Right. Right. I want to ask you a question based on the, your kind of entry into this space and the timing of it. You’ve seen a lot of cycles since then. What is your sense of where we are? We’re just talking in the middle of 2021 right now, right? I mean, the history kind of rhymes and these things go through cycles. What are you guys doing today, and what do you think about the next couple of years in front of us?
Dave:
I mean, I’ve been saying for a few years that the good times are going to end and I’ve been proven wrong. I see lots of people chasing deals, offering more for the real estate than I thought the real estate was worth. And I just kind of see the good times always end, and there’s always that dip. I think there are a lot of people that are overpaying for real estate, and depending on how much the operational hit takes, depending on how good they were on placing the debt, getting IO, getting a longer term deal, there’s always going to be some people that run into trouble. They get too aggressive on leverage. They didn’t underwrite the deal properly. They’re not really operators. They partnered up with bad operators. Whether everyone’s doing gangbusters. I think a lot of people have bought deals in the last six, seven years made money because all the tide was rising everybody up.
Dave:
It’s hard to believe their own BS and they take bigger chances and they roll the die. It’s those people that are not really operators that sometimes run into trouble. And even good operators run into trouble. So I find it that as a workout person in multifamily and other types, times are good for me. Not because I’m smarter than anyone, but I’ve been through the battles, I’ve made every mistake and I kind of see the fire before it gets out of control and kind of put it back on course.
Devin:
That’s great. Thank you for that, for that insight. We talk a lot about multifamily on the show. If you’re talking about multifamily specifically, you’ve got an operator looking to get into a deal right now in this market. And it’s a competitive market, no doubt, right now. What are some of those things that you would kind of guide that operator onto to watch out for? Because we’ve seen a long run of run-up and values and rents and all this stuff. And then you’ve got all this fresh money in the economy in the last year and all these things happening. But what are some specific things, let’s say around underwriting, that you would tell that operator getting into multifamily right now?
Dave:
The first thing is don’t believe the brokers package. The brokers is like the barker in front of a McDonald’s. He just needs to get one person in to go buy that hamburger and his job is done, right? So brokers will send out packages with a story and you have to do your due diligence, and you have to kind of figure out where the holes in the story are. And figure out how you’re going to create value based on your own devices. Two, if you’re going to partner with a management company, make sure you pick the right one. Sometimes the bigger shops, if you’re a small client don’t care. And just in general management companies are always looking at their management fee, which is based on revenue, it’s not based on bottom line. So their interests are always going to run contrary to you as an owner operator.
Dave:
I think due diligence is kind of understated by a lot of people. They take the CapEx rehab plan that the broker gives them, sometimes the costs are pretty close and a lot of times they’re not. Older properties, you need to figure out the plumbing and the electrical. So you got to do your homework. You got to shop your own comps to figure out what’s a comp, what’s not a comp. And find some people that you can trust that are going to give you truthful answers and not just take your money as a contract vendor.
Devin:
I love it all. Fantastic points and very well stated. Thank you. Yeah, we’ve seen trouble from all those items in the past. There’s no doubt. What do you guys, what have you historically done for your capital stack and in terms of, I guess, more specifically around equity, and how are you guys structuring that today on new acquisitions?
Dave:
So my business for the last six years is truly, we’re a third party asset management shop. We don’t own a property management company, we don’t have one, we get kickbacks. So in the beginning it was mostly clients that were in trouble that would hire me. Syndicators now, family offices, institutional. So typically when they buy their own deals, they have their own brokers for debt. They have their own equity source, whether it’s high net worth individuals, it’s on a public raised forum, or they have true institutional, or they use an equity broker to find that. So my, on that type of stuff, I’m more of kind of a guidance than actually the person placing the debt, the equity. And so usually a lot of the clients, they like chasing deals. They like doing the capital stack. It’s everything else that they don’t like to do. You know?
Devin:
Work after the deal is closed, right?
Dave:
Yeah, C to G, Cradle to Grave. We do everything from the beginning to the capital transaction at the end, and everything in between.
Devin:
Outstanding. So what does, as an asset manager, from an asset manager perspective, who’s an ideal client for you in terms of size, location, asset type, that kind of thing?
Dave:
So currently we oversee about 5,300 units across the country. So we go anywhere where our clients ask us to go. So that doesn’t stop us. We do majority multifamily, but we’ve had portfolios of office and retail. But the majority is multifamily. We’ll do everything from A to C. It’s all the same just different nuances in each class. As far as clients, our clients run the gamut from uber sophisticated to newbies in the industry. We’re just looking for people that want to learn, want to get better. And the better you are as an operator, the better you are as an underwriter, because understand property management companies do. So our clients will sit on the weekly calls with us, if they want to. I have some clients that don’t and they just hand the ball to us and we get the business plan completed.
Devin:
Yeah, outstanding. It’s such a huge layer of responsibility above the property management, which is doing a lot of work for sure. But the asset management piece of the stack is, that’s where the buck stops, right? That’s where the business plan is executed, or it isn’t.
Dave:
We represent the owners of the real estate. So there are our bottom line is keeping them happy. If the management company is not producing we can switch them out. It doesn’t bother us, hurt us, it’s just the nature of the beast. And look, we’re good at setting up the business plan. Lots of times people buy deals and they don’t have a business plan, so they hand it to the management company. And that’s not really their skillset. Their skillset is ownership gives them a plan, we manage that plan and we keep them within the white lines and make sure that they’re hitting the returns that we’re looking for without raping the property, without filling it up with people that are probably going to get evicted. We get that property going, moving, and then set it up for the capital event, whether it be a refire or sale.
Devin:
Right, yeah.
Dave:
Rolls looking proper, we’re making sure the financials are moving. We’re building a good exit story.
Devin:
Right. Is there a narrative, I guess, nationally for what happened last year with office? I mean, I’m not in that space at all so I hear things, but I’m not seeing it. How did office do through COVID and what do you think is ahead for office, or is it too nuanced to have a blanket answer like that?
Dave:
I think it’s nuanced, but I think at a macro level is some firms are starting to have their people come back. Some people are saying part at home part in the office is the new way to go. I mean, if I’m an employer and I have a big foot space in an office, I’m paying a lot of rent for that space. If I can have people working from home, I can downsize that space. I think office has been hurt. Some people are moving to cheaper digs, less space. And you look at it in New York, a lot of the firms aren’t going back. It really depends on where we are now in the COVID virus. Are we hitting another level or are we going to continue on the positive trends that we’ve made? So I think the jury is still out.
Devin:
Yeah, that’s right. That’s right. A lot of variables there. Getting back to multifamily, you mentioned you do A, B, C. In the A space, the newer space, how are you seeing operators create a real value add, right? I mean, some of these older properties, it’s fairly obvious that they need everything. But on the newer stuff, it’s a little more difficult, right? Maybe it’s a little bit thinner, or rents are closer to the top. How are you seeing operators successfully boost NOI those newer properties?
Dave:
I mean, look, on the revenue side, there’s always amenities and the charges for it. It’s billing back expenses that you haven’t. The problem that you have is on all property types our insurance costs are going up, real estate taxes are going up, costs are going up. So even if you have a really good rent increase, those three big items are tough to overcome. And the problem with new, this is always something else that’s newer, and you continually are putting money back in to compete. At least on an older property, you kind of know where you are on the food chain. You could fix the things that are broken and you just make sure that your prices, versus something above you in the quality stack has a nice price differential. And when times get tough people move from A’s to B’s, and B’s to C’s. And there’s more poor people in the US than there are rich people. So what you’re finding is when people have trouble, they’ll go home, they’ll double up, or they’ll move down in the food chain.
Devin:
Right, yeah. It’s tricky when you’re competing with something that’s some brand new construction next door. That’s tough.
Dave:
Two, $300 rent differentials is a big number for people. So you can take your own property and give them some of the interior amenities. You can do the hard kitchen surfaces. You can do the appliance packages. You can make the floor plank vinyl. You can do that and get a nice return, all things being equal. Which the hard time is you can’t change the aesthetics of the buildings as easy. You can send these property, it’s a little antiquated and you don’t know what’s behind the walls and the electrical, and you don’t know what’s under the ground and plumbing. But if you just work on clean, safe and priced right, you’re going to do, okay. Good customer service, you can do it on a C just as you do it on the A.
Devin:
Yeah, that’s right. I love it. I love it.
Dave:
Remember, some people are renters because they have no choice. They can’t afford to go buy a house. People living in the A’s paying good rents, they have choices. They can go from an apartment to a house. There’s someone who’s been a long-term renter that kind of, in that cycle and stuck in it. So your turnover costs, it could be less if you can do a good job and just keep them happy and keep them in your units.
Devin:
That’s right. Let’s talk a bit about cap rates here. And we can kind of focus specifically on multifamily. Obviously we’ve seen cap rate compression in our market in Texas, and I’m sure nationally, but we’d love to get your feedback on that. I mean, these things have really compressed over the last couple of years. What are your thoughts on what’s happened and where it’s going? As unfair of a question as that is.
Dave:
I mean, just from a general, things are tradings in the threes, some fours. I mean, how much lower can it get?
Devin:
Right, right.
Dave:
And typically you would buy, and we’re hoping you were getting in a wide growth, but NOI growth could be tough because of the taxes insurance, and if there’s another hiccup in the market. Interest rates are pretty darn low, equity yields are low. So you kind of hit that bottom point of cap rates. There’s only one way for them to go eventually and that’s back up. So that’s kind of the problem. I think the thing that’s helped everybody is the long run on the climbing interest rates.
Devin:
Right, right. In your career, have you seen situations where you saw some cap rate expansion that really caught people off guard? And what did that look like?
Dave:
In the late eighties, some of the loans we’ve picked up on the public company, we had loans that were 13 to 15%. It wasn’t like they are now.
Devin:
13, 15 on the rates?
Dave:
Yeah. When I worked at Signia Financial we were buying the old syndicators, we were using 10 as a cap rate at 95, 96. They do our annual evaluation. So I’ve seen the rates kind of come and go all across the board. But generally speaking, they’ve been kind of more on a downward trend than an upward trend.
Devin:
No doubt. Well, same question on rates. Do you think we can, did the fed shoot all their bullets? I mean, or do you think they’re going to try to kick this back up here over the next couple of years? I mean, they’ve been really quick on the QE. And what’s your thought on, is this just perpetual QE machine or are they going to try and raise rates? What’s your take on it?
Dave:
They’re smarter people than I, so I wouldn’t be the person to ask. But a lot of it is trying to keep the economy going so they’re trying to stimulate. But at a certain point in time, prices are going up. I just think they’re going to have to do something to slow down. I mean, the stock markets through the roof, but most Americans are not invested deeply in the stock market. It’s more, most people don’t have that discretionary income. So things are, it wasn’t that long ago where the market was low. Talk about April and May of last year and it’s gone through the roof, but the question is, are the earnings really there? Just people getting in the market because that’s the place to go. Again, they’re smarter people than I, I’m just a multifamily guy.
Devin:
That’s right. That’s my line I use all the time. Let’s talk about your firm and an engagement. Somebody comes to you, they say, we’ve got this portfolio, but we’re really not good at the asset management component. What does an engagement with you guys look like in terms of kind of initial call to taking over some portfolio?
Dave:
So traditionally, if someone just calls, they have some questions, we give them the free advice because we try to play it forward. Our agreements are handshakes. If you don’t like us, they’re over. We’re on a fixed fee, a low fixed fee. We try to be that plug and play that if you’re too small to have an asset management department, you don’t want to deal with everything except for underwriting, finding new deals, and we’re the plug and play. We take a flat fee plus travel. We’re cheaper than you hiring inexperienced people that you have to watch, and we know to do our thing. If you’re unhappy, again, it’s a handshake. As long as we’re happy with you. And we try to only take clients we like to work for.
Dave:
There are a lot of people out there that have bad reputations and life is too short. So our clientele is with people that we like to spend time with, and be with. And we’ll do anything within the operations. But traditionally we’re not, come out twice a year and look at the property from a parking lot drive. We try to be on our assets every month. We’re on weekly phone calls. We’re pushing the management company as hands-on owners reps. So for our clients we bring results, and for the management companies, there’s accountability.
Devin:
Right. Yeah, that’s great. Well, thanks for the overview there. I love it. And thanks for sharing some of your insights here. Just to kind of wrap up, what would you say to the perspective passive investor out there, right? Somebody is looking at maybe invest in a project with a syndicator. They don’t want to go through all the work and headache of owning it themselves. Do you have some words for that person that wants to be a limited partner?
Dave:
Yeah. I would go shop the Syndicators for other properties. See if they’re clean, see if people are bubbly and engaging. Syndicators are raising money. They’re the barker at the carnival. They’re trying to get you through the door. Everyone’s getting somebody else’s money.
Devin:
That’s right.
Dave:
I would ask for financials every month, not just take the letter you get. You have to choose partners wisely because you can lose your spouse quicker than you can lose your partners. And as a limited partner, you really have no rights. So you really have to do your homework on who you’re picking. Because without having any rights you’re just sitting in the backseat of a car that if it’s going off the cliff, you can’t do anything about it.
Devin:
Yeah, that’s right. Big trade off there. Big trade off there, for sure. Well, that’s helpful. Dave, thank you very much for sharing some time with me today. And I enjoyed getting to learn about you and your company. If somebody wants to connect with you, what’s a good avenue for that?
Dave:
You can email me the dave@c2gam.com. Phone number is (954) 646-7382.
Devin:
Outstanding. Well, we’ll link to the website there in the show notes. And thank you again. I wish you a prosperous year ahead. Appreciate you jumping on today
Dave:
You as well. And we appreciate the opportunity to be on your show.
Devin:
Outstanding. All right. Take care.
Dave:
You bet.