Kenny Wolfe, Founder of Wolfe Investments, joins us in the studio for a big conversation on real estate investing. We discuss how Kenny moved from being a CFO to investing in multifamily real estate. We also talk about scaling his business, buying Class A assets, and office conversions.
Connect with Kenny at http://wolfe-investments.com/.
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Kenny Wolfe, welcome. We’re glad to have you today.
Kenny Wolfe: (00:03)
Thanks, Devin. Appreciate it.
Yeah. Thanks for jumping on. So want to get into your story, where you came from, how you got into multifamily, and, eventually, today owning thousands of units, multiple states, the management company, the whole thing, and we’ll dive into that stuff. But for those that haven’t read your book, or that aren’t already investing with you guys, or whatever the case is, not familiar with you, where are you from, and how’d you get into this real estate world?
Kenny Wolfe: (00:31)
Absolutely. So we’re based out of Plano, Texas, just north of Dallas. So I got into multifamily family via oil and gas. So I started out in the accounting world of oil and gas, and then quickly moved up the ranks in that company and spun a company off in Shreveport, Louisiana, was CFO at age 28. And then that company was winding down. Our sole client was Chesapeake Energy. So for those that are in oil and gas or know of Chesapeake, they had money issues the first time. So I had to figure out what else, what we were going to do, stay in oil and gas or move to something different.
Kenny Wolfe: (01:08)
And, really, just was a great way to kind of reset. Okay, what do we want to do? So, actually, I used to use that time to figure out, okay, what industry do we want to be in? So it was-
And you had a blank slate at this time. Really, this is a starting over period.
Kenny Wolfe: (01:23)
Exactly. So at 28, had to hit that reset button, figure out what we want to do with our life. And so anyways, with oil and gas, it’s either feast or famine. So I wanted to find something different. Called up a family friend, she’s a trust fund kid. So, I’m big on modeling. So I ask her, “What do you do? I want to be like you when I grow up.” So anyways, she goes, “Well, I invest in multifamily properties.” And, honestly, at that time, I thought just East Coast hedge funds bought apartment buildings. I didn’t even know about that. So she got me down into a local real estate investment club there in Dallas. It’s a two day event. The first day they talk about single family rentals. My wife and I had both attended. I think it’s important for your significant other to be a part of this big decision.
Kenny Wolfe: (02:06)
So she was there. And the first day, they talk about single family rentals, and we were pumped that night. We were going to buy 10 houses in Dallas and all the big plans. And then the next day, they talk about multifamily. And, really, then we totally scrapped single family. Forget single family. We’re jumping right into multifamily, and we had the money to do it, and the business experience to do it as well, so we could jump right into that. So jumped right in, did two passive investments to learn the ropes, really sought out a value play. So you’re a big fixer-upper and then a yield play to kind of see both business models, learn, figure out who should be on the team, all these things, because I was coming from oil and gas accounting. I knew nothing about operating a property.
Sure. But as a first step, you had an opportunity to be a limited partner, invest $50,000 or whatever as a passive investor, and not have to do any of the work, but you still get to see the P&L you still get to see the business plan. How did that stack up versus your expectations of what you thought that would be as a passive investor?
Kenny Wolfe: (03:13)
Yeah. I mean, so as a passive, I was kind of an active passive, I guess. I made sure to be on every phone call. I asked a lot of questions.
Because you wanted to do this. You wanted to be an active operator, but you intentionally started passive to learn the ropes.
Kenny Wolfe: (03:27)
Yeah. Because I mean, I knew nothing about how to run these things. So I asked a lot of questions and learned a lot along the way. Some passives are just going to be passive. They’re just going to, “Where’s my check?” And they don’t read a lot of the statement, which is fine, if that’s what they want to do. But as someone who wanted to be a syndicator or a sponsor, that was a great way for me to use that time to educate myself on the team. How do you operate these big assets?
Yeah. Yeah. That’s right. And how long were you in that kind of phase of your journey before you said, “All right, I’ve got a handle on this. Let’s go make an offer on a deal?”
Kenny Wolfe: (04:05)
About 18 months.
Kenny Wolfe: (04:05)
I’m ballparking it, but about 18 months. The first one we did was a big fixer-upper. So that was also the rehab. So, I mean, I learned a lot about how to rehab these properties. And then the second one, kind of a keynote, is that it was a Fannie Mae loan, which was a big deal, because that gets you your Fannie Mae card. So the first syndication deal was 76 units that I did, and I was able to get Fannie Mae loan by myself on that transaction.
Because of what you’d done on the limited partner side as a passive investor? So explain that to folks that haven’t heard that before maybe, getting in this country club with Fannie Mae. What does that look like?
Kenny Wolfe: (04:43)
Right. I mean, so I’ve actually been asked, there’s no physical card you get. It’s just a way to kind of get your experience with Fannie or Freddie, these agency lenders. And once you do that, even as a passive, they tend to count that as your experience, and what that allows you to go is go out to get the best financing out there that’s possible for any kind of real estate.
Right. Right. And it’s really interesting. And multifamily, I mean, there’s basically… the government is rooting for guys like you and guys like me to go provide housing.
Kenny Wolfe: (05:15)
And really kind of providing some of these financing tools that are… I don’t see them in other industries.
Kenny Wolfe: (05:24)
No, absolutely. Yeah. No, this is the best lending you can get on the face of the planet.
Kenny Wolfe: (05:29)
That’s right. So if Fannie and Freddie are willing to come in and write a check for 75% of the capital stack with these amazing terms, non-recourse too, I mean, we talk about that a lot, but that’s huge.
Kenny Wolfe: (05:41)
Oh, that’s huge.
I mean, I’ve been able to basically build my whole portfolio as non-recourse. It’s amazing.
Kenny Wolfe: (05:48)
And so anyway, huge advantage to that. So you had the on-ramp as a limited partner passive investor. I think that’s an awesome first step. You get to do it, then you go out and manage your own deal. What were you guys thinking at that? It’s funny, you mentioned the 10 single family houses. I had the same kind of vision when I started. It seems like everybody gravitates towards, “If I could just do 10 single families, pay them off, I’m retired,” which is true. You could do that. It’s kind of funny that everybody gravitates towards that. But as you’re going through passive investor then getting your first deal, what was your target? Did you want to get to a certain amount of doors? Did you just want to see how it unfolded?
Kenny Wolfe: (06:33)
Right. So the first syndicated deal we want to do, we want to make sure that we had full-time onsite management so that there’s a threshold to do that. I ballpark it about 60 units here in Texas, probably more than that, really, but 60 is right on that line. So we went off. So that was a big box that we wanted to be checked on this new syndication, because my wife and I, actually, right out of college, bought a tanning salon with the idea of growing that so we-
As a franchise deal?
Kenny Wolfe: (07:04)
No. So this is a whole… I don’t know. I call it my wife’s MBA, because I already had one, and it cost us as much. But the big lesson we learned there was that go big or go home. So we had this idea of buying this thing and then eventually getting a manager to run it for us. Well, it wasn’t big enough to do this. So we kind of took that lesson, go bigger, go home, to multifamily where look, I mean, I don’t want to be onsite every day. I can’t change out a toilet. I don’t know how to do that. So that was our focus is to get to that point. So we didn’t have the equity ourselves to do that, so what that means is that we had to go raise the money.
Kenny Wolfe: (07:40)
You kind of work backwards from where you want to start out. So that was a big box that we had to have. That was a must have. And then, obviously, you have these things where we prefer pitched roofs, [inaudible 00:07:50] HVACs, all these other things as well. But the professional onsite management was a big, big thing for us.
Yeah. There’s no doubt a property management company handles so much, and that’s the real work, too. I mean the managing tenants, the maintenance guys. I mean, those guys work their tail off. We’re super, super grateful, but you can’t come in as the operator and do those things.
Kenny Wolfe: (08:14)
No. I mean, as a sponsor, you’re syndicating your job and for your investors is to manage the assets you already have and go find more investments for them to invest in as well. So I mean, that’s my job. So if you’re bogged down in the day-to-day on the 30 unit deal, you can’t do that.
Right. Makes you an inefficient operator.
Kenny Wolfe: (08:31)
Very inefficient. And so that first purchase was actually a portfolio deal. So I bought the 76 unit piece to it. There’s another guy that we bought the 32 unit deal right there. The funny thing is, is that the seller of that deal did not want to sell me mine until he made sure that 32 unit was sold. So that tells you he did not want to be stuck with a 32 unit deal.
Kenny Wolfe: (08:52)
And then also, too, so over this 10 year run we’ve done about 6,800 units today. And then that guy’s probably done 600, because he’s bogged down in the day-to-day stuff. So you can’t build your portfolio if you do that.
It’s a tough thing I talk to people about a lot. It’s scary to try and go big and wrap your head around that and raise millions of dollars, and you shouldn’t just go out and do it. You need a team and a mentor and an education, the whole thing. But once you do get into that larger stuff, a lot of it becomes easier.
Kenny Wolfe: (09:24)
Yeah. I mean, our second deal was 133 units. That was a big rehab fixer-upper deal. So it really was a launching board for us to start at that level where you can do the professional management, because, still to this day, I don’t know how to evict anybody. We have great people that do that. And I don’t know how to, like I said, fix toilets.
Yeah. What forms you need? When does it need to be filed? All that stuff.
Kenny Wolfe: (09:45)
All the little logistics, our great onsite people do that.
Love it. Yeah. Yeah. And that lets you stay focused. And the proof’s in the pudding. You guys have scaled up. You’ve done, like you said, 6,800 doors to date, Texas and beyond. Let’s just fast forward, and then we’ll kind of dive into some of the details. What does the current portfolio look like today in mid 2021 as we’re talking?
Kenny Wolfe: (10:08)
Sure. So yeah. All time record 6,800 units that we’ve done. We’re down to about 4,200 units right now of current assets under management. This year we’ve bought already 70 million worth of acquisitions.
Kenny Wolfe: (10:21)
And then we’ve got another 70 million going to contract by the end of the year. So it’ll be a big, big year for us on the acquisition side.
Kenny Wolfe: (10:31)
And we’re really focused on Texas and Ohio, acquiring more units there right now.
Kenny Wolfe: (10:35)
That’s been the focus for a couple of years, but those are the states we’re having some good success in right now.
Right. Just doubling down on that. Do you guys set targets for the year? “Hey, we want to acquire this much and make sure we have the team in place for it and hope for the best,” or how do you guys look at that on an annual basis?
Kenny Wolfe: (10:50)
Right. So we’ve got… For those other business owners, traction is a really good book to use.
Kenny Wolfe: (10:56)
Kenny Wolfe: (10:57)
The EOS system. So anyways, I found that a couple of years ago. So by 2029, the goal is to have 1 billion of assets under management.
Kenny Wolfe: (11:08)
So, really, you kind of work backwards. How many…
Kenny Wolfe: (11:11)
Yeah. So how much acquisitions and, obviously, growth of the current portfolio on evaluation as well. So take those into account. But right now we’re well ahead of that number. We’ve got a lot of office to multifamily conversions that’s just going to speed our current holdings way out the next year or two, once those jobs get completed. So I’ll have to reset that number.
That’s all right. That’s all right. Yeah. I love that big target out there. And let’s talk about the office conversions. You guys are buying distressed office buildings and, in some of these markets you’re already in, converting them exclusively to multifamily. How did that come about?
Kenny Wolfe: (11:54)
So we kind of fell into it, which is kind of a funny thing to say. We fell into the Rockefeller building in Cleveland, which is a historic office building the Rockefellers built in 1905. It’s still an office today. So about a year and a half ago, we were driving back from the airport in Cleveland, a buddy of mine up there, and we passed an old warehouse, and I’ve always wanted to convert one of these older buildings, repurpose them into a multifamily property. I went to Baylor. They did that when I was on campus there, a group did. And it was an old warehouse, and they converted it to amazing lofts and all that stuff, which I could not afford, but a buddy of mine could. And it was really cool. His place was cool. So I was jealous.
So you had that in your mind since college.
Kenny Wolfe: (12:32)
I want to do that.
Kenny Wolfe: (12:34)
So anyways, we’re driving back and passed the old warehouse in Cleveland, and I tell him, “Man, I’d love to do this, do that.” And he said, “I’ll find something.” And he lives up there. So he started digging and then about a month later, he gives me a call and says, “Hey, I’ve got this deal called the Rockefeller. You got to fly up here, and you come check it out.” And, honestly, I didn’t even look it up on my phone where it was. It was like Rockefeller? I’m there.
Kenny Wolfe: (12:55)
So fly in, we’re driving down Prospect and you can see it, the building there, 17 stories tall. It’s got big white letters, Rockefeller, on it. And I’m hanging out the window, taking photos and stuff. But we had found a local GC that’s worked this property a few times trying to figure out how to repurpose it.
So they had already seen the property for years.
Kenny Wolfe: (13:14)
They knew it and they’d probably run bids on it.
Kenny Wolfe: (13:18)
Absolutely. So we had drawing six different ways of hotel, keeping it office, multifamily, a whole bunch of different options. So they kind of ran us through that. Today where it is, it’s going to be a little bit mixed use, but mostly multifamily. So four through 16 are going to be A class multifamily, two and three-
That’s floors four through 16?
Kenny Wolfe: (13:38)
Kenny Wolfe: (13:40)
On the 17th floor, it’s really cool, is there’s 44 walk-in safes that were the Rockefeller family’s.
Oh my gosh.
Kenny Wolfe: (13:46)
So that’s going to be storage, because it’s only eight and a half foot ceiling for everybody. But four through 16 will be A class multifamily. A lot of efficiencies and one bedrooms, that’s the need in downtown Cleveland now. And then two and three we’ll keep office, and the bottom floor retail, restaurant. And then there’s some cool marble staircases that go down to a ballroom. So that’ll be part of, hopefully, a speakeasy restaurant kind of thing.
Right. Yeah. Totally unique. That’s fantastic. And the need downtown is not so much about space, it’s about affordability and location.
Kenny Wolfe: (14:20)
Absolutely. I mean, all of these we’re buying are 97 walk scores. Because we have that property, we bought another one in downtown Atlanta as well. We’ll have a second one coming there, another one in Cleveland. So we’re looking at these downtown settings. Hopefully Dallas-Forth Worth, places like that, where we can bring in repurpose these office buildings, which before COVID we had too much of any ways. The average vacancy on an office, in every major market, was about 30%.
That’s incredible. 30% vacancy.
Kenny Wolfe: (14:48)
30% vacancy before COVID. And now, I’m one of those that think office will come back, because if you’re not in the office, you’re missing that creative spark. Definitely IT probably can be all virtual.
Somewhere else. Yeah.
Kenny Wolfe: (15:00)
But anyways, I see a lot of folks coming back. But, at the same time, we will lose some need for office.
And it was already bad before COVID.
Kenny Wolfe: (15:07)
Yeah, exactly. So this is a way to kind of repurpose these buildings. Our rents are going to be 285, 3 bucks a square foot, and we’re buying them for probably 40 to 60 bucks a square foot with a lot of, obviously, rehab in there, too, but on top. But, at the end of the day, we’ll have these amazing assets, great locations, and great views of Erie and downtown and Atlanta, good locations.
Kenny Wolfe: (15:32)
Yeah. So you can’t [inaudible 00:15:34]
How’s the appetite been from the debt lending side for these types of projects? Obviously a little different than your 1985 garden style kind of bread and butter multifamily deal.
Kenny Wolfe: (15:44)
So we also did some ground up construction. So we saw during COVID in 2020, basically, construction loans dried up. I mean, you could not get one. So, actually, for Rockefeller, we ended up having to do an acquisition loan, and now we’re going to the $70 million construction loan. But we are seeing now construction lending is coming back in a big way, and we’re getting great terms. I mean, 75%, kind of your normal, your typical, before COVID terms, but they’re all back, which is good to see.
Yeah. Yeah. That’s fantastic. And then you’re just bringing in a GC, that’s done played the game before and can just come in and run through it.
Kenny Wolfe: (16:20)
Absolutely. You’ve got to team up. Like in anything, you’ve got to bring in the right team for that project. So we’re working with Rockefeller with Geis Corporation. They’re a third generation developer there in Cleveland. They know everybody in the city.
It’s not a guy in a truck.
Kenny Wolfe: (16:36)
No. Yeah. Absolutely. And they just finished up Dan Gilbert’s multifamily conversion in Cleveland. And Dan Gilbert’s the owner of the Cavs, and probably Rocket Mortgage is what he’s mostly known for.
Kenny Wolfe: (16:45)
But if they can do Dan’s, they can do mine.
A hundred percent. Yeah. Good company to be in. Good company to be. That’s fantastic. So that’s a project you’re able to launch to your investors, and say, “Hey, we’ve done all these other types of projects. This is some growth, but it’s not entirely outside the box either.”
Kenny Wolfe: (17:01)
Right. Exactly. It’s just a big rehab project. And then Rockefeller and then some of our other projects are opportunities zone as well.
Kenny Wolfe: (17:09)
So that’s a way to really kind of capitalize on both the construction, the big appreciation that we’ll get, while at the same time, they’re in opportunity zone areas, which will be great as a tax tool for some folks.
Sure, sure. Yeah. Amazing tax shelter there on those. That’s fantastic. Well, let’s talk a little bit about how you’ve grown your investor base and kind of the investor experience with Wolfe Investments, because that’s how we go bigger, faster. I mean, if you had to write the check on all these deals, and a lot of people kind of have that mindset. They’re going to buy three single family rentals, that’s all their money, and that will actually be a good investment over time, but it’s not going to get you to 7,000 doors or billion in assets.
Kenny Wolfe: (17:50)
Now. I mean, I’ve kind of likened single family, they’re great net worth builders, but not great cashflow. You have to change out a roof, your cash is gone for maybe a year or a year and a half. So you’ve got to keep that in mind. They’re not bad investments. They’re, like I said, great net worth builders, or for folks that want to get into multifamily, to get in there you may have to flip your way to 50 K.
Yep. There’s nothing wrong with that.
Kenny Wolfe: (18:11)
Absolutely. So everybody’s got to start somewhere. So what we focused on, we found a lot of our investors come through in-person events. So I speak at a lot of events, just like your great event here in San Antonio. I’m speaking in Columbus, Ohio next month. So a lot of speaking engagements like that. We host a big multifamily event three times a year at MFin. We just got back from one in Miami, had 350 people attend.
Yeah. I heard Miami was really good. I couldn’t make that scheduling conflict, but a lot of my team went and they loved it.
Kenny Wolfe: (18:44)
Yeah. It was a lot of fun.
Yeah. Especially coming out of the last year and a half, COVID and everything. And one more Zoom call, you’re going to go melt down, but a live event in Miami, 350 people, I heard. That was awesome.
Kenny Wolfe: (18:57)
Right. Yeah. So that’s good. So we do those also, and then, really, because of COVID kicked off a YouTube channel that we’ve got as well. Because of the lack of in-person events, that’s a lot of our way we get our new investors that way. So, really, just went out and bought a 4k camera from Best Buy and started recording. And so we do a weekly video output on that. And then we started doing these cool property tour videos. So we get a camera guy to follow us around a few of our assets. And they kind of walk them through the process to as how we added value to that building and that community and the city that we’re taking part of.
Yeah. There’s nothing like seeing the walkthrough. I mean, look, if you’re an investor, you go tour a property, that’s great if you have the opportunity. But a lot of times that doesn’t line up. And then the OEM’s are great offering materials. I had one of our investors tell us, “I’ve never seen a bad offering memorandum. They’re all great. It’s all up and to the right.” Which, if you operate well, that’s what it is. But getting to walkthrough a property, see you explain what’s happened, see you actually talk about the dollars and cents of the rent increases, things like that, I think, that really connects the dots for people in a way that’s scalable.
Kenny Wolfe: (20:13)
Right. Well, and I wish that we could add a smell-o-vision. Smell-o-vision.
Kenny Wolfe: (20:19)
Or not. Yeah. But to let folks know what, some of these properties, we go through. I mean, to see the worst of it, too.
Absolutely. Yeah. A hundred percent. It’s like once I got into real estate, a switch was flipped in my mind. I drive by a beat up apartment and kind of get pumped up. Oh man, I wonder what their occupancy’s at.
Kenny Wolfe: (20:39)
Because it’s still a profit.
Yeah. That’s right.
Kenny Wolfe: (20:40)
Even if it has really bad smells. It’s still a profit.
Yeah. That’s it. Yeah. It looks like work. The opportunity looks like work. Go figure. Go figure. So you’ve built up your investor network over time, you’ve gone full cycle on a bunch of deals, which is a real kind of milestone for any sponsor, getting out of that first deal and everybody gets their money back and maybe you beat the returns you projected. And everybody goes, “Okay, this is real. We like it. We want to do more of that.” And then they tell all their friends. Yeah. That’s kind of an interesting thing. What do you guys have set up now in 2021 as far as the team? Because you’ve got 1500 plus investors at this point. How do you guys manage that, I guess, the admin side and internally?
Kenny Wolfe: (21:28)
Yeah. So we just had a lot of growth. So this year we’ve added a whole bunch of folks to the team. We hired an investor relations manager. So Savannah does a great job. We had a marketing slash investor relations person, so now she just does marketing. We’ve got admin. We’ve got a part-time remote person that does a lot of our surge work. So when we do have an offering come out, that’s a lot of paperwork to manage. Well, I should say digital paperwork to manage. And so we have that now. I hired another asset manager so one will focus there in Ohio, and then we’re split up Texas and Oklahoma. We’re going to get Oklahoma and Texas, I guess, for our purposes.
Kenny Wolfe: (22:09)
So he’s going to do that. So just keep adding to the team, hired development managers. So he manages all of our development projects and then we have a triple net fund as well. We’ve got a guy, a young kid, I shouldn’t say kid. Young guy that runs that for us as well. So it’s really just kind of keep building that team. We just snagged an awesome CPA. She was working at PWC. So now she works for us.
She come in as a controller, just in-house accountant, or how did you-
Kenny Wolfe: (22:35)
As an accountant for now. Her role is going to keep expanding as we grow is the idea. So, really, just kind of keep adding to the team, and we’re moving to a bigger office space.
Oh, outstanding. Outstanding. So you guys have an office in Plano then, right?
Kenny Wolfe: (22:50)
We have an office in Plano. It’s our second office in Plano now. We’re going to more than double our square footage there in kind of the legacy bank building here in a few weeks.
Sure. Yeah. So pretty much most of that team, obviously, not the onsite teams that are all remote, but most of the corporate team is kind of under one roof then, right?
Kenny Wolfe: (23:06)
It is. COVID, to me, really showed that to have the team in-house, or in the office, to have those interactions are key. You can move so much faster. You’re much more efficient. I mean, you miss that spark. If I’m walking down the hall and I have this idea, well, I can’t shout down the hall, “Hey, I got this good idea.” I’ve got to set up a Zoom call, and maybe they’re not available. So I’m a big believer in having folks in the office as a more efficient and to do the creative side of what our business does.
Sure. And the culture, too. I mean, the camaraderie and then everybody kind of knowing each other well. There’s some fantastic tech tools we all have, no doubt, but there’s some limitations on those, too.
Kenny Wolfe: (23:53)
Absolutely. The in-person events like this are just phenomenal, are much more real, and you can go in-depth.
Yeah. Yep. Love it. So what are you guys doing currently? And I know we talked about this a little bit last night at the event, but you guys used to buy stuff for 30, 40,000 a door. And today, well, I’m in San Antonio, seems 100 K is the new 75 K a door, if we’re lucky, which is great as owners. It’s awesome. As a buyer, it’s more challenging. How are you guys approaching your acquisitions in a low cap rate environment, competitive, all that stuff?
Kenny Wolfe: (24:34)
Right. I mean, so really we’ve always been opportunistic, and I think you really have to do that. If you’re stuck on doing just BNC value add in Dallas, Texas, I mean, everybody wants that. So you’ve got to be able to change your business model a little bit to be effective and find the better deals. If everybody’s chasing one thing, well, maybe that’s overbought. We just saw a C plus deal, fixed up, very nice, but sold for over 115 K a door in Irving, Texas, which was just mind blowing. I mean, we were buying that stuff at, like you said, 30, 40 a door.
It’s like a ’70s asset.
Kenny Wolfe: (25:11)
A ’70s asset. Chiller. I mean, it’s just 115 a door. It’s amazing to see what the new pricing. So-
What’s crazy is that buyer, they may be okay.
Kenny Wolfe: (25:22)
You scratch your head, but they still probably will be all right.
Kenny Wolfe: (25:26)
Yeah. I mean, I’m sure you guys are seeing it here in San Antonio, too, but we’re seeing even more out-of-state buyers now since COVID happened, because we’re seeing a lot more California and New York buyers who are scared to death to buy in their markets, because-
Don’t like them.
Kenny Wolfe: (25:41)
Yeah. Rent control and all that kind of mess that they’re having to deal with now, the evictions. So that’s really pushing these prices up even higher. But the thinking is, so now in Dallas-Fort Worth, we’re focused on A class, because if I’m going to pay a four and a half cap rate, I mean, I better buy an A class instead of a C class.
Same cap rate.
Kenny Wolfe: (26:00)
It’s the same cap rate.
Yeah. There used to be some separation there, and now it’s all compressed. It’s basically one kind of mid force cap.
Kenny Wolfe: (26:08)
Absolutely. Yeah. A classes are focused in Dallas now, or ground up development, because they’re paying 115 a door. I can probably build them for 150, 160 a door. So I’d rather own an A class, brand new systems, granite countertops, all that stuff, for 150, then buy C plus for 115.
With all the headaches that are involved with that. So how are you guys approaching the A class stuff from a yield perspective or return perspective? Are you able to still go in and kind of bring your own team in and prove NOI that kind of thing?
Kenny Wolfe: (26:41)
Absolutely. I mean, every time we buy an asset, we’ve got to add value somehow. And so for the A class, a couple of deals we bought were directly from the developer, and I’m not knocking them, but typically they’re not operators.
Right. Build and sell.
Kenny Wolfe: (26:56)
Exactly. Right. So we were able to streamline their expenses, make it more efficient, and then on the revenue side, we actually, on kind of a flyer, our first A class in Dallas-Fort Worth, I said, “Well, why don’t we do an upgrade and see what happens?” But the crazy thing is we bought it in 2019. It was just finished in 2018 completed. So how do you upgrade an A class property?
Was it leased up already?
Kenny Wolfe: (27:19)
It was leased out when we walked in.
So you bought it as soon as you could.
Kenny Wolfe: (27:22)
It was fresh paint and everything.
Kenny Wolfe: (27:25)
Exactly. Still smelled the fresh paint. But we tried five units and see what happens. And so the developer, beautiful cabinets, granite countertops, the flooring, everything you’d think of an A class. He did black appliances, no backsplash, and the fixtures were mediocre. So, really, in those first five we did, and since then, but we’ve done stainless steel appliances. We did a kitchen backsplash, upgraded the lighting to have that wow factor when you walk into the unit and other fixtures, too, throughout the unit. But, I mean, we’re getting 150, 200 dollar rent bumps on that A class, and we only spent maybe 2200 bucks.
Wow. That’s the kind of interior rehab budget you want to see.
Kenny Wolfe: (28:09)
Exactly. So now we have that property. I think we’ve done over 50% of the property like that. And we obviously have a lower cap rate. We’ve got fix that helps our cashflow in a big way as well. And the valuation is just skyrocketing. I mean, we’ve blown away the initial projections, because it was something that we just tried out after the fact. We bought it, wasn’t in our numbers. But, really, we took that model and then bought a few other A class there in Dallas-Fort Worth and did the same thing. And we were getting the same rent bumps in on that. So you’ve got to be creative on how you add value to any asset, but A class, we’ve had success.
Yeah. That’s interesting to hear, because you might think that’s too slim, but if you’re getting $150 bump, especially on a low cap, that’s adding… The lower your cap, the more you’re boosting your valuation with those NOI bumps.
Kenny Wolfe: (29:01)
And we’re getting great loan terms. I mean, so on that first A class we bought, I think it was 82% leverage, which is unreal on those. And then the other one we bought a few years ago, 82%, 81% somewhere around… So you get great leverage on those as well.
And how’s your experience been with… I mean, look. Yeah. You’re buying a 1970 asset at a four cap or a 2019 asset at a four cap. The ’70s one, your RNM line item is going to be variable and high, but on the new stuff and then your tenant base as well, different demographic… I mean, you own all of it, kind of ’70s through brand new, how’s your experience been on kind of the tenant base and your recurring expenses and stuff like? Obviously, it’s different on the newer stuff, right?
Kenny Wolfe: (29:50)
Right. Yeah. On the newer stuff, it’s less kind of ongoing maintenance as you go through. I mean, there’s some have to tweak some ACs and stuff, but it’s a lot less. But it does change who you have in the front office and your leasing agent. So you have to make sure those folks are more geared towards A class than the C class or B whatever. I mean, there’s a right person for that desk. So you’ve got to make sure you have that for sure to give the right service level, too, because A class do demand a little bit more service and attention and you better get those work orders down within 24 hours. So you have to change the expectations on there. And also, too, I mean, we do different community events. I mean, A class kind of sometimes we’ll do wine tastings and stuff where C class we’ll do breakfast on the go. I mean, things like that. So you have to tweak your operations on that site for that site.
Right. Yeah. No, totally makes sense. So we’re coming at COVID right now, mid 2021, we’re seeing a lot of rent growth. We’re seeing a lot of asset price appreciation. What are you guys thinking for the next year? More of the same? More of these office conversions, more A class multifamily, or what’s on the horizon for you?
Kenny Wolfe: (30:58)
Yeah. I mean, so back in March of this year, we bought two properties that are completely different. So we bought the post office building in downtown Dallas, A plus historic building, a beautiful asset. Already fixed up, we’re just operating it more efficiently on that one. The same week we bought a D class in Wichita Falls for 29 a door.
Totally different [inaudible 00:31:19].
Kenny Wolfe: (31:20)
We’re putting 30 K a door into the rehab-
30 K a door?
Kenny Wolfe: (31:22)
… to go for B plus on that deal. And so we’ve been nimble. We’ve been buying in Cleveland. We’ve got a thousand C class there, units, as well. So, I really see us keep growing that. We probably will pick up two or three more office to multifamily conversions coming up. I think we just got a big piece of dirt in Cleveland that overlooks downtown to build ground up, about a hundred units there as well. So I really see kind of growth in a lot of our arms. And that’s really why I built up those arms, because sometimes it’s good to buy existing multi-families, sometimes it’s better to do development. And then I have the triple net arm as well, and that’s just for the monthly cashflow for investors. So to be able to have three arms like that, operating at the company, we’ll definitely stay busy.
Yeah. Stay busy and be able to kind of ride these different cycles up depending on what they do in different areas. I love it. Well, tell people about the book and then how can they get in touch with you if they want to meet you and your team, see your projects, et cetera.
Kenny Wolfe: (32:20)
Sure. Absolutely. So our website is Wolfe with an E dash investments.com. Find us on YouTube, Facebook, LinkedIn, all those normal social media places. And then the book, I wrote that a couple of years ago, Investing in the Dream. It’s on Amazon. You can check it out if you like. That’s been a lot of fun. It was a goal of mine to always write a book. I’m actually working on the second book right now. So I actually hired a mentor to kind of walk me through the book process. And he told me, “Hey, you write this one. You’re going to want to write a second one.” So I said, “I don’t know about that,” but anyway, so there you go. He’s right.
Kenny Wolfe: (32:56)
So writing a second one now. It’s more about investing, financial freedom, how to kind of set yourself up for success. And it really goes to the point where a lot of folks talk about mutual funds and IRAs and 401ks and 90% of the books out there tell you about that. Well, this is the way you should do it. This is how the wealthy do it. How to build a real proper financial freedom kind of book.
I love it. I think there’s a huge need for that. It’s funny. You and I both talked to hundreds of investors, have lots of investors in our deals, but that’s such a tiny fraction of Americans investing in these private placements. The wealthy know about it, and they do it for a long time, but your average guy that makes 200 K at a good corporate job is, in my experience, a lot of times doing just some super basic financial stuff on his investing, and it could be a lot better with a little bit of education. There’s a huge gap there.
Kenny Wolfe: (33:58)
It is. I mean, we’ve talked about the four wealth building blocks. We got a video on that, but I mean, to be able to do the cashflow, someone’s else paying down your loan for you. The appreciation that the tax shield is just phenomenal that you get on these deals. So if you can use that intelligently in the right way, talk to your CPA, I mean, you can quickly exit corporate job if you want to do that, or you keep it and still have the tax benefits. But there’s definitely a way to invest better. And I do wish most people would get out of the mutual fund, IRA, 401k kind of race that most folks are in.
Most folks are in it. So, I mean, it’s like, you guys are just getting started with how many… Even though you have a lot of investors, your addressable market is massive. I mean, it’s massive. So love it. Well, Kenny, thank you for coming down. I love following you. You’ve been an inspiration to me. I learned a lot of good stuff from you, and thanks for coming to share it with our audience. So hope everybody reaches out and connects with you.
Kenny Wolfe: (35:05)
Thanks, Devin. I appreciate it. Always good talking to you, buddy.
Awesome. Catch up soon.
Kenny Wolfe: (35:07)
See you. Bye.