Zach Winner is the CEO of Prosperity CRE, which provides investors with the opportunity to invest in multimillion-dollar commercial properties for as little as $50,000. In this episode, Zach shares his strategies for evaluating markets, why he invests so heavily in the Midwest, and how he works with his property managers to stay in front of occupancy volatility.
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TRANSCRIPT
Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed and I'm here with Zach Winner. Zach is joining us from Los Angeles, California. He is a commercial real estate investment advisor and asset manager. He focuses on value-add multifamily currently, with around 300 units of multifamily, and also 75,000 square feet of industrial flex office space, primarily in the Midwest. Zach, can you tell us a little more about your background and what you're currently focused on?
Zach Winner: Hi, Slocomb. Yeah, thank you for having me, to start with him. I'd be happy to. so my background is I'm an attorney by training, but at this point, I have the luxury of devoting all of my time, full-time, to real estate investing. So I invest primarily in multifamily value-add properties, and we bring in passive investors to invest alongside us. So we syndicate our investments, and create opportunities for others to invest with us, with the goal of providing ongoing cash flow to our investors, and helping them to create long-term wealth.
So the typical property that we're looking for is one where we can come in and have existing cash flow, but where we can implement various value-add strategies to increase the ongoing net operating income, and the ongoing cash flow that our investors receive. And that also exponentially increases the sale price, so that when we eventually sell the properties, our investors are also getting a very strong profit on sale.
Slocomb Reed: That makes sense. A lot of our listeners are familiar with the value-add multifamily business plan. You were saying before we started the interview that you're primarily focused on Kansas City and St. Louis?
Zach Winner: Yeah, we like the Midwest. We look at over 20 different metrics when we're looking at markets and deciding which markets are strong. So things that we look at are, for example, a net migration into the city population growth, job growth. We like areas that have STEM-related jobs, science, technology, engineering, etc. So we look for areas that have a lower cost of living than the national average, and that are very business friendly and landlord friendly.
So with respect to Kansas City, that definitely meets all of these metrics. It's a very strong market for us. And it also provides us the opportunity to get in at a price point where we can meet our investor-projected returns. So Kansas City, Columbus, Ohio, Indianapolis, those are a few examples of markets that we like and that we target.
Slocomb Reed: Tell us more about why it is that you're interested in these Midwestern markets. You said below the national average cost of living, I believe, and looking for growth in employment in the STEM fields. Why is it that those are the metrics that are delivering the returns you're looking for?
Zach Winner: We look at different metrics that help facilitate a strong multifamily market. So if you think about it, what's going to help facilitate a strong market from a landlord of multifamily standpoint? Certainly population growth, net migration growth is going to help maintain higher occupancy, is going to help maintain pushing rents; as more people come in, that demand is going to maintain a certain level of occupancy. We're looking for job growth, and we like STEM-related jobs, because those tend to be more higher income-paying jobs, so the tenants can afford to pay a little more in rent. So our basic philosophy is we're coming into an apartment complex where the rents may be below market in their current state, but also where the complex and the units haven't been upgraded in a while, so we want to come in and make those upgrades so that we can then increase the rents. So we're looking for markets where renters can afford to pay a little more for the rents than that apartment complex is currently charging. So all of those factors support our basic value-add strategy for multifamily.
Slocomb Reed: Zach, I'm an apartment operator in Cincinnati, Ohio; not one of the markets you just named, for the record. I will point that out. But I would like to make an argument against us - you, me and our fellow Midwest investors - and I'd like to hear your response.
Zach Winner: Sure.
Slocomb Reed: The value-add business plan requires that we be projecting 3, 5, 7 years into the future. We have a defined hold period, we have an exit that we are underwriting towards around five years from now, and the number one economic driver in all industries, all markets is supply and demand. The Midwestern markets are not growing as quickly as markets in other parts of the country where supply of apartments has not been able to keep pace with demand, therefore there is greater growth in other parts of the country - the Southeast, the Southwest, the Sunbelt. And people should be looking to do their value-add apartment investing there, instead of the Midwest, simply because of the population growth that will occur in the next five or so years, between acquisition and disposition. Here I am, a Midwesterner, and a Midwest apartment investor saying all of this... I want to hear your response to all of that, Zach.
Zach Winner: Yeah, that's a very good point. But from our standpoint, we like the Southeast. One of the reasons we haven't gone into the Southeast is because of the price point. The cap rate's more compressed in the Southeast versus the Midwest. But yet long-term demographic trends, the smile states of Southeast are showing some population growth. But what we like to do besides just looking at the specific broader market is we drill down into the sub-markets.
For example, in our latest acquisition, we're in an area of Kansas City called The North One submarket, and there's very strong population growth, job growth going on there. So within this submarket, it's extremely vibrant. So for example, we're near the Kansas City International Airport that just had a $1.5 billion expansion. Right next to that is a commercial industrial park; that's a $1.5 billion park. Right next to that is Meta/Facebook's new campus, which is an $800 million project. And also nearby is the Ford F150 assembly plant, which is a huge driver for that local market.
So I think it's important to drill down and look at specifics, even within a market that you may like. But that's an example of why we like this specific area where we're in in Kansas City.
Slocomb Reed: We're recording just a couple of weeks after the Best Ever Conference that was in Salt Lake City, just a couple of weeks ago in March. There was a lot of doom and gloom preached from the stage, and there were a lot of people whose presentations were centered around, "Stay alive until 2025" or "Survive until 2025." Those are the same people who had been preaching bridge debt for the last few years... And it's funny, the majority of the multifamily investors that I stay in touch with are investors investing in the Midwest, and we're pretty boring. We've been going for long-term fixed rate debt this whole time. Our growth curve is linear, not exponential. It is a growth curve, but it's linear. And we've gotten to a point, or we may have gotten to a point in the market cycle, Zach, where boring is good, because our linear growth isn't going anywhere right now.
To that end, I can speak to Cincinnati, and I want to ask you about KC and St. Louis. We have not seen demand for multifamily when it lists. We haven't seen demand go anywhere. Everything is still selling. The smaller stuff has been flying off the shelf, regardless of interest rate, for the past year. And the larger stuff, if it lists, it sells, and it sells at a price that makes the seller pretty happy, unless there are some underlying conditions with the property. What has Q1 2023 looked like in Kansas City and St. Louis when it comes to the apartment market?
Zach Winner: So we're in Kansas City for the apartment market. In St. Louis we've got a couple of industrial flex office parks that are 100% occupied. And in St. Louis, that market, industrial flex, office parks as a type of property is incredibly strong. But in Kansas City, the apartment market is very, very strong. There's not a lot of product; we haven't seen a lot of product in a while, and for the last, I'd say six months, we've seen even less. So it's a very tight market. We're not seeing a lot of new product come to market. And you were previously talking about bridge debt, people that got into bridge debt. We don't like bridge debt. We like long-term fixed agency debt as well. But we, as well as other funds and investors, have dry powder waiting to see if there's going to be some fallout. We've seen a little bit of initial fallout from people that got into bridge debt or variable rate loans, where either the rates have doubled, or if they had a cap rate that they had to renew every year, they've seen that cap rate increase exponentially in price, and that's creating some distress.
So we're keeping a lookout to see if more of that type of distressed opportunity comes about, but right now, Kansas City continues to be one of the top markets from a multifamily standpoint.
Break: [00:11:43.25]
Slocomb Reed: In 2021 some people were questioning me for getting a 15-year fixed rate mortgage on one of my apartment buildings at 4%, because I could have gotten a 5,25 at 3.5%. They thought I was overpaying on my interest rate. I don't get those comments right now.
Zach Winner: Everything's [unintelligible 00:13:01.01] I mean, you're looking great right now with a nice 4% interest rate.
Slocomb Reed: Yeah. And the amount of debt pay down that you see on a 15-year fixed, especially at 4%, even in those first few years, it's phenomenal.
Zach Winner: That's fantastic.
Slocomb Reed: Given the conditions that we're finding ourselves in right now, Zach, let me ask - I know you have an emphasis on asset management, correct?
Zach Winner: Yes, we like to steer the ship and manage the assets. So we manage the managers.
Slocomb Reed: Absolutely. We're wrapping up Q1 of 2023 right now. We've experienced some economic volatility. All rents everywhere are not climbing up and to the right anymore. How are your conversations with your property managers changing right now?
Zach Winner: As we proceed with our value-add strategies, which primarily entails not renewing certain leases, and upgrading those units, we're very conscious of occupancy. And this is something we went through during COVID. At the height of the COVID lockdowns, we were in the middle of a value-add strategy were where we were non-renewing leases and spending the time to upgrade the units rather aggressively. And when the lockdowns hit, that kind of hit us, and we saw a significant drop in our occupancy level. So we had to immediately shift our strategy to one in which we focused on occupancy, renewing leases as they came up for renewal, and de-emphasizing upgrading units until we got the occupancy back up to the level that we were comfortable with.
So that's something that we've gone through during COVID, and we're very conscious of occupancy right now as we go through unit turns. So we have a certain number per property of units that we look to turn each month to stay on track for, for example, turning all of the units and upgrading them all within two years. But if we need to dial that down to ensure that we're protecting cashflow, we're prepared to do that.
Slocomb Reed: I've caught myself holding back or delaying on my incremental rent increases right now, because my rents are close to market, and I just like being fully occupied, or very close to fully occupied. Minimal volatility right now seems like a good way to go. This doesn't seem like a moment of the market cycle to be pushing the rents at the expense of increased vacancy.
Zach Winner: Yeah, I totally agree. We're in weekly Zoom calls, and we review weekly reports with our property management teams, so we really have a good finger on the pulse of how each property is doing, how much we're able to push rents, while maintaining a very high occupancy level. And at this point, we haven't had to really ease off much, just because we happen to have product in strong markets, where our particular product, workforce housing, there's not a lot of supply. So we haven't had to ease up too much yet, but we are really monitoring the situation closely. And if we have to trim back on rent increases, we will.
Slocomb Reed: Zach, as a remote asset manager for Midwest multifamily, given your experience with the occupancy volatility of the COVID lockdown, give us some advice on the questions we need to be asking our property managers to make sure that we're staying in front of any waves that could be coming with occupancy issues in the future.
Zach Winner: Sure, I'd be happy to. So in addition to just looking at the overall current occupancy, you want to see how it's trending; you want to look at which leases you have coming up for expiration, the number of leases, so what your trending occupancy is going to be. You want to look at how they're currently marketing the property, where they're marketing, and what the results of those marketing efforts are; how many applications they're getting, how many signups they are getting, how does that relate to what was going on two months, three months, prior, a year ago at this time, because there's a seasonality issue... So you want to dive into some of the specifics when you're analyzing and trying to figure out which way occupancy is trending.
Slocomb Reed: That makes a lot of sense. Zach, are you ready for the Best Ever lightning round?
Zach Winner: Let's do it.
Slocomb Reed: What is the Best Ever book you've recently read?
Zach Winner: A book that I loved was Walter Isaacson's biography of Benjamin Franklin. It's called Benjamin Franklin, but it's a really fascinating look at what I think is probably one of the most interesting founding fathers in our country. Just a very interesting guy; ran away from home at 17, started his own printing business, became a media mogul, was a scientist and elder statesman... Just a really, really interesting guy. So I've found that just to be a great read.
Slocomb Reed: "Benjamin Franklin, an American Life" by Walter Isaacson. Zach, what is your best ever way to give back?
Zach Winner: I'm a frequent donor to the West Side German Shepherd rescue; they're in Los Angeles, and our dog who passed away last year was adopted from West Side German Shepherd rescue.
Slocomb Reed: Zach, thus far in your commercial real estate investing, what is the biggest mistake you've made, and the Best Ever lesson that resulted from it?
Zach Winner: The biggest mistake I made was when I first decided to shift away from buying single family homes and wanting to get into commercial real estate. I bought a small mobile home park in a remote town, and I was more focused on the cash flow on paper. And the lesson I learned was to gravitate towards higher-end properties. So this was maybe a C property, and it was very hands-on intensive work, and it required a lot of work to try to meet the cash flow that I had been projecting. And what I decided after that was it's better to focus on higher-caliber properties.
Slocomb Reed: On that note, what is your Best Ever advice?
Zach Winner: One of the big shifts in my career was shifting from buying single-family to buying multifamily. And there's just a whole lot of advantages to doing that, but one of the biggest is the way multifamily is valued, and that's based off of the net operating income. So to the extent that you can increase the NOI, you exponentially increase the value of a multifamily property. Versus if it's a single family home, the value is primarily based off of what comparables single family homes are selling for in the area, so it's a market driven appreciation, versus with multifamily and our value-add approach, it's a forced appreciation, where we really can control the appreciation of that property.
Slocomb Reed: Last question, where can people get in touch with you?
Zach Winner: If you would like to get in touch with me, my website is prosperitycre.com, and I'm also on LinkedIn.
Slocomb Reed: Those links are in the show notes. Zach, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show. Leave us a five star review and share this episode with a friend you know we can add value to through our conversation today. Thank you, and have a Best Ever day.
Zach Winner: Thanks, Slocomb.
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