Matt Picheny, a real estate investor and coach with a portfolio of over 4,500 multifamily units, shares his strategies for navigating around increasing expenses, including evaluating your budget for potential savings, creating additional income where possible, and contesting property taxes when appropriate.
Key Takeaways:
- Expense Reduction Strategies: Matt emphasizes the importance of scrutinizing every line item in the financials, questioning vendor relationships, and seeking opportunities to reduce expenses. He highlights negotiating insurance and taxes, renegotiating contracts, and in-house hiring for specific trades as effective methods to cut costs.
- Property Tax Contesting: Matt shares his experience with contesting property tax increases, emphasizing that it's an ongoing process. He discusses the alignment of interest with consulting firms that work on a contingency basis, ensuring that they only take on projects where savings are achievable.
- Acquisitions in the Current Market: Matt outlines his acquisition strategies for the current market, focusing on properties where he can assume seller debt and secure favorable financing terms. He also discusses the potential of new construction deals with advantageous financing, presenting them as the ultimate value-add opportunities.
Matt Picheny | Real Estate Background
- Real Estate Investor & Coach
- Portfolio:
- 4,500+ multifamily units as a GP
- 7,000+ units as an LP
- Based in: Brooklyn, NY
- Say hi to him at:
- Best Ever Book: Principles by Ray Dalio
- Greatest Lesson: I should have bought rate caps on several deals as opposed to using variable rate debt.
Check out Matt’s previous episode: 2679 - 5 Tips for Transitioning from LP to GP
Click here to learn more about our sponsors:
Transcript
Slocomb Reed:
Best ever listeners. Welcome to the best real estate investing advice ever show. I'm Slocum Reed. And today we are joined by Matt Pacenny. Matt is joining us from Brooklyn, New York. He is a real estate investor and coach primarily as an investor, focused on value, ad multifamily as a general partner. His portfolio includes over 4,500 units currently, and he has LP positions in another 7,000 units.
Matt, can you tell us a little bit more about your background and what you're currently focused on?
Matt Picheny (01:14.902)
Yeah, sure. I actually moved to New York City. I grew up in Orlando, Florida, moved to New York to pursue a career in theater. I was actually a professional actor for five years, then started getting involved in digital marketing and then eventually started real estate as a hobby. So I have kind of a non-traditional background, I think, when it comes to real estate and real estate investing. I think I might be the only person out there syndicating real estate deals who has two Tony Awards. So I think that makes me stand out from the crowd a little bit.
But yeah, I'm focused right now on, you know, like you had just said, looking for multifamily properties that have a value add opportunity for us to go in and increase our NOI. And yeah, one of the things that also I think makes me stand out a little bit is we're really very interested in making improvements for the properties. I like to make improvements for the residents who live at the properties, as well as make money for the investors. So I kind of look at this sort of from both sides of the coin. I don't want to just like cut expenses down to get our NOI up. I don't mind spending a little bit of money if we can make life better for everyone.
Slocomb Reed (02:28.036)
That makes a lot of sense. And I should have said in the bio, you are a returning best ever guest. Uh, you were, uh, on the show a few years back interviewed by Joe Fairless. That's episode 2679.
We are recording in the fourth quarter of, uh, 2023. So you do have some track record in a fairly sizable portfolio now, Matt, what is it right now that you find yourself focusing on?
Matt Picheny (02:58.754)
Well, right now with the current economic climate that we're in, we're seeing a lot of pressure, right, across multifamily with expenses. We have seen an incredible increase in expenses, especially when it comes to insurance and taxes. Most of my properties are in the Sunbelt, mainly in Texas, and we've gotten hit kind of hard by those. So what I've been really focusing on, I would say over the past I'm always looking at it, but really focusing over the past six months or so on what can we do to bring our expenses down? Are we doing things in the most efficient manner than we can to sort of help offset the large increases that we're experiencing?
Slocomb Reed (03:55.6)
Of your current portfolio, how much have you been holding? How much of it have you been holding for longer than three years?
Matt Picheny (04:37.914)
A very small portion of the portfolio for more than three years. A lot of the properties that we had, because I think the real estate market was acting in such a bullish manner, it made sense for us to go ahead and exit those and lock in those gains that we had for our investors. So we had one deal where we essentially doubled investors' money in a little over two years. So when we have that kind of gain, and that kind of return for investors, it seemed to make sense for us to go ahead and exit it. I'm actually glad that we did because we have seen now the market retreat and I don't know that those deals would trade for what they did just a year or two ago.
Slocomb Reed (05:53.552)
Matt, the reason why I asked that question the way that I did is that, yes, of course, it made a lot of sense to be a seller a couple of years ago when you were able to sell at a premium that you may not be able to get now. And so especially when your investing is driven by internal rate of return, great time to sell a couple of years ago. The reason I asked the question the way that I did is that the COVID era and coming out of COVID saw dramatic rent increases.
And for my properties that I've held longer than three years, we had some impressive cashflow for the last couple of years and it feels like the expenses are catching up, but not nearly as problematic because we already experienced the revenue growth to cover this expense growth. Are you seeing something similar with the properties that you've acquired in the past three years? Is it, um are these increased expenses creating, uh, NOI issues or big picture? Is it really just, uh, expenses catching increased expenses, catching up to increased revenue to create the kind of performance that we would have all underwritten three, four years ago.
Matt Picheny (07:21.482)
You know, I'm not sure. I'll say on the longer term assets that I have, I would agree with you where we had tremendous amount of rent growth and expenses are sort of catching up with that, but still, you know, very good cashflow. Things that we've bought, I would say, within the past three years, even just a couple of years ago, we did not have the dramatic rent growth. We've had rent growth, but not as dramatic as the expense growth that we've had. So it is impacting NOI. I do think that over time, there will be an equilibrium.
The thing is, when your insurance almost doubles and you don't find that out until right around your renewal, all of a sudden that that creates a very, very large expense. And you can theoretically sort of, you know, if you will, pass that along to your tenants, right, by doing a rent increase. But obviously it's going to take you a while to increase those rents, right? Even if you say, okay, to cover this new insurance bill, we need to raise rents $10 a unit or $20 a unit, whatever that number is, you're still not gonna be able to do that day one. It's gonna take you 12, at least 12 months to get through your entire rent roll. So you've got 12 months of experiencing that higher expense without having higher income to offset that. So it can be problematic, but hopefully you have a buffer in there.
You know, I have a bestselling book called Backstage Guide to Real Estate. And in the book, I teach these 18 different Keystone concepts that I've learned along my journey. And Keystone concept number five is called cash flow is king. And it talks specifically about how it's really important to have cash flow so that when you do have the ups and the downs in the market, that cash flow can serve as a cushion. So maybe we have deals now where, you know, we've had to stop distributions or lower our distributions because our cash flow hasn't been as high.
And that's helping offset that insurance increase, but we believe in six months, 12 months time, as we're able to readjust our income to match our expenses, we'll be able to increase those distributions back up to where they were.
Slocomb Reed (09:56.752)
That makes a lot of sense and keeping the focus on net operating income, you know, increasing revenue and reducing expenses are very different strategies that require very different tactics and have very different market factors affecting them. I don't know anyone who is still talking about driving up revenue right now. I think the general sentiment is that - we've market rents have peaked in the vast majority of markets for now.
What you're saying makes a lot of sense, Matt. So let me ask what what is your best ever advice specific to reducing expenses for, for value add multifamily plays.
Matt Picheny (10:50.194)
I think you need to go through every line item in that general ledger and question it. Are you working with the best vendors, the most efficient vendors on every, I mean line item by line item. When it comes to insurance, we talked with other insurance carriers to see what we can do. When it comes to taxes, we protest our taxes. Every single line item.
We leave no stone unturned and we look for ways to generate other income. These are all things that we did before this, but I think we're going through it with a more fine-tooth comb even now. What are things that we can do? Can we negotiate better contracts, better deals because every penny counts at this point.
Slocomb Reed (11:57.532)
Questioning every line item in the ledger in the P and L. Where are you seeing the most success in reducing expenses and what is it that you're doing?
Matt Picheny (12:09.442)
You know, I don't know if there's one sort of magic bullet. I wish there was, I'd be happy to share that information, but it really varies from property to property. You know, sometimes you have, you know, a laundry contract that you can renegotiate. Perhaps, you know, one of the things that we've done recently was negotiated some of our cable packages that we have, we're doing, you know, bulk cable and internet.
Those are good ways to either reduce expenses and or generate other income to help offset that. But I really think you wanna look at each individual line item. And I don't know that there is a single magic bullet that I could recommend.
Slocomb Reed (13:06.208)
What, where is it that you're having success reducing expenses right now? Which, which line items?
Matt Picheny (13:12.886)
Well, I think all the ones that I talked about, right? So with insurance, we were able to, I'll give you an example with insurance. We were able to take a look at, that was our single, single largest increase. And so we found a broker that we had heard, you know, from others was doing a very good job at reducing those renewal rates. And we worked with them and instead of having an increase, in some cases, we actually had a reduction, which was phenomenal.
Unfortunately, that carrier in that state has now pulled out of that state. That's what we're seeing across the board, right? Is carriers pulling out of states. So we got most of our portfolio pushed over to there. We have one property that didn't quite make it. We were shocked. We found out like all of a sudden they just pulled out. They're not writing multifamily in that state anymore. If it's like over, I think it was like eight or $10 million, they're just not doing. So, you know, these things are happening as they're going on.
Protesting property taxes has also been really good. That's a very long term thing. You know, we're often protesting last year's taxes. So a lot of times we have to outlay that capital, pay that tax bill, and then we protest it and then get refunded later. I feel like we're always, always in some form of litigation with the taxes. And it's just an ongoing thing that we do.
So we see, and those are some of the biggest line items, you know, and another big line item is payroll, right? For our staff at the properties. Unfortunately, I don't think there's much we can do about that. We want to keep our, you know, I talked earlier about making sure that the residents are happy. We also want to make sure our staff is happy. Because if our staff's not happy, if our maintenance team doesn't feel like they're being appreciated and being, you know compensated appropriately, they're gonna leave or they're gonna be really slow. They're not gonna do a very good job. And then we have trouble tickets will pile up, then the residents who live in the units aren't happy and then they move out. So we need to keep everybody happy. So payroll is something where we have not been able to really see a reduction because simply with inflation, like the cost of living is a lot higher and we need to pay people a little bit more than we have in the past.
Matt Picheny (15:35.266)
But dealing with contractors, dealing with landscaping, maybe you can renegotiate your landscaping contract. That's always good. Maybe you can hire people in-house who can do some of the stuff. We had a property that had a lot of plumbing issues. Just unfortunately, when the property was constructed, I think the plumbing was done very, very poorly. We actually brought a lead maintenance guy on staff who used to be a plumber. And so he could do a lot of that work in-house.
So that's one of the things that we try to do. Whenever we can do things with our internal staff rather than paying an outside contractor, that's another way to help save some money.
Slocomb Reed (16:22.892)
I want to come back to a couple of things that you said, but are you, uh, intentionally targeting the trades to bring them in house right now? And is that, uh, just about cost savings?
Matt Picheny (16:37.446)
I wouldn't say intentionally just targeting the trades, but when we can, I mean, it sure makes a lot more sense to have somebody who's HVAC certified on your maintenance team, rather than having a call of outside contractor for that all the time and paying for their overhead and profit and insurance and all of that kind of thing. So I wouldn't say we're intentionally targeting that, but sometimes, right? Sometimes specifically, again, it's, I feel like it's very much on a deal by deal basis, a property by property basis to see what is needed. It doesn't make sense for us to hire somebody who maybe used to be a plumber that we might have to pay more to be on staff at a regular property that doesn't have a lot of plumbing issues.
Slocomb Reed (17:29.036)
Yeah, that makes sense. Wanna come back to what you were saying about property taxes and contesting, litigating those property tax increases. Is that something that you are perennially doing for each property or is it whenever there's an increase you can test or do you specifically target with individual properties, tax increases that you feel are not justified.
Matt Picheny (18:05.466)
I would say yes. Because I think what's happening is that perennially, we are seeing tax increases that we don't feel are justified, that we speak with our consultants about. They agree that they don't think that they are justified and therefore we have been contesting those. If there was one, and there has been, personally on some of my own properties that I own, right?
You know, the tax increase seems to make sense, seems to be in line with the market, and you know, it doesn't make sense to fight it. But a lot of times on the larger commercial, we have a lot of opportunity to contest it. And we generally win. The consultants get paid a percentage of the savings. They're not getting paid a flat fee. So they're not going to take on a project where it's going to be a waste of their time and effort. So at least I've never seen them do it, right? So I think that most of the, you know, in the 99% of the time when they take something on, we're going to prevail with some savings. Sometimes it's more than others, but the only way that we're able to prevail is because those taxes weren't shut. Like we have to have some way to to justify what we're contesting and the numbers that we think it should be. And so there we have data and the consultants have data to back that up, which shows that the increase is not fair. And we usually come out, we're usually the prevailing party.
Slocomb Reed (19:57.388)
Yeah, it makes sense, especially the alignment of interest with those consulting firms and your attorneys, where they're only getting paid based on results.
Slocomb Reed (20:10.836)
One more question before we transition this episode, Matt.
Slocomb Reed (20:20.446)
What is your focus right now when it comes to acquisitions?
Matt Picheny (20:26.586)
Two types of things being the current state being the end of 2023. In this year and looking forward at the moment, we've been focusing on properties acquisitions where we can assume the seller's debt. For instance, we acquired a portfolio of almost 700 units earlier this year at a 3.8% interest rate for the next seven years. So, you know, that felt good. The other project I'm working on is a new construction deal. If we can find new construction with favorable financing terms, that makes sense. You know, that's the ultimate value add, right? It's taking a piece of land and building something on there. Or in this case, the project that I'm working on now, we're taking businesses that weren't doing very well actually going to demo those and build new. And that makes a lot of sense right now in the current market.
Slocomb Reed (21:33.176)
You said most of your investing is in the sum belt of the markets you're currently invested in, which ones are you seeing the most attractive deals in? And which ones just aren't making sense right now.
Matt Picheny (21:45.866)
I don't think that it's a market by market opportunities right now. I think it really has to do, as I mentioned before, with like being able to assume the debt. I think it's really the structures of the deals that are what is making or breaking. Obviously, I want to be in good markets. I want to see all the things that you'd want to see in any sort of market, not only stability, but some sort of growth. But it doesn't need to be the type of growth that you might see in a Phoenix or what we've previously seen in Austin, right? Where you've just had tremendous rent growth in those types of markets. But I don't feel that I need to be in a place where there is tremendous growth. I need to be in a place where I'm able to put a deal together, where the financing actually makes sense, where we can approach this in a really smart and strategic manner.
Slocomb Reed (22:40.976)
That makes a lot of sense. Matt, it has been a few years since you were on the podcast. Are you ready for the best of our lightning round?
Matt Picheny (22:48.876)
I hope so.
Slocomb Reed (22:50.492)
Great. What is the best ever book you recently read?
Matt Picheny (22:54.427)
Principles by Ray Dalio.
Slocomb Reed (22:58.904)
Nice, that's a good one. What is your best ever way to give back?
Matt Picheny (23:04.254)
Well, besides just charitable type of contributions, I always try to help other investors who are getting into this space, who are new to the space. I donate time, I speak at meetups and other events and just try to give back to the community whenever I can.
Slocomb Reed (23:24.996)
Matt on the properties that you have acquired, what is the biggest mistake you've made and the best ever lesson that resulted from it?
Matt Picheny (23:36.114)
I think, you know, hindsight being what it is, that never really foresaw such a rapid increase in interest rates. And I've been doing both a mixture of variable and fixed rates. The properties that I have that we did variable rates on, I would have bought rate caps that were for a longer term, right, because the rate cap costs have gone up so much, but I didn't foresee that. And I think doing any variable rate, projects in the future. That's something I'm definitely gonna keep in mind.
Slocomb Reed (24:12.716)
Awesome. And I've already asked for advice on expense reduction. I've already asked for advice on, uh, expense reduction, Matt, but generally speaking, What is your best ever advice?
Matt Picheny (24:27.394)
Best ever advice, I think, you know, this is a relationship business. It's all about relationships. So go out there, meet people, get to know people, build those and foster those strong relationships, help others out when you can. And if you need help, don't be afraid to ask others for help.
Slocomb Reed (24:45.24)
Last question, where can people get in touch with you?
Matt Picheny (24:48.078)
Picheny.com is my website. I'm sure you'll put it in the show notes, but it's P-I-C-H-E-N-Y.com. I got tons of free resources on there, downloads and just tons of valuable information. So check it out.
Slocomb Reed (25:00.952)
We will put that on the show notes. Matt, 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.
