January 9, 2023

JF3049: Lessons Learned Scaling a Multifamily Business ft. Jimmy Edwards

Podcast


Jimmy Edwards owns High Five Multifamily, which sources, acquires, and manages multifamily assets in the B- and C-class space. In this episode, he shares the pain points that motivated him to scale his business, how he builds relationships with brokers, and how he learned the hard lesson of knowing when to walk away from a deal.

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TRANSCRIPT

Ash Patel: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I'm Ash Patel and I'm with today's guest, Jimmy Edwards. Jimmy is joining us from Dallas, Texas. He is the owner of High Five Multifamily, that acquires and manages Class B and C multifamily properties. He's been a previous guest on our show, so if you google Joe Fairless and Jimmy Edwards, his episodes will pop up. Jimmy's portfolio consists of over 500 units, and he has gone full cycle on over 100 Single family rentals. Jimmy, thank you for joining us, and how are you today?

Jimmy Edwards: Man, I'm good. Thanks for having me back.

Ash Patel: Thank you for coming back. Jimmy, before we get started, can you give the Best Ever listeners a little bit more about your background and what you're focused on now?

Jimmy Edwards: Absolutely. I've been in real estate pretty much the past 15 years career, started as a real estate agent, and then a mortgage broker, and then flipping houses, and then now we've been doing apartments full time for about the past five years. So just kind of been trying to scale every step of the way; you get some pain points, and you grow, and you look back, and you're like "Oh man, this all has rounded me to a well-rounded real estate investor."

Ash Patel: Jimmy, let's talk about scaling. 100 single-family homes, and these weren't flips, they were rehabs. You went in there and turned them around.

Jimmy Edwards: Yeah, the majority of them were distressed sellers. I started buying in 2011, and the bulk was 13 to 17. I think 2016. we did 60 transactions. We probably flipped five houses, keep one as a rental; flip five houses, keep one as a rental. So we were kind of scaling two businesses at once, and we had a lot of success with inheritance deals, pre probate... I was really just able to connect good with those sellers, and it wasn't always about the money... I got really good at listening what problem am I trying to solve here; because it's not always the bottom line. And we'd buy these houses on a win/win, and we'd fix them up, and they'd come back in, and sometimes it was the granddaughter or the daughter that she grew up in this house, and her mom passed, and just seeing this thing come to light again, I think it was pretty special.

Ash Patel: So Jimmy, let's talk about your pain points and what you did to scale in that business... Because I'm sure at some point you were inundated, and at your wit's end, not enough hours in the day... So give me a pain point, and along with a pain point, give me the mindset. What were you thinking, and then how did you solve that problem in scale?

Jimmy Edwards: Sure. I think really, when you're doing volume, how are you going to scale that business? We looked at "We have all this volume. Do we want to do more volume? Do we have to hire more crews?" And instead, we kind of looked at it and said, "Hey, how can we make more money and do less?" So we did less volume, bigger margins. So we went from 60 deals to 20 or 30. And then at that same point, you're looking again - and this was 2017, so I was thinking "Hey, man--" I think everybody kind of was like "We might be near the next recession." So how do I scale this business? Do I do bigger houses now, with more risk, do I do new construction? And we had a property that kind of ended up over budget on, and there was a bunch of flips, rehabs that came to the market in the same weekend, in this little subdivision, and it got real competitive, trying to sell, and we kind of stuck it out, and we ended up losing some money on that deal, and it was towards the end of the year, when we were digging into our year-end numbers, and forward-looking on the next year goals, and I was probably listening to podcasts or something and learned about apartments, and then just - boom! Just super-explosion of the brain, because what really will eat up your costs on single family rehabs is your holding costs. So I learned in apartments, you can flip an apartment building, 10 units, 100 units, 400 units, while the tenants are paying your expenses, along with forced appreciation. So we learned a big lesson, and it pushed us into the next category.

Ash Patel: Why did you lose money on that one deal?

Jimmy Edwards: The hard money loan was super-expensive, and also, we had to redo an entire plumbing line, which we would have probably been fine on both of those things, but we had to hold it for longer than normal, and we ran into additional expenses we didn't account for... So now we budget for both, make sure you have extra money, and make sure you've got plenty of time.

Ash Patel: Okay, so the way you scaled that business was by chasing higher margin deals, and not taking some of the easier deals; not easier, but not taking the deals that require a lot of time, with low returns.

Jimmy Edwards: Right. So in 2016, that was how we grew. "I'm going to do more lower-margin deals to keep my guys busy", and that ended up keeping us really busy, so then I said, "Okay, now how can we improve this?" and it was exactly that - bigger margins, less deals, and we kept our guys still busy.

Ash Patel: That's interesting, because a lot of people have that dilemma - they'll do pet projects just to keep their crews busy. So interesting perspective.

Jimmy Edwards: Yeah.

Ash Patel: Now, translating that into multifamily... There's a lot of people that are doing deals to keep their syndication machines moving, and a lot of people have staff; they have management staff, operational staff, they've gotta keep them employed. So is it hard not chasing deals that don't have the returns that you're hoping for? How do you apply that to multifamily? Because the returns are naturally lower, because there's more competition in that market.

Jimmy Edwards: Yeah, absolutely. We're ramping up; we're going to be net sellers in 2023. I think there's going to be buying opportunities in quarter one, quarter two. I think at some point, everybody's going to jump back in the market, so I think there's going to be a short window... But we're net buyers, probably for the next three to five years; we've sold most of our stuff, and we've sold several deals this past summer... We had a couple under contract to buy, but I didn't think rates were gonna go up as quick and as fast and as high as they did, so we ran out of runway on some of those. We ended up being net sellers, we got cash in the bank, a lot of dry powder... So now it's just like you said, kind of the same thing - we kind of have a clean slate, let's refocus on what our core fundamentals are as a company, what kind of deals we're gonna go after, that are going to excel over the next 3, 5, 7 years, and just try to feed the machine again.

So to answer your question, I'd rather not buy a deal, than a deal that's not a good deal. And that's a lot. We have investors all the time "When's the next one? When's the next one?" and it's like, "I'm not finding anything right now that meets it." But again, like you said, as you build the machine and you scale, it's actually easier to find deals, because you already have plug and play.

Ash Patel: Where are you looking for deals?

Jimmy Edwards: We're in Texas, we're in Dallas... We've bought in quite a few different areas in Texas, but right now we're focused on DFW down to San Antonio. I'm pretty bullish on the I-35 corridor, coming from North Dallas all the way down to San Antonio. I grew up in Austin; I drive back there a couple times a quarter, and I think it's just -- at some point, between Dallas and San Antonio, it's going to all merge into one big giant metropolitan area. That's just my gut feeling. I love Houston, but there's so much opportunity here. We're just focused on Dallas and down to San Antonio.

Ash Patel: Jimmy, do you get your deals from brokers, or do you try to source them yourself?

Jimmy Edwards: A little bit of both. I think really building the relationships with the brokers, and I've learned this over the past 10-15 years, is I do what I say I'm going to do, unless there's circumstances that are out of everyone's control; be easy to work with, pick up the phone... So we've built all these relationships with brokers, where we're fun to work with, we try to do what we say we're going to do... But then really after you kind of build those relationships, you get those phone calls, people know what you want, I'm constantly reaching out and saying, "Hey, my buy box is evolving. Here's what I'm looking for in this quarter." And then eventually, lenders, they know you've got the strength, and then management companies, too.

So right now I'm thinking that as we move into 2023, really the people you want to make sure that you're touching and that you have strong relationships with is the lenders, because they're probably the ones getting the first call, "Hey, my loan's coming due, I need a refi." Well, the refi is not looking good. So those guys usually have the first look, I would think. So it's all relationships. We even get calls on leads from vendors, roofers, anybody really, but just letting people know that you're a buyer and having integrity I think is huge.

Ash Patel: What are you seeing for cap rates in cash on cash returns on deals in the DFW area?

Jimmy Edwards: I think that historically, over the past five years, cap rates started to compress between the asset classes, and there'd be a 75-basis point spread between A and C... So I think a lot of people were moving up in asset classes. We're starting to see them actually spread between C and B, and even a little bit between B and A. I think you're gonna have these higher returns on the harder deals, at least for the short future.

I think historically, in 2021, cap rates were plus or minus 4%, depending on the deal, and the area, and all of the things, but even some A deals down to three and a quarter... But I'm starting to see more C class deals coming up over five, up to six... And those deals are still kind of making sense. So you've got to kind of shift your mindset. I was going from C to B and trying to get to A, because it was less risk and the same returns, but now it's like, "Okay, well, do I want to get back into more risky stuff and make some more money?"

Ash Patel: Yeah, what are you seeing for debt today?

Jimmy Edwards: Most of the deals that I'm working on is bank relationships. And we've had to build new ones; we had a five-year relationship bank that their metrics changed. It's tough, man, because the banks want to give you money when the economy's good, and then when it sucks, they turn their back on you like they never knew you in the first place. So they were building new relationships right now, we've got a small bank and they're really excited about lending to us... But there's a time and place for bridge loans, but towards the end of the cycle, I was kind of conservative, because - look, I was a mortgage broker in 2009 to 2012, so I really felt the scenario of being careful. And we're in a different position now, but I think agency is gonna get more competitive, and I like bank loans. I'm okay doing a recourse bank loan, because they'll give me seven to nine years, rather than a three-year bridge deal that sometimes you end up with a [unintelligible 00:11:56.05] lender and they don't want to get through with you. They wanted to take the deal back. So leverage is decreased, you're probably looking at 65%, rates are seven plus...

Break: [00:12:09.17]

Ash Patel: When you say seven to nine years, is that seven to nine years with a rate lock?

Jimmy Edwards: So I think it just depends on the deal and the business plan, but the deal we're looking at right now, I believe it's actually a 10-year loan with a five-year rate that's fixed. And I feel good about that, because I don't think in five years rates are going to be higher than they are today... And you never know how long a recession could impact you, but... I've never wanted to get caught holding the hot potato, so to speak.

Ash Patel: So 10 years is...

Jimmy Edwards: ...probably more than we need.

Ash Patel: I get that. The interest rate is fixed for five years.

Jimmy Edwards: Right.

Ash Patel: What happens at the five-year mark? Does it go to market?

Jimmy Edwards: Correct. Yeah, market plus spread. So if it's 100 basis points over market, then it'll just offer prime, Wall Street Journal.

Ash Patel: It's a five-year loan, amortized over 25 years?

Jimmy Edwards: Correct.

Ash Patel: Okay. And interest-only at all on this, or no?

Jimmy Edwards: 18 months, I believe.

Ash Patel: Okay. And your rate is set at the inception of the loan.

Jimmy Edwards: Correct.

Ash Patel: And I'm glad we talked about this. It's so important. I always advocate for people to have three lenders, and I'm an advocate of making your lenders your business partners. I'm not a fan of using mortgage brokers, because you get X, Y, Z Bank in Omaha, Nebraska, that is just hungry that day. Literally, that day they have to get a deal done to meet their goals, or whatever. And you don't end up building relationships. So in the non-residential world, we've always relied on the smaller banks, that we had long-term relationships with. We just closed on a co-working space in Atlanta, Georgia. The bank that we had used for forever was giving us 15% down payments, and we're very competitive on interest rates. Well, now they pass this down from the top, where all office space is 25% down, they did us a favor and brought it down to 20%, but the cash on cash returns on this deal are 40% at purchase, because we're buying a business as well, not just real estate.

Jimmy Edwards: Sure.

Ash Patel: But had we known that this was going to be the terms, we would have shopped that around; we became complacent, because we had these lenders that always did the deals, they gave us great rates, great terms... We got caught.

Jimmy Edwards: That's exactly what happened to us this summer. We'd been working with the same bank, and then they pulled the rug out from under us. So now the brokers that I'm working with are local, and so they're able to shop to these local banks. And then we met at the property on one last week, or the week before, and I got excited, because the banker said exactly that. He's like, "Look, man, you guys are local, y'all been doing it, you're going to do it for a while... We want to build something with you." And I'm like, "Okay, awesome." So you're exactly right. It's good to have a vehicle for every different situation, which could be a couple of different banks at all times.

Ash Patel: Yeah. And Jimmy, a lot of people think that shopping out banks when you have a good relationship is like cheating on your banker. It's really not. A good, competitive banker should be happy that you're shopping it around. And if any of them give you a hard time, that's not on you, that's on them. I mean, everyone's here to do the best they can for their business, so your banker - they should know that there's other lenders involved in this transaction, so sharpen your pencil when he come to the table.

Jimmy Edwards: Absolutely. And if you're building those relationships - one of my guys, we've been doing deals for 10 years, we did all the single family stuff, and we're trying to get some multifamily stuff done... And I'll talk to him and I'm like, "Hey, Jason, here's what I'm working on. What are you looking at?" He's like, "Here's what I think I could be. Is that competitive?" And I'm like, "Meh, plus or minus..." But his response has always been "Dude, I want the deal that's best for you." And the guys that react the opposite way, they cuss you out, then that's probably good that that happened, because you move on to different relationships. Right? So it's just part of it.

Ash Patel: Yeah. But at the same time, don't get emotional. I had brokers that we got into a giant pissing contest on text with a lot of people. F-bombs were dropped... But it was just two people that were fired up. We're on the same side. We're literally on the same team, right? He's our broker. But things got heated. And then the next day, we're sending emails back and forth like it's nothing. It's truly nothing, right? It was in the moment. But then take the emotion out of it. Focus on your business, focus on your goals, and if you have a banker that gets really upset, don't dismiss them on future deals. Just take the emotion out of it. I know it's hard to do a lot of times; me especially, man. I'm a, you know, hothead from Jersey. But I'm telling you, 47 years old, and I wish I knew that earlier... So it's okay to get emotional, it's okay to get heated, but then take the emotion out of the equation and get back to work.

So yeah, if you have a lender that cries and moans that they didn't get this deal, and they did all this work, they did all the underwriting, guess what - they're gonna work harder on the next deal, knowing that the only last one. They don't want to L's on their record. So they'll fight harder, man, but...

Jimmy Edwards: 100, yeah.

Ash Patel: It's a tough lesson to learn, or at least it was for me. Hopefully, Best Ever listeners are a little bit more savvy than I was, but... Yeah, leverage all of your resources, and always have three lenders, because at some point, you're going to get caught with your pants down. We both did.
What's the hardest lesson you've learned? Whether it's about people, deals, brokers... You've been at this, what - 20 years, 15 years?

Jimmy Edwards: 15 years almost, yeah.

Ash Patel: What's a hard lesson that you learned, that maybe you got your teeth kicked in on a deal, or were really disappointed. Give me something deep.

Jimmy Edwards: Yeah, there's a lot of lessons in a broad spectrum, time blocking and walking away, instead of just bop-bop-bop-bop-bop, which is what I used to get through my first part of the career, and then now I'm a little more methodical... But the biggest humbling moment was this summer, we had a deal under contract, and the lender retraded us upwards of 3%... And we had a lot of hard money on the deal, and it was a really good deal, and we locked it up in February... It was actually a 1031. Our buyer fell out, so that deal started over, which was a chain reaction on this deal... At the end of the day, the partners got together and ultimately made the decision to walk away from the deal, because the seller didn't want to really work with us. And there's a lot of hard money that we walked away from, but really, what I took out of that as we were talking with our partners was over the past 10 years we've taken a lot of risk, and we've won, and we've won, and we've won, and we've won. And if we made X millions of dollars, minus one hard money deposit when the market changed overnight - don't get down on it, because you made a good business decision, and now you're prepared to go after more deals... So sometimes it's hard to take an L, but if you look at the entire season, and you're winning team, then - that's kind of how I tried to look at it, and it was hard at first, but I had some mentors that made me shift my mindset.

Ash Patel: Yeah, thanks for sharing that, man. I think over the last 10 years it's been relatively easy to make money, right? Now that we've got some economic headwinds coming at us, things are gonna get challenging. And for the Best Ever listeners that have only had wins, I think it's important to know that there's times that you're going to lose. Listen, everybody that's successful - you know this, people that have been in this business over 10 years, we've all taken hits. And it sucks, man. Because you go on this run where you think that everything you touch is going to turn to gold, and nobody can touch you, and you're killing it. Now, all of a sudden, you're in a position like you were, where not only were you going to lose your 1031 money and pay taxes on that, but you were going to lose your earnest money, and it would have been easy just to brainstorm and try to figure out a way to get this done... It had to have been a very hard decision to walk away from that. But Best Ever listeners, if you're in that scenario, you've got to make an informed decision, and like what Jimmy did here, get mentors, bounce this off of people. Because when you're in your hyper-focused bubble, and your only goal is to get this deal done, get that 1031 money transferred over, get the investors in on the deal and hit the closing table, you have blinders on, and it's hard to see other avenues. And maybe walking away is the right thing to do. And like you said, putting it in perspective, you've had so many wins... Yeah, okay, big deal. You know, it's par for the course. Take a couple of hits here and there. Thanks for sharing that. That's an important lesson.

Jimmy Edwards: Yeah, yeah.

Ash Patel: Jimmy, what's your best real estate investing advice ever?

Jimmy Edwards: Don't make emotional decisions. You look at everything methodically, but you also don't want to get analysis paralysis. So I think over time, your gut starts to kick in, and you start to say, "This is a good deal." But then there's also times where you're like, "You know, this kind of feels like a red flag", like the death by 1000 paper cuts, where it's like, "All the signs are trying to tell me this is something we shouldn't pursue." And one of the things I learned really early on in my career was from one of my very first mentors, was the next deal is just right around the corner. And that's really been my saving grace, is like, "I want to do a deal, I want to do a deal, but let's pass on this one." And we hit obstacles here, and -- kind of in my sales career it was the same, right? You go through a whole day of a bunch of garbage leads, you know the next day is gonna be full of good leads, right? So it's just kind of the same thing. Just keep positive and stay optimistic; you don't want to buy a bad deal. There's always a good deal around the corner.

Ash Patel: Yeah, great advice. Jimmy, are you ready for the Best Ever lightning round?

Jimmy Edwards: Yes!

Ash Patel: Alright, Jimmy, what's the Best Ever book you've recently read?

Jimmy Edwards: Most recently - and I might have said this last time, but "Who, not how" has been really, really important for me. I kind of grew up in the early stages of my career as a solopreneur, but then realized I built myself a job. How am I going to do all of these things? And then a mentor of mine recommended it, and I read it, and it just exploded my brain. If you want to build this team, I don't have to build the team, I can bring someone in that can build that team that's built teams before. So that was a super-powerful book. "Who, not how" by Daniel Sullivan.

Ash Patel: Yeah, great book. Jimmy, what's the Best Ever way you like to give back?

Jimmy Edwards: It's kind of selfish, but I really enjoy helping -- I make money too, but going back to the housing flip thing... That has been really, really, really rewarding for me. My five-year plan is when I reach a certain level, I've got one of those big checks I want to write, and I'm gonna write a big, giant check to a charity. I haven't figured out which one yet, but that's on my vision board.

Ash Patel: Awesome. And should we how can the Best Ever listeners reach out to you?

Jimmy Edwards: Yeah, our website - it's highfivemultifamily.com. There's a little bit about us on there. Some of the stuff we've done. Reach out. There's a little Contact thing there. Boom, hit us up. Get in touch.

Ash Patel: Jimmy, thank you for taking the time. 15 years in this business, coming from single families, going into multifamily, learned some hard lessons along the way... So thanks for sharing all of that today with us.

Jimmy Edwards: Absolutely. Thanks for having me.

Ash Patel: Best Ever listeners, thank you so much for joining us. If you enjoyed this episode, please leave us a five star review, share this podcast with someone you think can benefit from it. Also, follow, subscribe, and have a Best Ever day.

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