Tony Castronovo is the founder and managing partner of Novo Multifamily Group, a multifamily real estate investment and asset management group that focuses on building communities that offer affordable living at higher standards. In this episode, he discusses his journey from management consulting to real estate, his new company, and the challenges he navigated with his first multifamily property.
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TRANSCRIPT
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I'm Joe Fairless, this is the world's longest-running daily real estate investing podcast. We only talk about the best advice ever, we don't get into any fluffy stuff. We don't like this fluffy stuff. No time for it. We want to talk to Tony Castronovo, and we want to talk to him about his multifamily ventures. How're you doing, Tony?
Tony Castronovo: I'm doing great. Thanks, Joe.
Joe Fairless: Well, I'm glad to hear it, and a little bit about Tony. He has the company Novo Multifamily Group, he's a full-time multifamily real estater... That should be a term; I think I've just coined something. He's a real estater. He's a full-time real estate entrepreneur and syndicator. He's a real estater. He's got a portfolio of 868 multifamily units across seven properties in Texas and Oklahoma. He's based in Houston, Texas. With that being said, Tony, do you want to give the Best Ever listeners a little bit more about your background and your current focus?
Tony Castronovo: Absolutely. And thanks for the intro. Actually, I focused on multifamily for the last four plus years; before that I had spent about another four years in the single family space, before being totally focused on multifamily starting in 2018. I am a full-time real estate - real estater, I should say - entrepreneur, and that's about a year in. So that's pretty exciting. Lots of things we can unpack on that. I actually just launched another business just yesterday, focused on transition and performance coaching for entrepreneurs that are looking to get out and make it a full-time thing, or maybe started that way and just need a little bit of help to stay focused, and be goal-driven. So that's something new and exciting.
Joe Fairless: Well, congratulations on the new business launch. That's awesome.
Tony Castronovo: Thanks.
Joe Fairless: I can see how it can tie into your multifamily business, I assume, since you syndicate, you raise money from investors... So let's talk about your story a little bit. One year ago, approximately, you were not full-time; you were doing something else. What were you doing?
Tony Castronovo: For the last 25 years or so - I'll date myself - I was a management consultant. I spent about 11 years working with Ernst & Young before I made the jump.
Joe Fairless: Okay. And then what did you do to prepare yourself to make that jump into real estate full-time?
Tony Castronovo: I like to say that it was very methodical, and I reached financial freedom, and then one day I said, "Okay, I've hit my point in the timeline. It's now time for me to ride off into the sunset", and it absolutely wasn't that. We went through all this stuff with COVID, which kind of set my timeline back a little bit, probably a good year, year and a half... During that time I had a little concern about layoffs, and where my job security was, I'd seen people around me being let go, people scaling back... So I ended up taking a short stint with a much smaller consulting company to just give it a shot, be entrepreneurial, try to help this business grow... And it was a bit of a, dare I say, train wreck... Which was great,
because --
Joe Fairless: It forced your hand.
Tony Castronovo: Yeah. It just pushed me out the door and I said, "I'm going for it." And sometimes that's just a blessing in disguise.
Joe Fairless: That's a very similar story for what happened to me. I was working at an established advertising agency in New York, and I worked there for seven years. And then I decided to give myself a promotion by taking another job at another agency, and make more money. But I was there a year, and it was more or less a train wreck also, because I wasn't a good fit for that agency, and it forced my hand, where after that I then left the advertising world and I went into multifamily full-time.
So if someone's considering leaving their industry to become full-time, simply go to a company where you won't be a good fit, and then you'll have to go into multifamily to make your ends meet. You said you just launched a business that helps people in performance coaching and also in the transition period. What are some milestones that you recommend in a best case scenario be accomplished prior to going into another business, or another career path full-time, whether it's real estate or some other unrelated field?
Tony Castronovo: It's probably no perfect solution for everybody, but I certainly wouldn't recommend just listening to a few podcasts, reading a couple books, and saying, "I'm gonna go out and do my first deal. I'm gonna quit my job." You have to be somewhat established, and really have a good idea of what's your day going to be like the moment you decide to turn in the keys to the W-2. How are you going to operate? How are you going to stay disciplined? What are you driving towards? Are you syndicating and looking to continue raising money for deals? How many deals are you going to do? What kind of fees do you think you can generate? You have to have somewhat of a plan in place, and some ability to have executed at least part of that plan, so you can have confidence, you've got a little bit of a runway to get out there and try this thing called entrepreneurship.
Joe Fairless: So let's talk about your deals. You've got multifamily deals in Texas and Oklahoma. It totals 868 units. What's the smallest deal in terms of units and what's the largest deal?
Tony Castronovo: The smallest is 20 units, and that was what I call an IRO, independent real estate owned type of property. The first and only that I bought just by myself; no syndication, no partner, no JV. An interesting learning experience, but it was my entry into multifamily, and turned out fantastic; couldn't have asked for a better deal, but it was tough along the way. So I got lots of war scars from it, but I learned so much.
The largest one is 396 units, and it's class A property. It's a year old. It's actually on the market now to sell... And we just got it last December. So it's another great case study, if you will, but I'm pretty fortunate on that one.
Joe Fairless: Where are the 20 units located and where is the 396-unit located? The city.
Tony Castronovo: The 20 actually is a property that I recently disposed of; that property is in Bryan College Station, Texas, where Texas A&M University is. And then the 396 is up in a town near Fort Worth, Texas.
Joe Fairless: What town? I'm from Fort Worth.
Tony Castronovo: Oh, okay. Weatherford.
Joe Fairless: I grew up in [unintelligible 00:07:51.21] high school, so it's literally the town right next to Weatherford.
Tony Castronovo: Oh, awesome.
Joe Fairless: Got it. That is a certainly path of progress, West Fort Worth, where Weatherford is located. Alright, so College Station, you've just sold it... What do you buy it for? How much did you put into it? What did you sell it for?
Tony Castronovo: I bought it for $980,000, and we ended up selling it for $1.825 million. It was a three-year hold. So essentially, it was close to a 31% IRR, and I just really couldn't have asked for anything better. During that three-year-hold I refi-ed it twice, pulling out cash so that I could go and do other deals and continue to grow and build momentum.
Joe Fairless: And how much did you put into it?
Tony Castronovo: All in all, I put in about 325k.
Joe Fairless: Okay. It was in College Station. I imagine [unintelligible 00:08:46.27] college students... Is that who you're renting to?
Tony Castronovo: You would think that, but no, it was all workforce housing, just blue collar workers. The thing about College Station is, yes, the university is the bellwether of the city, but there's just so much around that, from restaurant workers, to auto shops, to moving companies, you name it. And those are the type of folks that were living in our place.
Joe Fairless: So 1.825, and you put in [unintelligible 00:09:20.23] 1.3 or so. So you cleared a little over half a million dollars on that in profits, is that about right?
Tony Castronovo: Yeah, that's about right.
Joe Fairless: Wow. Bravo, my friend. No wonder you're doing multifamily instead of single family. You got some scars from that property... So you've got half a million dollars plus from it in profit, but how did you get the scars?
Tony Castronovo: Well, as you know, multifamily everybody says is a team sport, right? I didn't know that at the time. I just figured, I used to buy single family homes, I used to renovate them, and then rent to them, and rinse and repeat... And this is just bigger and more units. That's what I thought.
Joe Fairless: Me too.
Tony Castronovo: But... Totally different, right? And especially, my single family homes were about a 30-minute drive. This was about an hour and a half, and I also inherited tenants, whereas my homes were always vacant. And I inherited 20 -- I'm not gonna say problems, but they weren't easy tenants to deal with. So I hired a third-party property management, which was another change for me, because I was self managing the single family homes at the time... But battle scars along the way I'd say is from a financing perspective. When it's just you - yeah, you can put a CapEx budget together, and understand what your run rate is gonna be... But man, when the wheels come off, it's you. So we had to get very creative... And I'll tell you, I had this fantastic plan with the bank. I said, "Alright, everybody's month to month leases." The prior owner was in his 80s, he owned the property for over 40 years; he never raised the rent, everybody was month to month. Late fees were $3 on this property... So this was a fantastic opportunity to just say, "Okay, every month we're not going to renew two tenants. We'll come in, we'll renovate, and keep occupancy at 90%, and be able to pay our mortgage and all that good stuff, and then rinse and repeat."
Joe Fairless: And on the spreadsheet, that looks amazing, right?
Tony Castronovo: That's right. Wonderful business plan, but it doesn't always go that way. So for me, after the first month, and I realized, "Hey, I've got two brand new units. Why won't anybody move here?"
Joe Fairless: Oh, the other 18?
Tony Castronovo: Yeah, it's a turd all around it. So that was a big wake-up call, and I said, "Okay, that's it. Not two units a month, we're doing seven." And that hurt from an occupancy standpoint, but we basically let seven tenants go the next month, and we doubled down on our construction crew, and we just started churning through units. And within seven months, we renovated 19 out of 20 units. I had one guy that just would not go, and was always willing to keep paying higher rent, so we kept him... But other than that, we turned that place in seven months
Joe Fairless: [unintelligible 00:12:33.01]
Tony Castronovo: 19 out of 20. We brought rents from $500 to $750.
Joe Fairless: That is such a good insight for the Best Ever listeners. On paper, you are going to do a couple units, be very conservative, and then do the turnaround process over time... But because prospective residents who are coming in at a higher rent, different demographic, they're looking to have a better community experience, and they saw that they weren't going to get that, therefore you weren't renting it out, even though the cops were showing, I'm assuming, that you could rent it out, or you should be able to rent it out at $750. That's gonna help a couple people who are listening to this, whenever they're putting together a business plan. So thank you for that.
Tony Castronovo: Of course. The other thing I mentioned - I put 325k into that, which is kind of a lot for that size property... But the reason why I spent that kind of money was this was like a 1967 vintage property. It needed a new roof in a bad way. It was a flat roof. It also needed new HV/AC systems; they were all pretty much like original equipment. They don't make them like that anymore, that's for sure... But I just said, you know, ripping the band aid off; it's all new systems, brand new TPO roof... We had five balconies across the front of the property that were all rotted out, so we had to tear those down, new concrete, new framing... These are things that people don't necessarily pay extra rent for, but it drastically reduced my operating expenses. Once we were fully stable, we hardly spend any money on repairs and maintenance. There was just nothing wrong with it at that point.
Joe Fairless: You mentioned earlier, you had to get creative with the financing. You were talking about financing initially, but you were talking about the debt. But then I figured out I think you're talking about cash out of your pocket to make this thing happen. Will you elaborate on some examples of how you had to get creative to support the CapEx that was needed to turn this thing around?
Tony Castronovo: Yeah, I had a pretty decent bank loan that also included some capital expenditures, but not really to match what I wanted to do on the property. So I took what I could get on that and said, "I'll figure it out. I've got funds in the bank, and access to credit lines, and things like that." But when you've got to accelerate everything, and you've got crews working around the clock, cranking out units, you start burning through a lot of cash in a pretty fast way. So I really had to tap into additional lines of credit... I was maxing out credit cards, I was using sources like Fundbox and Kabbage, and these sources of funding where you have to pay weekly... It was stressful, but man, after I did that first refi, it felt so good. I paid off all that debt, and still had something left over to go do another deal... But it was stressful.
Joe Fairless: Mad respect for you to persevere through that and have the faith and the fortitude to see it through. Do you have a significant other in your life?
Tony Castronovo: I do. How did that conversation go with your significant other during this time where you're maxing out credit cards, you're doing weekly Fundbox and Kabbage... I'm not familiar with them, but you said you were having to pay weekly, or do weekly draws from them... It seems like [00:16:18.15] almost. So how did that go on the family front?
Tony Castronovo: It went well enough. Part of it is, my wife trusts me, and I keep her in the loop. We're not looking at account balances every day, every week kind of thing, but she trusts me that I have our best interest in mind. And that's super-important, to have the confidence that she believes in me and what I'm doing. And these are all just short-term type things that she could see the improvements that we were making, she could see that we were bringing in new tenants at higher rents... It was just a matter of time... So I like to think that all those years of management consulting and helping clients and executive suites to better manage their businesses surely would allow me to manage my own finances for my real estate business. And it did.
Break: [00:17:13.07] to [00:19:08.03]
Joe Fairless: Let me give you a hypothetical scenario... Someone who is -- we'll call him Bob. Bob bought a 20-unit in College Station. And Bob bought his 20-unit for $980,000. And Bob put $325,000 worth of CapEx into the 20-unit, and Bob used lines of credit, maxed out credit cards, used those Kabbage and Fundbox... But Bob ended up losing money on the deal; hypothetically, of course. How could it have gone different for you than Bob? What could have happened to you that happened to Bob, where you did all this, but then you ended up getting burned?
Tony Castronovo: I think some things that could have gone differently. If I didn't take a chance to move so many tenants out so quickly... If I was more concerned about the short-term occupancy and keeping people in place so that my income every month wasn't dropping significantly - for whatever reason; my own perspective, or the bank's perspective - if I was so worried about that, I think that could have either slowed things down dramatically, and just taken a long time, or something that I saw on another property, which was right in the heat of COVID, was that you start making all these improvements, and then you kind of fall back. You almost slip back into dropping your standards, bringing people in that maybe don't really qualify, just because you've got units available, you just spent the time renovating these things... I think sometimes you just have to trust your gut, your intuition, and if it's just short term pain for long term gain, I think you'd go for it.
Joe Fairless: Mm-hm. I just got back from being at the park with my soon to be four-year-old daughter, and she loves this huge slide. And she not only loves going down the slide, she loves climbing up the slide, and this reminds me of when she attempts to climb up the slide, she goes all the way up, and she's like, "I'm gonna do it", and she does it. She gets to the top and she reaches her objective. But if she has second thoughts right around the middle part, and then she looks back, she'll slide right back down. Same thing here - if you're going to do it, you need to do it all the way. You can't just do it a little bit and then have second thoughts, and now your tenant base isn't reflecting the quality of renovations that you've created. So it makes sense to me that you'd say that, because when you talked about the two units a month plan, and then you had to scrap that, and you had to be intentional and consistent with these turns, doing the in bulk... That makes sense.
Tony Castronovo: Yeah, and not lowering standards. Trust me, it hurt when I had 25% occupancy during the peak of the renovation cycle, and letting people go, and so forth. It hurts so bad to turn away applicants. But we couldn't accept people at sub-600 credit scores, and who weren't paying their bills... They couldn't afford to live there.
Joe Fairless: Wasn't your property management company saying, "Hey, Tony, listen, I know they're not above 600, but that's who we're getting right now. Let's fill this up." Were they mentioning anything like that?
Tony Castronovo: Yeah, there was definitely a lot of that. But I think once they understood where my standards were long-term... They were gonna have to manage these tenants, so... We don't want to just remove one problem just to introduce another problem. We really are trying to reposition the property. And that's an important word there, because you can come into a nice little turnkey property that's just humming along, make some operational improvements, that's great. But if you're going to take on a huge value-add and completely reposition the entire property, just be in for a very big project and plan to take few risks, but don't lower your standards when it's time to start filling it back up.
Joe Fairless: I assume you didn't 1031 the money, because you hadn't mentioned that. If you didn't, why didn't you, into something else?
Tony Castronovo: I 1031-ed into it. But when I was coming out, I was going into a syndicated deal.
Joe Fairless: It was a challenge, but you came out really well, so why did you choose to forego a 1031, and put money into a syndication, versus keep building your own portfolio?
Tony Castronovo: Well, I guess there's a few ways I can answer that. First off is I started while I was running the 20-unit, I started to surround myself with people who were thinking bigger, who were in the syndication space... I had no idea that that even existed back when I first acquired that property. But I started seeing another way; I started seeing how I could partner with people, how I could raise capital, bring on investors, scale my money a little bit better; maybe leverage is the better way to say that. So there was that aspect.
The other thing, quite candidly, was that was right about the time I was thinking that I'm going to go full-time into real estate. And I could 1031 all those proceeds into another deal, but shouldn't I give myself a little bit of runway to make it work for a while?
Joe Fairless: Right... Yep.
Tony Castronovo: So trust me, I was going through every permutation with my CPA on "How can I possibly save some money on taxes, instead of taking a capital gain on over 500k?" And we did a few things, but the best way for me was buy a bunch of deals. Just get into some syndications, get that bonus depreciation, offset as much of it as I could, but keep some money liquid so that I can start really running my business and getting off the ground.
Joe Fairless: Taking a step back, what's your best real estate investing advice ever?
Tony Castronovo: Probably on the spirit of partnerships here, is that you can quickly sort of jump into bed, if you will, into deals with people, but I think you really have to get to know them and align philosophies, risk appetite, strategy... You really have to know these people; that's going to make your life much easier. If you're holding a property for, say, five to seven years, you don't want it to be painful for five to seven years. So you really want to enjoy the journey. Because you're going to be doing a lot of deals, and it's important to have some longevity along the way. So pick your partners really carefully.
Joe Fairless: It might be a little awkward to say, "Hey, can you tell me about your philosophy? What's your risk appetite? And what do I need to know to get to know you?" Clearly, we're not going to ask those questions. What are some questions that don't sound weird, that will help accomplish the objectives that we need to in order to get to know someone to determine if they're a good partner?
Tony Castronovo: You're right, it could sound weird. I don't know that I'm out there interviewing for partners, right? These are relationships that take time to develop. So the best ones are ones that form when you're not talking about a deal; you're actually maybe in the same real estate community, mentoring program, or you live in the same town and constantly see these people every month at a meet up, and develop a relationship... Something besides focused on a deal. Because that's a transaction, and you don't want to start forming a partnership for the first time when you have a deal in front of you.
But I'll give you one little example. I was considering a partner, and we actually went and drove out to a property, it was a couple hours away... And as we were driving back, we got into this topic of how we were going to finance the deal. And he said something like, "Well, I would only pay cash." And I'm like, "Well, why would you only pay cash?" "Well, because I don't believe in paying somebody else interest." And I was just like, "Well, nothing against Dave Ramsey, but that's a Dave Ramsey mindset, perhaps. And it's not something that I personally subscribe to." And it's not the he was right, and I was wrong, or vice versa, but there were two different philosophies. And so I knew pretty quickly that we probably wouldn't make the best partners. Great friend, but not a great partner.
Joe Fairless: Noted. And thank you for that. We're gonna do a lightning round. Are you ready for the best ever lightning round?
Tony Castronovo: I hope so.
Joe Fairless: Alright, what deal have you lost the most amount of money on?
Tony Castronovo: I don't think I've lost, but I surely could have gained a whole lot more. I had my second deal, which was my first syndication, and everybody made money on it, but we exited early, and I took the approach of "Let's exit, let's give people a return now, for not having to go another three or four years of just pain and suffering on my part, because I just poured my entire energy into that property for over two years." And so we ended up with a 15% return on it, which is certainly nothing to write home about. But we could have lost money, and my goal was to preserve investor capital, and I always said I would not sell unless I could give my investors a return.
Joe Fairless: What was in the background, lurking, where you could have lost money?
Tony Castronovo: It was one of those things, like we were talking, where we could have slipped back into this state of needing to reposition all over again. During the heat of COVID, after we were doing all these renovations, and bringing people in at higher rents, and so forth... All of a sudden, it was a ghost town. And when you don't have tenants, residents, you don't have a business. So you start lowering your rent, lowering your standards, and then all of a sudden you kind of look up and go "Man, look back where we started', except we just poured a bunch of money renovating these units. So that could have happened. And then the other big one was a CapEx tsunami. It was a property that just was sucking a lot of cash, and we were replacing HV/AC systems about every month...
Joe Fairless: 1970s, 1960s, your construction?
Tony Castronovo: '63.
Joe Fairless: '63. Okay.
Tony Castronovo: Yeah.
Joe Fairless: Best ever way you like to give back to the community?
Tony Castronovo: Oh, man... I'm always doing something, but I think that I love to mentor people, and I do a lot of meetups, I do a lot of one-on-one conversations with newer investors... I'm part of a mentoring community, with Jake and Gino, and through that we just have a lot of new investors where they know they can always call me anytime; and it's nothing formal, it's just I'm always available for them.
Joe Fairless: How can the Best Ever listeners learn more about what you're doing?
Tony Castronovo: They can always email me. It's tony [at] novomultifamilygroup.com. Or same website, Novomultifamilygroup.com. They can reach me there as well.
Joe Fairless: Tony, thank you so much for being on the show. I enjoyed our conversation, I enjoyed getting to know you, learning about your journey... Congratulations on the new company yesterday, and congratulations on the deals. It was impressive to hear the 20-unit case study that you walked us through, and the challenges, and how you navigated those... So I appreciate it. I hope you have a best ever day, and talk to you again soon.
Tony Castronovo: Thanks, Joe. I appreciate being on the show.
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