On the show today we have… Preston Walls of Walls Property Group!
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Show Links:
– Wallspropertygroupre.com
– Appfolio.com
Show notes for Preston Walls of Walls Property Group
The Vantastic Life is…
– is in Enumclaw, WA!
We are all getting geared up for Christmas around here (and hoping for more snow).
We are getting stoked for the snow to come so we can all go snowboarding!
Welcome Preston Walls from Wall Property Group!
It’s awesome to have Preston on the podcast.
Joe
Preston give us the goods about your life and how you got started with real estate.
Preston
My grandfather was a professor and owned some buildings, and I painted some of those properties. My grandfather and father also painted, and it’s a great way to know your way around a building.
With painting you will get to know a scope of work, and get to know vendors.
Julie
Was your grandfather the guy that kicked this all off?
Preston
Yeah, it was a way to supplement his income and house some students.
Julie
Did he live in one of the units?
Preston
He did not, but my dad did, and that started me off with real estate and house hacking. It’s been in my family for a long time.
I bought my first triplex in 2003, and paid 505k for it, which was a LOT. I still own this building and glad I do. I actually converted this to a four plex.
Julie
Preston has a value add niche. Is that something your family has done?
Preston
It’s something that I’ve evolved into. My father just did the improvements for the value adds.
After college I went to Manhattan and it’s an expensive place to live in. I created my bedroom by putting a wall up in the middle of the living room, and turned our two bedroom into a three bedroom. That action made it affordable for the 3 of us to live in Columbus Circle, right next to Central Park.
I worked for some investment companies in NYC, and got my series 7.
Julie
I almost went that route as well. Are all of your properties local?
Preston
They are ALL in Seattle, and I self manage, and have my staff.
Julie
We are in aww of that. Were they all purchased a few years back or are you able to buy today?
Preston
There’s no shortage of compelling deals out there right now! I’m in contract to buy a deal right now, and before that, early fall.
Julie
How are you finding your deals?
Preston
Half are listed properties through commercial MLS, and I’m a broker so I write it up. And the rest come from brokers that I’ve done deals with in the past. I write up a number of offers that way. About 50/50.
Julie
Are you getting multiple offers on the buildings that are listed?
Preston
Many times, yes. I’m competitive because I’m not coming in with a financing contingency. Even though I’m using debt the relationships that I have are really strong, and I have a backup plan.
Julie
Does that put you in first position?
Preston
I would say it’s fairly standard to write all cash offer.
My sweet spot is 5-30 units in Seattle.
Julie
What else puts you ahead?
Preston
Track record and assuring of closing ability. Credibility.
Julie
Is that your biggest advantage?
Preston
Yeah.
Julie
Do you offer 3rd party Managment?
Preston
Yes, 3rd party management and syndication as well.
Julie
Is the syndication something that people can get involved in?
Preston
Yes, you can absolutely get on a list and we are always looking for potential investors.
Julie
At the end we’ll let you know how to get involved with Preston.
What the smallest you’d buy?
Preston
Probably 5 units, or a 4 that I could turn into a 5. Smaller is problematic.
Julie
Good stuff!
Do you have mixed use as well?
Preston
Yes, and primary component is residential, but could have retail on the bottom. We managed the brokerage and leasing in house on the retail.
Julie
Do you broker and of your 3rd party buildings?
Preston
No, we haven’t done any sales. Selling multi family properties is it’s own beast. I use my license to represent myself on purchases and lend credibility on leasing.
Julie
Do you sell or hang on to all of your buildings?
Preston
I rarely sell. One to get out of a partnership and another to buy a house.
Julie
Do you help your fee based management clients do value add, or why do they come to you?
Preston
All of the above. We have an in house construction Managment team, and we are familiar with all of these things.
Once you see the property you can tell the owner what you think it will cost to add the value.
Julie
Let’s talk about how you’re doing that…
Preston
Zoning wise that’s hard to do. Within your building there’s a lot to do. I look for as large a difference between gross square footage and rental-able square footage. Could be a laundry room or other non-living area.
Julie
Listen up! Is this the first thing you look at?
Preston
Address, and then zoning. If it’s single family I’m going to disqualify it 99% of the time.
Julie
Do you think the city will get rid of residual zoning like in Portland?
Preston
I’m happy to speculate with you, but I’d never make an investment based on that. There are a lot of things in the margins.
I think it would be really hard or take a long time for Seattle to move toward more flexible single family zoning.
Julie
There might be some people looking to send you deals.
Preston
I would love that. I look at GIS map and things like urban village because there’s a lot you can do there. But I will settle for a frequent transit area. These give you more flexibility around parking.
Converting garage spaces or carports into new units are something that I like to do.
Julie
And that’s allowed with the right zoning, correct?
Preston
This is where you need a good architect to bounce ideas off of. I send a lot to an architect and they go with me on walk throughs.
I typically go with no inspection contingency.
A good broker will give you enough into to write it up.
On the physical inspection I care a lot less about what’s there. In vintage I’m changing a lot of it. Plumbing, electrical, HVAC. If it’s copper plumbing I can leave pieces in place. All galvanized comes out.
Julie
What’s next?
Preston
I put together a quick model to see what the budget is going to be and what the rents are going to be. That will give me a good idea of what it’s worth. This will help me to put permanent financing on it.
Julie
Do you also know how much you’ll need to increase the rents per unit?
Preston
I look at it more on a building wide perspective. Purchase, renovation, total cost, return on total cost, incremental value added. I don’t get caught up in individual rents. I don’t like using internal rate of return. But I will calculate on over 10 years to use as a comparison.
Julie
What’s the return on cost that you’re looking for?
Preston
Oh, I look at it two ways. Return on cost and return on equity. I look to double the equity value in the property. The cost will be in the 20-25% rate. Internal rates of return are around 14 for a 10 year time horizon.
Julie
I’m geeking out here! This is really good stuff if you’re looking at being a passive investor.
I’ve spent the last 5 years vetting syndicators.
Let’s go back to the density thing. You can add through garages or carports… we would take laundry room, and put a stack laundry unit.
Preston
We absolute do that. Right now we have a laundry room on every floor, and putting stacks in the unit, and using the space of the laundry room.
Ideally we try to do the stack in the bathroom to share the venting. But it could be a hall or coat closet.
Julie
There are probably a handful of ways to do this. What else?
Preston
Club rooms or common rooms. Roof decks or roof access. Buildings have locked stair towers. We get a permit to put a roof deck and gas grill, table and chairs.
Julie
How about parking? I know this is very important in commercial real estate. Is there any risk in taking away the parking?
Preston
Well, I look at it this way. If you take away parking you’re reducing your renter pool. In a tough market that could hurt you. But what’s the value of the space. The space is far better valued as a housing unit, than a car unit.
Julie
What’s the permitting time on that?
Preston
It’s a reviewed permit with the city. 5-6 months to look at it, and then another 5-6 to review. So about a year.
Julie
When you buy these and know you’re going to be adding value, do you ever buy, or does that addition allow you to pay more?
Preston
I’ve never not gotten a permit for something that I’ve set out to do. It’s more of an administrative process.
Julie
Do you factor that into your offer?
Preston
I look at acquisitions as “what do I need to make a competitive offer”.
There are others looking at doing this as well.
Julie
So, it’s not a secret here, and this is common place. You get these because of your rep and ability to preform.
Preston
The cap rates that value add properties are at is horrifying. I don’t even look at these.
Julie
Is all you care about, are you going to be able to put your loan on down the road and it works on your financing plan?
Preston
A lot of the strategy is driven by lenders. What do I need to do to get this building to a point where a lender will put a conventional loan on it.
Right now that’s in the 65-70% loan to value range. And mid to upper 3% interest rate. And I like to put fairly short debt on the property. This allows me to refinance these if there’s a few years down the road.
Julie
Couldn’t that set you up for a spanking if the market went down?
Preston
It could, but you have a lot of equity in these properties.
Julie
What’s the biggest percentage drop that you’ve seen?
Preston
08-09 rents dropped around 8% during that time.
Julie
What about cap rates for appraisals?
Preston
That is a factor, and I lump that in the bucket of appraisal risk. You’re both looking at the same set of numbers.
Part of this is staying in tune with the market. If you use an unrenovated comp that’s not going to be the same. And what are the banks feeling…
There’s always risk in that, but keeping a pulse in what’s going on and where people are leaning.
Julie
When you are assessing risk, what is a shorter term?
Preston
5 year ARMs are my preferred with no yield maintenance.
Julie
Is that a choice that you get to make?
Preston
Yes, you can choose a lender that doesn’t have yield maintenance.
Julie
When you are getting ready to plan this are you forecasting for 5 years?
Preston
Yes, you have to look 5 years ahead for the rents.
Julie
What does 5 years ahead look like today? And do you worry about new construction?
Preston
I don’t worry too much about the impact of new construction.
Julie
What do you feel about the building of class A building with all the bells and whistles. What does that mean for rents?
Preston
In Ballard I would say that new construction is in the 350-370 sq/ft rent range. And an older building when renovated is going to be in the 300-325 sq/ft range.
Julie
Wow, the rent growth has gone up.
Preston
Yeah, it’s exploded!
Julie
Let’s say you’re doing a full remodel, what is that on average per unit improvements?
Preston
An interior cost for unit I budget 90-100k, and new unit 125-150k range.
Julie
You said 90-100k to renovated a unit?
Preston
That’s going down to the studs and putting it all back together with nice appliances.
That evolved over a lot of deals. I started out with a lower budget. And not all buildings can justify that level of spend.
Julie
So you know what you can get to on a certain building, and you can reverse engineer from there.
This is a completely different world than house flipping. Different numbers and everything.
What are the property management fees you charge?
Preston
It depends on the number of units in aggregate of your portfolio.
Julie
We are talking about the gross rents.
What kind of programs and app?
Preston
Appfolio for our property management software. It’s worked well from our side and the tenant side.
There’s a ledger and statement to post all of the charges.
Julie
Let’s get Appfolio on the podcast.
Preston
I’m happy to give you a contact over there.
They’ve been good at expanding their offerings for tech demand. They are going deeper with artificial intelligence.
They’ve been good at adding things on the investment side. They have a landing page where you can see all of your investments.
Julie
What’s your leasing criteria?
Preston
We go with 3 times rents and will take a co-signer in lu of no income, in a student situation. And we have roommate situations.
We found that it works when we have 3 professionals in one unit for the financial requirements.
There’s one lease in these deals. So if 1 person doesn’t pay the rent, it’s on the others to pay.
Julie
Couldn’t you get more for renting out rooms separately?
Preston
Yes you could. But there is more management, and that’s the downside.
Banks like to see a lot of year long leases.
Julie
Why couldn’t each sign a year lease?
Preston
They could.
This is definitely more lucrative.
Julie
Is the pain in the ass worth the return… right.
That’s interesting, right.
Are there any rules on that? Co-living and such.
Preston
None that I’m aware of.
Julie
The city of Seattle is a pain in the ass, and how do you deal with that?
Preston
Ahh, the hardest things to deal with is the rent control by a thousand paper cuts. It won’t be called rent control, but you won’t be in charge of what you can charge.
Julie
I believe I heard it was one vote away from passing last time.
Preston
I don’t worry about it in near term.
Julie
Does that add more risk in 5 year financing?
Preston
There are too many variables that I can’t control, so I don’t worry about it.
There’s a lot of overhead with staying up to date with compliance.
Julie
How about the first come first serve?
Preston
This restricts landlord selection, and I understand why it’s done. The cumulative impact will lead to less housing being constructed.
MHA fee portions are 18k. That just to keep an application for 1 unit moving along.
This latest proposal to ban evictions during winter months is another example of… it’s hard to run a business.
Julie
We don’t even have sever winters here. I like the “death by a thousand paper cuts”.
I think we are going to need to wrap it up.
This has been awesome today!
We want to give listeners a way to further engage with you.
Is there a way to connect listeners to you, how can we do that?
Preston
Website is Walspropertygroupre.com and always looking for leads.
Sign up on the website for mailing list and we’ll send out deals.
Julie
How do you fill spots for syndication?
Preston
We do it on a first come first serve bases.
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