Table of Contents:
- Where To Listen To The Podcast
- Learn From the Best
- Hiring a Mentor Significantly Helps Efficiency
- Flatten the Learning Curve by Hiring a Mentor
- How Hiring a Mentor Helps in Various Ways
- Creating Advantage
- Hire a Mentor That Shows What Teamwork Is
- How to Reach Jacob Garza
Darin: Jacob Garza lives in San Antonio, Texas with his wife, Arlene. He built and sold his tech company, and took that capital and started a multifamily syndication business with his wife. He focuses on the operations and his wife focuses on acquisitions and financing. They are upscale and classy in everything they do. And they are one of the largest multifamily owners in the San Antonio area, and they show no sign of slowing down.
A little bit on how I know Jacob. So, I joined the multifamily mentorship group about three years ago. Jacob and his wife are business partners. When I joined the group, they just had an incredible reputation within the group and were the leaders in the space in our multifamily mentorship group. So, when I started putting capital to work, these were some of the people that I wanted to do business with. One of my early passive deals was with the Garzas. So, I am very interested in hearing what he has to say. Always interested in learning from the two of them. Once again, Jacob, I appreciate you coming on. The first question typically I ask is, how many properties and how many units are you currently invested in?
Jacob: Thanks, Darin. It was probably two and a half years ago since we first met. So, you’ve certainly known us for a while. To date, we have just over 2,000 units in our current portfolio, and just over 1,000 passive investments that we have as well.
Darin: Fantastic. So, another interesting thing about the deal that I invested in with the Garzas, I was getting into several different passive deals, and so I was investing for different reasons.
The Large Unit Deal
Darin: I knew I wanted to be an active syndicator. So I wanted to learn from some of the best, and so one of the things I did was my criteria. I looked at, one, I wanted to do business with the
Garzas. Secondly, I wanted to get into a large unit deal. The deal that I have gone into with them was a two-property portfolio.
I’ll have Jacob share a little bit more on that deal, but that also was the first deal that I’ve had that has had any type of exit strategy. So, Jacob, if you could talk a little bit about that deal, some specifics on the deal, and then also talk about how long you’ve had it and what the exit strategy was.
Jacob: Sure. It was a two-property, as you mentioned, portfolio here in San Antonio, about 460 units total. By the way, I think this was probably our 10th purchase, and we’ve been doing this for a while. I’ll get into the story of how small we started, but, yes. This came to us and it wasn’t marketed through traditional direct mailings, but they did put an OM together, and they had interesting marketing. They had four or five brokerage houses each selling this portfolio. So, we were approached by one of the groups out of Austin, and we were able to take it down if you would.
Darin: That was two properties, and it was 460 units. I can’t recall. What was the purchase price?
Jacob: Roughly, $40 million.
Darin: $40 million. So, the capital raise on that was quite a bit. What was the capital raise on that?
Jacob: It was almost 20.
Take Action and Everything Else Will Follow
Darin: Almost 20 million. That’s a huge capital raise. What was the biggest capital raise you had before that?
Jacob: That’s it, and that’s the largest one we’ve done to date.
Darin: Before you had done the 20 million, what was the largest capital raise?
Darin: So, you almost doubled it. I do want to go back to some of the earlier ones. And I bring on a lot of people like yourself that have 2,000, 3,000 units and you’re doing a $20 million capital raise. Some people that are listening, that’s the path they’re on. They already have a few deals, and they’re trying to scale up, but then there are others that are just trying to break into the space. Sometimes it could be intimidating like, “Wow! These people have 1,000, 2,000 units. I can’t ever see myself having that,” but it all starts with one, right? It all starts with one deal. So, your first syndication deal, what did that deal look like?
Jacob: That was in 2012. It’s almost 10 years ago now, and there were 24 units here in San Antonio.
Darin: That’s a big difference. So, what was the capital raise on that one, or you may not even remember.
Jacob: We did it ourselves. It was about $110,000. And it was half a million dollars. So, $21,000 a door.
Darin: It’s crazy. Several things have happened over the years, right? The price per door has gone up. So the basis has gone up, so the capital raises are bigger, but what’s important is everybody starts somewhere. Everybody has to take action. If you think back to that deal, I’m sure there were scary things about that deal.
Hiring a Mentor Is the First Step
Darin: Now, if you were to do another one of those deals, it would not feel scary at all because now you’re doing $40 million deals. But you wouldn’t have gotten here had you not done what you did with just starting.
Jacob: Well, and you just touched on a point. I think people have to decide they want to do real estate and get into real estate. I had a previous background in building technology companies. So, I was somewhat used to stepping out of my comfort zone, but this was real estate. What I found was no matter what business experience I brought to the table, the lenders didn’t care. I mean, they cared, but they needed a sponsor, someone with experience. This is a recourse bank loan that we took out on, that we took, and they still wanted a sponsor.
So, I think for your listeners, the people who’ve decided to want to get into real estate, there are three things that I will say to them. One of them is to getting a coach, hiring a mentor. Get someone who has a genuine interest and wants to see you succeed, and educate yourself. Those go hand-in-hand. They’re not going to spoon-feed you, but they will give you guidance in an advisory role. If you can get them to sign a note with you, that’s even better.
The second thing is you have to go through all the steps. There are rings where you have to climb the ladder. Hiring a mentor is going to shorten and flatten your learning curve. Do your homework. Make offers. Get out and talk to people. So, that’s just going to help you get there without missing all the steps.
Building the Steps Towards Success
Jacob: You’re going to have to miss out on a couple of LOIs. You’ll finally get an LOI, and then you’re in. But before that, the other one is if you can do this full-time, my belief is the time to get there is going to be less, and if you have more money. If you have a significant somewhat networth, my belief is I think you’re going to find yourself a little more successful to a syndicator who wants to align themselves with you and says, “Jeez! Okay. This person, maybe they run a business, they’ve got a balance sheet and they’re in it full-time, they’re learning. Look at this. This guy is on fire.” All that together is going to get you a deal.
It’s not to say we’ve seen it, Darin, these people who have a full-time job. They’re sponsors, and they close deals. So, that’s certainly not a prerequisite, but you certainly have to build the steps, though, and more time and more money I think you can get there.
Darin: I think you hit on some great, great points. One, and I don’t hear enough people talk about it, is the word that you used, decide. If you are listening and you’re reading books and you want to do multifamily, there’s a difference between, “I want to do multifamily,” and you make a decision that you will do it. Because to your point, even if you join a mentorship group, you’re going to have to get out there and hustle. You’re going to have to build relationships with other partners. And you’re going to have to build relationships with the brokers. You’re going to have to build relationships with passive investors, but it’s all doable.
Hiring a Mentor Significantly Helps Efficiency
Darin: You also said you got to go through all the steps. I remember people have asked me, “What’s the scariest step?” I’m like, “They were all scary.” They were all scary the first time, but now I look back at some of them and I’m like, “Why was I scared of that?” The first time going through it, you’re going to have that fear. So, I completely agree with you.
The other thing you said about hiring a mentor or a coach is you could probably do it without it. You definitely can do it without it, but most likely, you’re going to shrink the timeframe between the start to finish if you’re hiring a mentor to teach you the ropes. So, I think that those are great points.
Going back to the deal that I’m in, where we just had an exit. When I think of exit strategies, I think of two, either a sale or a cash out refi. In this instance, there was a cash out refi. So, explain one from a lead syndicator standpoint, what was the review analysis as to cash out refi or sale and you decided on the cash out refi, what did that look like for investors?
Jacob: Yes. You’re right, Darin, going in we had a plan to do a sale or refi in anywhere from 24 months to 36 months. We bought the property on bridge debt because it was underperforming, which hence the value capture in the future. The properties did well even initially. The cash flowed well, and we decided to take out a loan or to refinance the property, excuse me, to retire that bridge debt and put it on agency debt.
The Exit Strategy
Jacob: We lined up both scenarios and presented them to our investors. Overwhelmingly they said, “Interest rates are at…” and they are. They’re very low right now. I think we closed, it was probably a 5% interest rate, interest-only bridge, and the new debt was three something. So, that just made a huge difference in our debt service. The properties, both of them are doing extremely well. So, that just allowed us. It wasn’t a decision. We all had to decide what to do, but when you lay them out in front, one piece of paper versus the other, we certainly could have sold it, but the properties have so much more upside.
Our investors said, “What are we going to do with the cash?” I mean, I’m going to pay taxes on it, then where do I go? This property has a lot of life in it. We pulled out enough money. We’re doing a second rehab on it, and we’re doing second cost segregation on it. It was tax-free that we’re able to pull out, so that was nice. It was 40% of their equity we pulled out.
So, typically, the property performance will dictate your decisions moving forward. I’ve been in enough deals, even our passive deals. It’s hardly ever two horses that are close. What do we do? It’s typically one that ends up being the front runner and in this case, it’s exactly what happened.
Darin: You said something that I would imagine the refi opportunity is more attractive when there are either additional value add opportunities. Where you can improve the property and increase rents in some way, or that you just see that the market is going to continue to run in that submarket. For that reason, the valuation should continue to increase.
Hiring a Mentor Is Gratifying in the Long Run
Darin: As an investor, I want to say thank you because that was 11 deals or something. That was my first deal that has had any kind of exit strategy, and that was less than three years. I don’t know exactly the time frame, but less than three years, and I’m getting 40% back of my equity. Some of that is being held. From the listeners’ perspective, with COVID, a lot of the lenders are having these principal and interest holdbacks, and so they put aside a bunch of money into reserves, and then they’re using COVID as the reason to do that.
We did a cash out refi, a portion of it. They were able to release to investors and a portion of it is sitting in this reserve account, and then it’s 12 months later.
Jacob: 12 months or when they officially say the pandemic has ended.
Darin: Got you. One of those two reasons. That’s fantastic. Going from a few things on the loan side on that for the listeners’ perspective, one is if you’re looking at a deal that has an occupancy of less than 90%, then you’re not going to qualify for an agency loan. So, you’re either going to have to get a bank loan or a bridge loan. In this case, the Garzas looked at the deal. It was in the ’80s occupancy-wise. So, they thought there was a good opportunity to bring that up. Then they looked at both bridge and a bank loan and decided on a bridge program, and then within the three-year window, they refi’d into an agency loan. They’re able to take the interest rate down from 5% to 3% plus, and that dramatically changes the debt service. So, you’re paying X amount in interest and principal.
Hire a Mentor to Help With Your Cash Flow
Darin: Well, it was interest-only, and then all of a sudden, you refi at a much lower rate, and now your interest payment is significantly reduced.
Jacob: Less than half. How’s that for cash flow?
Darin: I like it a lot. So, what was the term on the agency loan?
Jacob: Let’s see. The term was interest-only for three years, with two one-year extensions, and the payment on that was 150 a month. Now, we’re about 65 a month. Significantly different.
Darin: That was on the bridge loan, the three years or two, but the agency loan that you just closed on, what’s the term? Is that fixed for the next period of years?
Jacob: There were two properties. I was getting confused. One of them was an agency step down, and the other was a Freddie floater.
Darin: Got you. The terms on them, five-year, 10-year?
Jacob: Seven. One was seven, and the other one was 10 with a step-down. One of the things that we’ve come to know is putting long-term debt, it constrains you if you want to sell the property. So, the properties we’re buying today are refinancing today. We can put a long-term bid on them. We’re just wanting to make sure year three, four, and five, if we need to get out, it’s not a big huge prepayment penalty. That’s one of the fundamental changes we’ve made to our strategy.
Darin: A lot of syndicators got caught. They put a 5% loan on, 10-year fixed, 12-year fixed. Then all of a sudden, rates drop into the 3% range. It’s a very attractive seller’s market, but a lot of the gain would be gobbled up through prepayment penalty.
Know Your Exit Strategy When You Start Hiring a Mentor
Darin: So, one of the things that, from my other business that trades loan portfolios, where I saw people get hurt in the last downturn was when their loan comes due in a poor economy. And maybe cash flow goes down, cap raise goes up, and the valuation is negatively impacted. You’re forced to either sell or refi and you don’t have leverage.
I’m a proponent of the floater, but I like having a long term on it. Even if it’s going to hurt me from a debt service standpoint, and it’s going to float up as interest rates go up, if I can make the payment, at least they can’t take the property from me. So, that’s something that I look at. But that’s something that new syndicators, some of them just don’t focus on the exit strategy enough, and what type of financing to put on the deal. That’s very important, understanding the pre-payment penalty and how that’s going to impact you.
Jacob: Yes, no question.
Darin: So, what about inflation? What’s your view on inflation? There are two schools of thought that are going on today. One, the fed is saying they’re going to keep interest rates low for an extended, extended period. Others are saying, “Well, you just put $4 trillion into the market. How can you not have inflation?” So, what’s your viewpoint there? This is just a personal view. I mean, none of us has a crystal ball.
Jacob: Sure. This is a better question probably for Arleen to answer like you introduced her, my business partner and wife. I try to focus just on the X’s and O’s of the asset management and the operations part.
Jacob: I know that’s something we can control. And what you’re talking about is very valid. It’s something I think all syndicators should watch. After all, it may be time for you to get out of something if you feel like there’s going to be some inflation around the corner because that’s going to wreak havoc on, like you just said, a lot of people are going to get trapped. I know she’s watching it very closely. So, she’s probably the better one to ask about that one.
Darin: Yes. I’m going to have Arleen come on the show. We’re going to do an episode with her, and I’ll focus on that piece with her. So, that leads me to the question, how do you guys divide up duties? One, there’s not a lot of marriages that people can work together and have it work out, but you guys seem to do it just fantastic. So, how does that work from a personal level? Then, two, how do you divvy up responsibilities?
Jacob: Sure. Like anything else in life, you get on a bike, you fall three or four times, so did we when we first started doing this. We never worked together in our professional careers up until 2012. So, what we learned, the short answer is just divide and conquer. She would repeat those words. She handles the broker relationships, the acquisitions, all of the debt. She’s very good at it. She has a banking business background. For me, I handle asset management and operations. There’s a line between myself and the vice president of our property management company. For the viewers out there, we do own our management company, and that’s how we’ve operated since day one.
Before Hiring a Mentor, There Was Tenant Pro
Darin: Since day one. I thought it was when you started to scale up.
Jacob: You’re right. We started a management company, and that’s when we joined the Sumrok Group, and he gave me some advice, “Look, you’re in that 300 area. You should go third party,” and we went to the third party until about 1,000 units, and then we went up. We did keep a small property by ourselves, but that’s what I consider. We’ve been doing it for 10 years property management-wise.
Darin: So, you were in technology before. You were building software companies or hardware companies or what? What type of technology?
Jacob: Yes. It was software. The last company I had was called property automation software. Our product was called Tenant Pro, and it managed properties for apartments and small commercial buildings.
Darin: You knew this space. How did you get into that space if you weren’t in the investment world?
Jacob: The story is back in 1990, a lot of software was licensed to big marketing companies because you had a lot of software developers that would develop in their garage, literally, and would not have a marketing arm. So, I worked for a software company that had a marketing arm, and we would have exclusive rights to people’s software. We’d market them and sell them, give them 5%, 2% royalty, whatever it ended up being.
Well, they decided one day to discontinue the software. The guy who I knew, worked there, they ended up bringing him into work and fixing the program and bugs. He said, “I’m going to go back to California.” I said, “No, you’re not. We’re going to start a software company. You keep handling the programming and I’ll do the sales and marketing,” and we grew it.
Flatten the Learning Curve by Hiring a Mentor
Jacob: Well, he left about five years later, but I grew it to 21,000 installations across the United States and had over 100 employees when I sold it. I was the sole shareholder in 2007.
Darin: Very nice. So, one, great timing before everything tanked. Two, sole shareholder. You probably made out pretty well on that deal. Then you have all this cash. You got to do something with it, and that’s when you decided, “Hey, let’s start buying investment properties.”
Darin: That’s fantastic. Now, you were in Dallas, right? So, why move from Dallas to San Antonio?
Jacob: Grew up in Dallas, and we both have family here in San Antonio, and our kids were still small. So, it was just a good time. If we were thinking about making a move at all, we just make the move. So, we did.
Darin: Very cool. I get different trade publications sent in the mail, commercial real estate, and now and then I see these listings that come out and I’m sure you guys have seen it. Who are the players that own the most multifamily units in San Antonio? And you guys, the Garzas name is always on that list as being one of the top owners. That’s got to feel pretty good. You guys came a long way in a short timeframe.
Jacob: I haven’t seen that list, but, yes. We’ve been doing it for a long time, and we had a lot of things go our way. You just can’t give up.
As you said earlier, once you’ve decided, it’s perseverance and getting the right coaching. I’ll say that’s probably the biggest thing. It just flattens the learning curve.
Leverage From Coaches’ Experiences
Jacob: The mistakes today that you make in this business, my belief, is they’re much harder to recover today than they were five years ago, 10 years ago. Darin, you’re in this space. You know what I’m talking about.
So, getting someone, hiring a mentor who has been through the ropes and can teach you this and surrounding yourself with people with whom you can ride the coattails is the way to do it. As large as we are 2,000, we still look up to other people who’ve got 3,500, 4,500, 10,000 units, and I’m riding their coattails. I’m asking them what they’re doing. Well, that’s what I do. It just moves over.
Darin: Exactly. You know what? That’s fantastic. There’s always somebody that’s doing ahead of you that you can be learning from. There’s a certain point where it doesn’t have to be people get to a certain point where you don’t necessarily need it for the financial, but, look, we’re all on this Earth, and why not be productive?
So, you may have enough money to be financially free, but who wants to go just sit and do nothing, and then waste away? Be productive and give to charities or have an impact on other people’s lives. So, I applaud people that they reached a level that they could just cash in, but they choose to keep giving back. Not everybody looks at it that way. Some people may look at it like, “Oh, they’ve got so much. Why are they going for more?” Well, they’re creating more jobs. They’re helping other people come in. They’re taking investors’ money and they’re providing fantastic returns. So, there’s a lot of different reasons why.
Hire a Mentor to Shrink Timeframe
Darin: You brought up mentorship or hiring a mentor several different times. I know that you guys see value in it because you’ve been in the mentorship program for a long time. You guys are leaders in that mentorship program. And you mentioned two things. One is getting coaching, hiring a mentor and shrinking that timeframe. Then the second piece is surrounding yourself with like-minded people.
That, to me, I didn’t even really realize how important that was going to be, and how much of an impact that would have on me. But all of a sudden, being surrounded by hundreds of people that are focused on investing in large scale multifamily, and there’s not just one person to ask. There are all these people who ask like, “Who do you use for property management? And who do you use for attorneys? Who do you use for this?” That shortens that timeframe dramatically because there’s a comfort level that all of these other people have used these vendors, they’ve got skin in the game. So, that provides a lot of comfort level for somebody new.
Then secondly, you brought up, I don’t know if this is the right word, but I don’t think you can win a deal if you don’t partner with somebody that has experience in today’s market. So, where do you find those people, and where do you build those relationships? It was just a natural component of the multifamily mentorship group.
Jacob: Sure. There’s a couple. I’m going to mention a couple of ways. There’s a lot of mentorship groups out there. I can think of probably four or five that are out there. I only have experience with two.
Start Hiring a Mentor Now
Jacob: So, my advice would be for your listeners to go and start hiring a mentor. It shouldn’t cost you much to go to their introductory. Now, it will cost you to sign up for their mentoring pro package, but initially, go and attend their weekend or their evening. Spend five or six hours with them.
What I will do is go talk to them because I can tell you the membership that’s there is who’s leading the group. All these groups are led by one person, and they’ll tell you right away the DNA if you would, the composition of the group. The characters almost match exactly. So, that’s what I would certainly do.
Darin: Great advice. The group that Jacob and I belong to is a group based in Dallas, Brad Sumrok Group. We’ve both had very positive experiences. I’ve met some great syndicators and plenty of other groups as well. So, I think that that’s great advice is to, one, contact the group, but go attend an event and meet some of the people that are there. Get a feel for the experience level and the types of deals that people are doing.
Some people may be wanting to do a 20-unit deal and maybe one group is better for that, and another group is better for 100+ unit deals or everybody says that they’re national. But certain groups are more highly centralized in certain areas. That could be a determining factor as well.
Jacob: Absolutely. The information, as you already mentioned, you get from the group. You get attorneys and you get vendors, you get lenders. Then you get so many people that can help you. Here’s a perfect example. We are on a deal and we had a conflict with our attorney.
How Hiring a Mentor Helps in Various Ways
Jacob: We had to find another one. So, I put out a couple of feelers. We need three of them, and one we’re going to end up using, but the other two said, “Yeah. I’ve done a couple of Fannie Mae loans.” He didn’t do that many, but he sold it like, “Oh, a contract is just a contract.”
I can assure you the nuances of a Fannie Mae PSA are completely different than a strip shopping center or something else. We’ve done 16 deals so far. If we didn’t know any better, we probably would have said, “Yes. He’s a likable guy. He can do it.” I think you’re going to end up getting out negotiated.
Darin: So, you asked somebody and they’ve pointed you in the direction of the one attorney that had the experience.
Jacob: Yes. Eventually, we got somebody who has the experience. During the interview process, one didn’t have the experience but said, “PSA is a PSA. I can negotiate it.” There are so many nuances with these contracts. You need somebody who’s done or with a firm who can learn the nuances of PSA when you start negotiating under a Fannie Mae or Freddie Mac loan.
Darin: Absolutely. A couple of other scenarios that play in there. One, you said you’re really looking to start your property management company at 300 units, and then you got counsel, “Look, you should probably wait till you get to 1,000.” You didn’t only get the counsel, but you thought it through. Look, you’re already a business owner, sold multiple businesses for profits, and you listened to that advice and you took it.
Meet the Right Team After Hiring a Mentor
Darin: So, that’s something if you’re on your own you may not even have that advice given to you. You might have just stumbled along the way.
Jacob: Darin, you’re exactly right because I hadn’t seen it up until then. No factor would have led me to believe that that wouldn’t have continued if I wouldn’t have heard that advice. So, you’re right. I got that from Brad.
Darin: You’ve had the property management company for how many years now?
Jacob: Let’s see, 2017.
Darin: So, good four years. I know it was on your mind the whole time. Is it because you’re an operations guy that you wanted it? Or were there other reasons why you wanted to have your own property management company? Control?
Jacob: Well, I’ll add to that. I wanted to control the user experience. I’ve always believed if you take care of the ultimate end user in any business and the ultimate end user is who writes your checks, who pays for your services.
Darin: The tenant, the renter.
Jacob: It’s the tenant. Right. So, when I go on property or now our VP of ops goes on the property, we’re so aligned. If she wants to make a change, she can make the change on the spot. There’s no policy. And there’s no board. There’s no corporate anything. We can make changes on the spot. For example, we made the initiative in 2019 when she came on board to go everything electronic, all of our leases, applications, all through docu sign we’re paperless.
Darin: Paperless. From the tenant, everything that they have to do is paperless?
Jacob: Everything. Driver’s license, they scan the community rules, any addendums. Of course, the TAA lease is pretty easy to do.
Going Paperless and Automations
Jacob: All of the other forms that you have, that I get the sign-off, they get my key, so they get this, you will have them sign that when they come to pick up. So all of that is customizable and on the docu sign now. We’re completely paperless when it comes to the application and the lease process and the lease addendums, and all of the customer forms.
Darin: That’s awesome. Have you received feedback from tenants that they like that?
Jacob: They love it. It’s mobile-friendly, and they can also do it in the office with us. They can sit down and type it through an accept the lease, or put it in the application.
Darin: What about payments? Do they have to do online payments with you guys?
Jacob: I love that question because everyone used to tell me, “We have ACH,” and everybody would come in with money orders. They’re not the same. ACH is an electronic funds transfer, right? It’s a little more sophisticated to use ACH. If you have a checking account, you have to learn how to go on a portal. People still like to pay with money orders, at least in our space they do.
So, in 2019 as well, we launched the initiative that now our residents do the same thing when they get their money order. They go HEB, Kroger, Tom Thumb, ACE Check Cashing. There are 10 places they can go to, and they give them the cash, but instead of getting the money order, they get a receipt. Because, at any one of those places, it automatically goes into our property management software.
Smooth Transactions With ACH
Darin: So they’re still going into those locations, they’re paying, but instead of coming back with the money order that you have to take and deposit, they receive a receipt, and then you get the money the next day.
Jacob: Right, and they’re done. Exactly. They don’t have to say, “I’m heading to your office. I just got my money order. I’ll be late.” None of that. It’s over.
Darin: It’s a convenience for the user and it gets the money in there much more efficiently from your standpoint also. Now, I have to imagine that you wanted to have the user just set up their bank account in your system and have it be automatically withdrawn the first of the month.
Jacob: Yes. That’s been around for 20 years, ACH. It’s been around forever. We had it. It doesn’t solve the cash problem, the money order problem. It doesn’t solve it. Check scanners, we got rid of all that. You come in your office, the check scanners. We got rid of all of it, too.
Darin: So, are you still seeing pushback from the tenant that, “Hey, I don’t want to put my bank account information in there and have it withdrawn?” They still want to make the decision when they have the cash to go and get the money order rather than have it be automatically pulled out of their account every month.
Jacob: We’re not seeing pushback. They like it because they don’t have to come back to the office anymore. And they could do it whenever they want to, 24/7, Saturday, Sunday. They can make a payment at any location.
Darin: So, how did you do that with all those different providers? Did you have to work with each of those providers?
Jacob: It’s a feature from our property management software that we use. That’s another thing. I think as I mentioned, the experience, that’s been around for not a long time, but a lot of management companies don’t offer that. I guess they’re too busy. And I don’t know why. Maybe they don’t have skin in the game. I don’t know why, but I am always looking to create an advantage for our management company to service our residents better. So I do it from asset management, from an owner’s perspective, but I’m also not trying to tell our management company what to do.
Believe me, they do it much better than I could. Our leader has been doing it for 14 years, and she’s out of a company out of Austin. She has been doing it, had 14,000 rental units. And she came to work for us because she saw all of the great things we’re doing and where we’re going, but some of the low-level things, the knuts, and bolts let them do it. But some of the strategic things that impact the business that I feel like I can provide or reach out to somebody else in Brad’s group or whoever’s the group that they’re doing, then we try to help each other and say, “How do we make our management companies better?”
Sometimes these leaders, these management companies, don’t have the bandwidth to think outside the box, if you will, Just quiet time to think, “How can I make my management company better?” Because the business by itself, management is tough. I’ll just say it.
Darin: It’s tough.
Jacob: It is. So, we feel like as a team we have moved the needle on our management company.
End-User Experience Is Vital
Jacob: We’re so much better at acquiring and at taking over and operating properties. And we started just four years ago. We’re so much better, and we’re getting better every day. I think some of the latest results have shown that. So, we’re always trying together to get better every day.
Darin: I don’t know the person that manages your management team, but, look, she’s got a directive, right? She’s got goals and KPIs she has to hit, and she’s focused on that, and that’s what keeps her thinking. Sometimes she just doesn’t have the time to think of the outside-of-the-box things. If you could go to a conference or if you can go and meet with other syndicators that are further ahead than you are, and you could take ideas and present them to her, and hope that she grabs on to some of them and runs with them, that’s fantastic.
You’re the only person that I’ve talked to so far that has used the terminology user experience. You said it, no matter what business you’re involved in, if you could satisfy the end-user, you’re going to be successful. Most of the time, myself included, when people talk about multifamily compared to, say, single family, the benefits are you can scale rather than have 10 single family houses. You could do a 100 or 200-unit deal. And you could have onsite staff, third party property management staff. Then it’s a little time-consuming getting the deal done. Then depending on what the rehab is, maybe the first six months of rehab, but then you can let them manage the day-to-day, but they probably don’t have the same mindset as you as owning your own property management company that is completely focused on the user experience.
The Decade of Management Companies
Darin: I would imagine a third-party property management company is, I don’t know, if this is to be the case, but focused on hitting certain hurdles to make the owners happy and the investors happy. That helps them get other deals, and may lose sight of the actual user experience.
Jacob: I think that’s true. For example, when we get a deal under contract, our entire company knows about it. To help drive the business plan and to help drive the vision. Every time we go on a property tour, we take our VP in construction, CAPEX person with us. So, as they’re hearing the vision from the story and why it’s for sale, and if you go back to the office and put together a business plan for it, and as we march through the PSA, through rate lock and closing, they’ve already seen the property three or four times. They’ve already met with staff.
HR is completely engaged four weeks before to make sure we’re going to take over the property on day one fully staffed. Our director of marketing is involved on day one of the takeovers, even before the takeover meeting. So, I think that to drive that user experience, the only people who can drive it are the employees. I think the earlier we get them involved in what we’re trying to do, the better. Our equity company is right here. And our management company is right here. We don’t look at them any differently.
Today, it is the decade of the management company. We’ve heard that going around. It’s true. It takes both sides to make these deals work. An asset manager who knows how to hold thereins just right.
Hire a Mentor That Shows What Teamwork Is
Jacob: You don’t want an asset manager to go beating up on anybody, trying to tell them what to do and be there every week. At the same time, they need guidance. It’s like saying, “The management company is going to drive, but I’m going to ride shotgun as the asset manager.” Just make sure you don’t hit anything and make sure our research and ongoing analysis of the market is in line with what you can do as an execution.
Darin: That’s a commitment also because there are deals that you go after that you don’t win or do you win every deal that you have? So, that means that you’re pulling resources onto other opportunities that may not come to fruition. It sounds like you have the buy-in from all the people in the other divisions that they want to participate, and they look forward to. Now everybody is on board when you guys pull the trigger. That’s awesome. Why do you like multifamily and not other asset classes?
Jacob: I’ve come to find out that two things are going to happen when all hell breaks loose. People are going to put food on their table, and they’re going to pay their rent. They may not make their car payment, they may not make their office payment, their mini storage. They may not go on vacation, but I can tell you they’re going to pay their rent.
Initially, I mean, I had some experience with space through my property management company, property management software company, and I thought, “Oh, let’s just do apartments.” There was nothing special about it other than I liked it. I always felt like I had a management company.
Doing What Nobody Else Was Doing
Jacob: I like the team-building part of that. Other than that, there’s nothing significant that drove me to it.
Darin: Listeners, I want you to know something like how far these guys have come because he said he started with a 20-unit deal, 24-unit deal. When I got into the space, as I mentioned, they’re leaders in our group and just so far ahead. Now, they’ve done 10-11 deals, but if you go around to a lot of these coaches, hiring a mentor, and mentorship programs, they have big events, and they have big bus tours and take you out to properties.
All of a sudden, I saw these guys, Jacob and Arleen, they were setting up their own event down in San Antonio. They were setting up bus tours to go visit the properties. They are not only investing in the user experience for the consumer, for the tenant, but they’re also investing in networking, in the building of relationships with investors. I was very, very impressed with their conscious effort to build those relationships. You guys decided to do that. It was different from what anybody else is doing.
Jacob: Yes. We just decided it would be an opportunity to get a lot of investors who don’t live in San Antonio. We have eight properties here now. Nine, I think. So, it gave them a chance to come together and a lot of them know each other. It gave them a chance to do two things, hear from industry leaders. I’m referring to ReepCon. We did that in 2018 or 2019. We had some really good speakers.
Jacob: If I’m not mistaken, I think ours was one of the first that we brought someone from Fannie Mae to speak out of New York. I mean, they were the black hole. No one knows who they are. So, we were able to do our relationship.
Darin: Everybody gets loans from them, but through other parties and nobody knows who they are.
Jacob: Yes. So, It just gave everybody a chance to come and learn about the San Antonio market, drive their assets if they have invested in it, they’ve never seen before because no one gets to San Antonio. We felt like if we could give them a full day of C0Star people speaking and some others that we had and then some dinner afterward that it would just help build camaraderie and get to know us a bit better. I think it turned out well.
Darin: I enjoyed being there, and I walked away thinking you guys are a class act. You guys did everything topnotch, and the actions paired up with the reputation that you had prior, so it was a nice event for me to attend and feel good about investing with you guys. So, what do you do outside of work for fun?
Jacob: We are fortunate to be a part of not only Brad’s mastermind but a few other masterminds. So, we like hanging out with people who do what we do even if it’s outside of what we don’t do. We travel three or four times a year, which is maybe a little more, but other places. We’re in Dallas all the time. So, we certainly enjoy that. We have two kiddos, and one is working with us now.
The Next Big Stretch
Darin: On what side of the business?
Jacob: On the acquisition side. She got her master’s in London in nutrition. And she went to work in Miami and decided, “Well, I don’t really like this space, this nutrition space.” So she went to work for a group out of Miami as the owner-manager for two years. Now she’s working with us. So, it transitioned very well. Aside from that, we just enjoy being home and having people over and building relationships. That’s pretty much what we like to do.
Darin: Awesome. What’s the next big stretch goal for the Garzas?
Jacob: I think we’re going to keep doing what we’re doing. I’ve been a business owner, fortunately, and I’ve seen a lot of people get really good in years five, six, and seven, and we’re past that. Something magical happens when you get past 10 years. You grow up. It’s like turning 40.
So, you’ve had 10 good years already. That’s right. When you’re in your mid-20s, you don’t know anything. When you’re 30, you’re just getting your legs. You’re starting to hit the corporate stride or whatever stride. Then you’re 40, then you get it all together. You’re mature. You got some wisdom. You’re making some money. You’ve been around the block. So, that’s where I like to say after 10 years. So, we’re just looking forward to finishing out this year strong and moving up. Perhaps some ground-up development is within our reach as well, but in the meantime, we’re going to stay focused on what we do well and deliver what we can to our investors.
Darin: So, you brought up ground-up development. I’m going to hit upon that just quickly.
Be a Senior Player by Hiring a Mentor
Darin: I have seen in the last year and a half a transition from a lot of syndicators that were buying BC focused more on trading up to B+, A-type products, and also some starting to look at the ground-up development. Some of the reasons that I received from different syndicators is, one, if I could buy at the same, not the same, but just a little bit more ground up, then it makes sense I have less maintenance.
Then on the A,B,C side, people are saying that “Well, look, it used to be you buy an A for say five and a half, and then B for seven, and a C for eight, eight and a half.” Well, now, it’s compressed, and you’re almost on top of each other cap rate-wise. So, why not buy a better asset? So, what’s your take? Is that one of the reasons why you brought up the word ground-up or is it just, “Hey, try something new”?
Jacob: We’ve been approached by several people. I think they’re looking for some experience on the debt side, somebody with a balance sheet, and someone with a management company. We would only speak to people who were interested in a long-term hold with that because that’s how we would build through this whole process and keep it, but those have been the initial talks with us. There hadn’t been many, but we’ve been approached several times. We have to have the bandwidth to do it, and we’ll see if we can make that happen. If not, we’re going to surely focus on what we’re doing.
Darin: You guys have transitioned from when you started, trying to figure it out. Now, you’re the senior player, so you have other people that are going out and finding deals.
Closing the Fourth Property in Houston
Darin: They’re coming to you guys just like this ground-up opportunity and saying, “We’ve got this deal. Would you partner with us and be our experience, our balance sheet, help raise some capital, and possibly use the property management company?” So, how has that transitioned from you going out finding the deal to having somebody else be the boots on the ground and then bring you guys in?
Jacob: We purchased our first property in Houston in 2019. We met Moe and Samantha Hashim at the Sumrok group. They live there, and he’s got a very successful landlord business. He manages single family homes for lots of people in five different areas in the country. So, there were a lot of synergies we had between us. It is hard to get into Houston until we meet someone like Moe and Samantha. That gave us a leg up with our experience here, but he was there.
Darin: So it’s a win-win?
Jacob: It’s exactly how you look at it. We were able to get our first property within six months. Then we closed on it. Now, we’re going to be closing on our fourth property in Houston. Another couple, Jaime Gonzales and Hoa Nguyen, I mean, we’re going to close our third deal with them now. If they align together, the partnership will work. Everybody brings something to the table that the other one doesn’t have. So, those things do work out, of course.
Darin: Fantastic. How do people reach out to you if they want to get to know the Garzas more?
Jacob: The best place is email, firstname.lastname@example.org.
Darin: Listeners, these guys are a class act. They know what they’re doing. They’re in it for the long haul. You heard it, they treat their tenants, employees, and investors fantastic. Get to know them.
How to Reach Jacob Garza
- You tube – https://www.youtube.com/channel/UCB4MW_ReXgAZS5OleI-HSFA
- Apple Podcasts – https://podcasts.apple.com/us/podcast/darin-batchelders-multifamily-real-estate-investing-show/id1518830437
- Spotify – https://open.spotify.com/show/1RxjHog9p1NkAWgYbg7fJV
- Stitcher – https://www.stitcher.com/show/darin-batchelders-real-estate-investing-show
- Google Podcasts – https://podcasts.google.com/feed/aHR0cHM6Ly9kYXJpbmJhdGNoZWxkZXIubGlic3luLmNvbS9yc3M