GI328: Transforming Properties into Cash Flowing Assets with Michael Margarella

GI328: Transforming Properties into Cash Flowing Assets with Michael Margarella

Michael Margarella is a seasoned real estate investor, broker, and attorney, as well as the founder of Next Play Investments, a real estate investment company. The company owns and operates apartment complexes, self-storage facilities, and other commercial real estate assets. They target undervalued properties and transform them into cash-flowing assets. 

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Transcript:

Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host, Charles Carillo. Today, we have Michael Margarella. He is a seasoned real estate investor, broker, and attorney, as well as the founder of Next Play Investments, a real estate investment company. The company owns and operates apartment complexes, self-storage facilities, and other commercial real estate assets. They target undervalued properties and transform them into cash-flowing assets. Thank you so much for being on the show!

Michael:
I appreciate you having me. Thank you. So

Charles:
Give us a little background on yourself. You have you’re involved in real estate on a few different fronts. So before becoming a real estate investor, can you tell us about yourself a little bit, prof professionally and also personally before you kinda made that leap over to investing? Yeah, for

Michael:
Sure. So I made the leap right around 2019 or so, and it was right around New Year’s in 2019, and I was at the gym working out, listening to podcasts and you know, normally listening to sports podcasts or fantasy football podcasts or whatnot. And it just kind of hit me, I guess as the new year had started that I wanted to find something that was a, a way for me to invest my money. I was a W2 earner living in New York City, so I was reaching the age where I wanted to invest. I wanted to diversify. I wanted to see, you know, what was out there. And so when I searched on, on podcast apps, I just figured I’d find things about the stock market or whatnot and just smarter stocks or mutual funds to buy. And I just stumbled across BiggerPockets and I listened to one episode about the burger strategy for smaller residential properties. And, and I was hooked. I just couldn’t figure out why everybody didn’t do this. I couldn’t figure out why it wasn’t more mainstream. And from there, I just dove in. And we, we’ve evolved over the years. We initially started in that residential space focusing on fix and flips and, and small burrs. And as you mentioned, we’ve since evolved into multifamily, which is what we focused on now and have focused on for the past few years.

Charles:
Okay, interesting. So when you were making that decision to go into it, you started with kind of residential and then how did that kind of transition work from going from doing, you know, fixed and flips and that type of information into doing you know, into going and doing what you guys are doing now and going into commercial investing?

Michael:
Yeah, for sure. And I think in the beginning, residential just seems less daunting. It seems easier, it seems more along the lines of what most people do, or at least how most people start. And that’s obviously what bigger box just focused on too. So that’s how I got my start. And after doing a handful of fiction flips and 10 15 burrs started to see that we would need to amass, you know, maybe 50 to a hundred single family or small multifamily homes for us to, to reach our goals. And the, the amount of work that goes into that one single family house, I don’t want to say it’s apples to apples with a larger apartment complex, but it certainly took a lot of time. And so putting return on investment aside, we just weren’t quite seeing the return on time that we wanted with some of those smaller projects.

Michael:
So we were looking for ways to, to go a bit larger. And so that’s when we decided to transition to the commercial real estate world just work on larger assets, work on things where if it took us, you know, six months or a year to find a deal, it was worthwhile. Whereas, you know, in 20 21, 20 22, the market was super hot in the residential space as we know. And so it was very difficult to find deals and on, on the handful that we were able to find, like I said, you know, the returns just weren’t in line with what our expectations were. So we ended up making the switch over to the commercial world.

Charles:
Yeah, interesting. Yeah. So can you kind of break down a little bit of what you guys are doing now? So what your current kind of investment strategy is your criteria for investment and and go over, I know there’s a few different markets that you guys focus on, if you can kind of let us know about those as well.

Michael:
Yeah, for sure. So we mainly target 50 to 150 unit apartment complexes now. We own roughly 540 apartment doors, and so we mainly structure those as partnerships with, with investors. And so each one’s a bit different. We have some syndications, of course, a fund and then just some joint ventures on some smaller projects. And we’re mainly targeting assets in the Midwest, so the Indianapolis market, Louisville Ohio as a whole. Those are the main places where we’re active. And so we started in Indianapolis just from a bur perspective there. So we built a whole lot of our relationships there. We built a lot of our contacts there. And so it made sense. It was an easy segue for us as we shifted into the multifamily world. And we really liked the Midwest just because, you know, I always call it the, the boring markets.

Michael:
They’re not the super sexy markets that we all heard about in 2020 or 2021. You know, the Midwest is just generally a bit more predictable on a lot of standpoint rent growth for one. So we all heard a lot about double digit rent growth during and right after COVID and the Midwest certainly saw some appreciation there. But certainly not to that extent. It’s more in that two to four, two to 5% range on the high end, and on most years you’re really gonna be in that two to 3% range. And so that’s what we’ve enjoyed is just, you know, even in the highs are our projections have stayed fairly stable. And then even in some of the lulls and some of the times where some of those sexier markets are maybe coming back down to earth, the Midwest is just a bit more stable and we’re still seeing by and large a a bit of rent growth there.

Michael:
And developments as well. You know, we see less new developments, less new supply coming out market in the Midwest than we see in some other markets maybe along the coast or things like that. And then expense growth, you know, that’s a big thing. And, and Florida and some of the other coastal markets nowadays with rising insurance costs and the rising cost of property taxes, those are things that certainly we’re experiencing in the Midwest, but not quite to the same degree as some of the other larger markets. So by and large, we just generally enjoy that, that boring aspect of the Midwest. And it just allows us to, to put forth more reliable projections for ourselves and, and our investors.

Charles:
Yeah, I always I kind of think that with the Midwest is a little bit more consistent because there’s not as much huge jumps into in in supply, you know what I mean? And I think you see in a lot of, it’s not just in the southeast, but I think in like a lot of different sunbelt markets, you know, the mid south as well, down in Texas, parts of this, you just get like an influx of like new supply at these different times. And this influx, it really disrupts everything where it kind of, like, you might get huge rent growth and then as that supply comes up before it slows down again, I mean, you see now the rents start going the other way, whereas I think, like you said, two, four, 5% consistent rent growth in the Midwest without these huge jumps that maybe we saw in some of these really hot, like you said, sexy sunbelt markets.

Michael:
Yeah, for sure. And, and that makes it very difficult for operators to predict and project for investors. And it makes it very difficult for for operators to perform to investor standards or, or even outperform because if you’re not sure if the market’s gonna go through a five to 10% rent boat, rent bump versus, you know, maybe a, a return to normal a correction, which is kind of what we’re seeing in the past year or two in a lot of the markets that you mentioned, you know, how can you possibly predict that for investors other than basically guessing? And, and there’s certainly a lot of money on the table there for those operators, and we know a lot of folks who’ve done very well in those markets. So I’m a big proponent of there’s no such thing as the best market. I’m not saying that the Midwest is the best, you know, place to invest, but I think for us it just offers that consistent and boring return profile, which makes a bit easier for us to, to project onto investors.

Charles:
No, that makes, that makes perfect sense.

Michael:
So tell us a little bit about, for your 500 plus units that you guys now have under management, can you tell us a little bit about how your management is

Speaker 3:
Structured there

Michael:
In these different markets, how you guys handle your property management? Yeah, so we are we’re a third party base, so we do work with property management vendors at this point. And so when we first started our very first apartment asset in Indianapolis, we actually worked with a property manager that was managing many of our single family and small multifamily properties. And they were not necessarily multifamily property managers, but they were willing to grow with us and we didn’t really know any better, right? We didn’t know many multifamily property managers and we, we knew, liked and trust this property manager and they performed very well for us on our portfolio. So we, we went that route and so we’ve kind of grown with them. They’ve since went into Louisville with us when we went into a new market, they opened a new office there, so that’s worked out well.

Michael:
And then, you know, we’re also big proponents of having two of everybody. So we do have another property manager that we work with in Louisville somebody who’s even more local than than the manager I mentioned. And then in Ohio we have another property manager as well. So as management is super important, that’s something that we focus quite a bit on in the past few years here, is just ensuring that we’re doing our best to to keep revenue as high as possible and, and doing our best to minimize expenses. And there’s so many little things that, that hit the books where if you’re able to mitigate those expenses or you know, maybe elong get the time to, to, to realize those expenses, it makes a pretty big difference, both from a cashflow perspective and then of course, from a valuation perspective, when you’re finding a new going into a different area or you’re finding a different property manager, since you guys work with a few of ’em, what have you found to be routes to finding good managers?

Michael:
So how have you found them and then kind of what have you looked for in that manager initially that kind of made it to the short list before you actually hired them? Yeah, I’d say referrals are super key. So we have a, a good network now of, of other multifamily investors. And that’s our first stop is, is who these folks are working with and, and do they enjoy working with the property managers. So that is something that we’re gonna put the most weight on before we actually get on a call with a property manager or do you know, an interview with a property manager. So and then as far as working with the property manager themselves, I’d say communication is, is probably the most key. Like anything else, things are going to go wrong. They’re not going to be perfect all the time but there’s very few problems that can’t be fixed.

Michael:
And so long as we have some, some honest feedback and so long as we’re getting notified of the problem on, on a timely basis, we can take steps together to, to mitigate the issue. And so I think that’s super key. And then communication in the sense of what type of rapport are we going to have on a weekly basis, on a daily basis, on a monthly basis once we close. So we like to have more frequent calls right after closing just to ensure that we’re onboarding the asset in a, in a proper manner. And then maybe we could back off those frequent calls and, and do more weekly or monthly calls as we start to stabilize, as we start to feel better about the transition. But ensuring that the property manager is open to that and has the capacity to do that for us is also a big factor.

Charles:
When you guys are buying a property, you are initiating like a value add process to that property. How are you kind of splitting up roles when it comes to the project management? Is your firm is, is next play really kind of taking the reins on that with working with contractors? Or are you kind of putting some of that on the, on your property manager as well?

Michael:
Yeah, we’re certainly involved every step of the way. And so we very much look at our job as, as managing the property manager. And in reality, nobody cares about these assets more than we do. And so we really, you know, like the property managers that we work with, but us from an ownership perspective, we know that really the buck stops with us and, and we’re the ones that need to drive the value. So we’re the ones spearheading those decisions spearheading you know, which lanes to take. And then if, if we’re seeing that there is a delay in perhaps a property manager or contractor or vendor in, in realizing those goals we’ll get on a call or we’ll figure out what the, what the the stunt is and, and we’ll try to do our best to figure out a way around it. Nice.

Charles:
Okay. As a real estate broker, I mean you, you’ve, you know, you source a lot of dealers yourself through brokers. I mean, what do you think many investors do wrong when they start speaking to brokers and really building that relationship? I would, I’d say, you know what I mean? Like what, what do you think are some of the missteps they make where maybe they’re not taking credibly by that broker they’re not given the time that maybe they deserve. I mean, what do you think are some of the things that successful investors do that maybe new newbies or amateur investors? Don’t, don’t do out of the gates. It,

Michael:
It is difficult making those broker relationships when you’re first starting out because one of the first things that brokers generally want to know is how many apartment complexes do you own? How many units do you own in the area? You know, what have you closed recently? And it’s, it’s a bit difficult for somebody who’s just starting out to, to have those conversations, but it’s certainly possible. And I’d say you just have to show the broker that you’re prepared. You have a team in place, you know, potentially a partner, whether it’s some sort of key partner that does have experience, you have management in place because generally brokers want to know, you know, if you are going to close, who’s gonna manage the property, who’s gonna help you during due diligence? They might ask you, brokers might ask you about your lending relationships. Are you plan to go maybe Fannie Freddie on this?

Michael:
Are you gonna be working with a local bank or a credit union? And so just having those pieces in place and, and showing that you’re prepared, showing that you’ve put some thought into it, I think is, is key for some newer investors when making new broker relationships. And then also I’d say just try to make the conversation a bit more organic. I mean, it’s, you don’t have to be super transactional where you’re just calling the broker about 1, 2, 3 main street and, and that’s it. Because chances are, whether you’re a new investor or a seasoned investor, that one broker call about that one specific property probably isn’t going to lead to a closing. It’s building a relationship and getting to know the broker on a more personal level. And after that first outreach, maybe putting the broker in a CRM and and following up with that broker, whether it’s monthly or quarterly or, you know, even nowadays we’ll send some holiday gifts to certain brokers and just doing little things to try to stay top of mind with brokers and, and try to make it a little less like a one stop experience and make it more fluid where you’re speaking with these brokers on a quarterly basis.

Michael:
And now, even if you don’t necessarily own a whole bunch of units in the market, at least you’re top of mind when new opportunities do, do come about for brokers.

Charles:
Yeah. One thing, when I think I’ve spoken to commercial brokers, one of the first things they’ll say is that they can tell after they send the first deal out because it’ll weed ’em out they won’t respond. So you’ll have new brokers, new investors who spend all this time building it up and they won’t respond, even if it’s a quick thing saying why it’s not right for them. And usually the deal gets sent out, it’s not something within that investor’s buy box or it’s somewhat near it, but there’s not even a response. And then they’re like, okay, well that’s been, you’ve been moved down the list because no matter what it is, if you’re asking for deals and they come in, you have to give some sort of feedback, you know, rather, Hey, don’t send two weeks later, you know what I mean? Feedback on the deal.

Charles:
And that’s one thing that I guess I’ve seen too from some people that I’ve coached before and they haven’t responded, even if it, they’re like, well, it doesn’t fit where, well, if they individually mail it to you, it’s not on like a huge drip, tell them why it doesn’t work or whatever it might be. And that continues to build a relationship that you actually looked at what they sent you and they’re more likely to send it to you in the future even if you didn’t move, move forward with it. That’s kind of things I’ve heard and seen. Yeah,

Michael:
That’s a really good point. And brokers love feedback because a lot of times they’re using that feedback back with their sellers and telling their sellers, Hey, you know, we were priced here. Here’s where, you know, we thought this, this asset was valued. You thought it was a bit higher. Here’s what the market’s telling us. So it, it is valuable feedback, it could help the asset trade closer to where your valuation is. And like you said, it’s basically just another touch point for, for the broker as well, where now they’re hearing from you again, they’re seeing that you’re on your Ps and Qs and it’s just making it more likely that you’re gonna be able to build that relationship out in the future.

Charles:
So inside, when we talk about commercial real estate, there is several different main asset classes within that, right? And I find with a lot of different syndicators that they’ll be in multiple different niches and stuff like this. What is kind of, what is the real benefit of really narrowing down your focus into one specific real estate class? I mean, and how does that help you and your investors and your team by just going really, really deep, you know what I mean, really narrow and deep into one niche? Yeah,

Michael:
It and I think that goes back to, to shiny object syndrome. It goes back to, to picking your market, not being into too many markets. And it’s okay obviously to to own things in multiple markets, but like you said, really zero down on that one market first, really own that market and then only expand once time has come where, where that market is almost second nature to you. And so I think the same the same methodology applies to, to asset classes, right? And so just from a time perspective to zero in on one asset class and not just multifamily, like within multifamily, are you buying a class multifamily or C class multifamily, because those are almost completely different assets in and of themselves. And from a broker perspective too, there’s usually different types of brokers that are transacting on the A class side versus the B and the C class side.

Michael:
So even those relationships are going to be different. So there’s a lot of value in, in saving time on your side, but also in just ensuring that you have the right audience. Because if you’re targeting B and c class value at apartment complexes, but most of your CRM is with a class apartment brokers, it might be a bit difficult for you to find what you’re looking for. So zeroing in makes things so much easier for you, it makes it easier for your team because they know what they’re managing, their expectations are, are on the same page as you. And it also makes it easier for your, your vendors, your brokers, right, to find what you are looking for. And then once you close what you’re looking for it makes it all lot easier for you to hit those projections like we were talking about earlier, because now you’re not going from, you know, c class apartments to a class apartments or, you know, over to car washes or, or into self storage. You’re just concentrating on one thing where you know this asset class very well, you know this market very well. So sure, your projections are never gonna be right on the button. But the better you know, the asset class, the more predictable you, you can have that performance be.

Charles:
Yeah, that makes perfect sense. I wasn’t even thinking about that. But yeah, once you get into an asset class, especially multifamily, there’s so many different parts of it. And the same thing too to add what you said about brokers, but say property management, I mean, if you’re somebody that tells you that an a class property manager is probably not gonna do well with your c class asset, I can almost guarantee it. I mean, it’s completely different clientele, even though it seems like you just sign leases and collect rent, but it’s a completely different clientele. It’s gonna be a different property. It’s, it’s a whole thing. And like anybody that says they can do it, I mean maybe walk away because that is, they’re completely different animals. So like you’re saying, if you, you’re like, oh yeah, we buy apartment buildings and this one market.

Charles:
But the thing though is that now I have to get two A apart two really property managers, right, between these and that it’s really hard as well. Everything with, you’re raising money from your investors. ’cause If you’re, yeah, you invested in a class with us and now we’re buying a C class, well the returns are gonna be different, but there’s also maybe gonna be a little bit more volatility in those in the collections, volatility in your distributions, you know, all the way down the chain. So it’s one of those things where I think it changes what you’re really investing into, even by just changing classes within it. So that’s, that was a great, that’s a great point.

Michael:
Yeah. And, and we’re very risk averse and investors generally are very risk averse. So they want to know, have you done this before? Like, have you executed this exact business plan? So we had an interesting opportunity about a year, 18 months ago or so where we were able to purchase an apartment complex located right across the street from one that we, we owned. And it was the same asset class, it was the same, very similar size. The same manager was going to manage it for us. And, and that was a very popular offering for, for all those reasons. It just took a lot of those questions outta the equation. There’s always unknowns, of course. But the fact that it’s located right across the street in a market that we had a, a, a large presence in already, and we knew, we knew that submarket very well that made us feel very good and it made our partners feel very, very good as well. Yeah,

Charles:
I think one of the real benefits when you start scaling in real estate, even if it’s a small like multi-family residential portfolio type thing, once you start putting more properties in there, stuff starts running smoother. And that’s how it was with me when I started building a portfolio, a small one initially, and it was like you know, everything, you start saving money, you like, you’re, it’s easier to get good vendors, it’s easier to get better management. It’s lower rate, you know, better to, it’s easier to get landscaping that’s less expensive. Everything starts really working and you start seeing that scale after you get multiple properties that are like, you know, similarly close to each other, or if we’re doing larger apartment complexes that can be a little bit wider of an area. But when that scale really starts happening is, is when you’re buying, I think, multiple properties in a nearer area, and that’s where you start seeing stuff really click and you start really see it in savings. And like you said, when you’re buying that property now, you can kind of sharpen that pencil a little bit more when you’re going in for that offer versus someone that’s the first time in that market or the first time in that part of the city, whatever it might be, because you know it, you are willing to take a little bit more, but you also have a team behind you and you’re probably paying less per door and on expenses because you have that team that’s already there

Michael:
With you. Yeah. Economies of scale. That, that’s a great point. And we always say, and you could apply this to vendors, you could apply this to investors. We always say doing a one-off with somebody is never gonna make you wealthy, right? So partnering with a syndicator on one deal, you’re never gonna be super wealthy on that one deal. And a vendor’s thinking the same way, partnering with this one apartment complex owner on, on, you know, a landscaping contract that’s not gonna make, you know, anybody wealthy. But if you start doing it multiple times over again, successfully five, six times, just like you said, well then things start to snowball and that’s when the real wealth happens. Yeah. Michael,

Charles:
So you’ve been in more an investor real estate in general from residential until what you’re doing now, commercial multi-family several years. I mean, what are common mistakes you probably have seen real estate investors make? Maybe yourself, maybe people on your team or just other investors in general? Yeah,

Michael:
I’d say not operating things like a business from day one. I think it’s super important to treat the real estate sector generally as a business and not so much a hobby. I think I see a lot of real estate investors kind of want to be a, a fly by night real estate investor and perhaps they have a super busy day job or whatnot, and that’s completely warranted. And maybe there, there should be a conversation there about that investor being a bit more passive or, or at least on the passive investor side. But if, if folks are looking to be active, I think you really need to treat real estate like a business. You need to start, start to operationalize it from day one. So build those systems, build those processes, and you know, in the beginning, you, you might not really have the things to fill those systems and processes, but grow into it. So even if you don’t have, you know, a lot of deal, deal flow right away, you don’t have a lot of due diligence that your team is doing. You know, bill out a checklist, make relationships in your market, talk to other investors about what they’re seeing, talk to other brokers and just do your best to, to stay within those systems and processes and just try to move the ball forward every day.

Charles:
Yeah, that’s, that’s a lot of great information. So for for investors, for listeners that wanna learn more about you and your business, can you give us a little bit of how they can reach out to you and what’s the best way to contact you? Yeah, for

Michael:
Sure. I think the best way to contact me is hop over to our website, it’s next play investments.com. You can reach out to me via email and we’ll be happy to chat

Charles:
Gel. Thank you so much for coming on today and looking forward to connecting with you here in the near future.

Michael:
Thank you. I appreciate it.

 

Links and Contact Information Mentioned In The Episode:

About Michael Margarella

Next Play Investments is an established private equity company that focuses on commercial real estate. The company owns and operates apartment complexes, self-storage facilities, and other commercial real estate.

Next Play Investments targets undervalued properties and transforms them into cash-flowing assets. The company accepts investments from private investors seeking to passively invest in real estate.

Michael, the founder of Next Play Investments, is a seasoned real estate investor, real estate broker, and real estate attorney. The team alongside Michael features a CPA, LinkedIn coordinator, and portfolio manager.

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