Apartment Portfolios with Andrew Cushman

Andrew Cushman is based in Southern California, but invests mostly in the South Eastern states. On today's show we are talking about the distress in the market and what is driving the distress. Portfolios in secondary markets in states like Georgia and the Carolinas are seeing high occupancy and rent growth. To connect with Andrew visit https://www.vpacq.com/ -------------- **Real Estate Espresso Podcast:** Spotify: [The Real Estate Espresso Podcast](https://open.spotify.com/show/3GvtwRmTq4r3es8cbw8jW0?si=c75ea506a6694ef1) iTunes: [The Real Estate Espresso Podcast](https://podcasts.apple.com/ca/podcast/the-real-estate-espresso-podcast/id1340482613) Website: [www.victorjm.com http://www.victorjm.com/](http://www.victorjm.com http://www.victorjm.com/) LinkedIn: [Victor Menasce](http://www.linkedin.com/in/vmenasce) YouTube: [The Real Estate Espresso Podcast](http://www.youtube.com/@victorjmenasce6734) Facebook: [www.facebook.com/realestateespresso](http://www.facebook.com/realestateespresso) http://www.facebook.com/realestateespresso%5D(http://www.facebook.com/realestateespresso) Email: [[email protected] mailto:[email protected]](mailto:[email protected] mailto:[email protected]) **Y Street Capital:** Website: [www.ystreetcapital.com http://www.ystreetcapital.com/](http://www.ystreetcapital.com http://www.ystreetcapital.com/) Facebook: [www.facebook.com/YStreetCapital](https://www.facebook.com/YStreetCapital) http://www.facebook.com/YStreetCapital%5D(https://www.facebook.com/YStreetCapital) Instagram: [@ystreetcapital](http://www.instagram.com/ystreetcapital)

• 0:01Speaker 00

  Welcome to the Real Estate Espresso Podcast, your morning shot of what's new in the world of real estate investing. I'm your host Victor Manash. This is the weekend edition where we interview notable people from the world of real estate investing. Today is no exception. We have a great guest all the way from Southern California. Welcome to the show, Andrew Cushman.

• 0:17Speaker 01

  Thanks. Good to be here. Appreciate it, Victor.

• 0:20Speaker 00

  Well, great to have you here. Now, Andrew, you've been at this game a while, specifically in value add multifamily apartments. And I'm excited to have this conversation because you have a slightly different perspective from many, I think. But maybe before we dive into the details, perhaps give a little bit of your backstory and how you got to this point in your journey.

• 0:37Speaker 01

  Yeah, I took the traditional path into real estate and got a chemical engineering degree, but that was just a placeholder. After working as an engineer for seven and a half years, flipped a house in Southern California and made as much as I made all year at my engineering jobs, I said, that's it, I'm out of here. And then two years later, my wife quit her job and joined me full time. We did that for about four years. And then we said, you know, this is great, but this is actually a harder job than what we quit. And this was 2010. And we said, hey, we just had a huge crash. Everyone got foreclosed on and they're not going to buy a house for another five or seven years. And then after a big economic crash, you typically have a big economic expansion. So economic expansion coupled with no one buying houses, hey, rentals should do well. So we found a guy who had bought 800 apartment units. We

• 1:21Speaker 01

  hired him to kind of teach us the business. In 2011, we syndicated our first one, which was 92 units on the other side of the country out in Macon, Georgia. Been doing it full time since, acquired about 3,000 units. Some of those have sold off, of course, at this point. And it hasn't been without its challenges. But overall, it's actually been a really good business. So here we are today.

• 1:41Speaker 00

  I love it. Well, we are, I think everyone would acknowledge, in the midst of an apartment downturn. And I think that's been driven by a few things, a few different factors. Obviously, number one, increase in capital cost. A lot of folks that are in the business or got into the business with the wrong debt structure are in a world of hurt. Second, of course, is the amount of new supply that has squeezed a lot of those value add projects from both above and below. And then the third, I guess, is that immigration is actually way down. So our population right now is not growing. Now, maybe on a hyper local basis, it might be, but the growth that has been there traditionally is not there today. And so absorption rates

• 2:23Speaker 00

  are down for all of these reasons. And there's probably a bunch more headwinds that we could talk about. But those are some of the things that stand out as at least top of mind. What are you seeing?

• 2:33Speaker 01

  So you're, you know, you alluded to this, but performance in multifamily right now is very asset and submarket specific. The immigration issue, that's primarily affected, let's say, C-class and lower properties and less so larger kind of professionally managed properties like ours, because those types of residents tend to gravitate towards a fourplex or a 10 unit. That's not the, that's just mom and pop managed, and they accept rent in cash. And it's a little bit looser getting in and staying. That's where a lot of that distress has been realized because of the very, I'd call it 180 change on immigration. And that does kind of filter up a little bit, but that's where you're really seeing it.

• 3:17Speaker 01

  There may be some exceptions, some larger properties in Houston, where almost the entire demographic is kind of made up of those type of residents. But overall, that has surprisingly been really kind of a non-event, at least for class B and up that we've experienced. We're in North Florida, Georgia. We look in the Carolinas. So it's not quite as dramatic of an impact as a place like Houston. So yeah, so that's on immigration. You know, it's funny, when you go back to the great financial crisis in 2008, apartments entered that already in rough shape. Because in 2004, five and six, anyone who could bog a mirror could get a mortgage. So you had completely unqualified tenants moving out of their apartment

• 3:59Speaker 01

  and buying a house, and then buying a second one to flip it or make a rental. And then real estate caused the economic crash. And so apartments in particular had a double whammy of they went into a recession with terrible fundamentals, because occupancy was a struggle. This time around, it's different where, and I know some of us thought that's like the kiss of death to say this different this time. But what I'll explain what I mean in that the operating fundamentals for most apartment complexes are actually pretty good. The about 1,800 units that we currently manage are worst properties, 92%. We have quite a few that are actually running 98% full. These are in secondary markets in the Southeast

• 4:42Speaker 01

  US where we depend on net internal migration, meaning people from other states moving there, or even people moving from other parts of town to certain submarkets where the schools are better, right? So literally, people just moving 15 miles because the schools are better. And so positioning yourself in those micro markets makes a big difference. And so our experience there is the fundamentals of operating have been pretty good, not without challenges. Insurance has been difficult, wages have been difficult, expenses have been difficult, etc. But where the real distress is, is the loans that were originated in like 2021, 22, and three, on floating rate in short term, like five year terms, those are coming

• 5:22Speaker 01

  due and values are down 20 to 30%. And the interest cost is way up. And even though a lot of those properties are running just fine, that 94%, they can no longer pay off that debt. That has become a distressed asset and an opportunity for those who are able to pick them up.

• 5:40Speaker 00

  Absolutely. And you know, one of the things that we see is that in many cases, you talked a little bit about secondary markets. Most secondary markets have not seen at least the level of new supply that we've seen in the primary markets. I mean, if I think about, you mentioned Houston, but Austin, Nashville, Dallas, Phoenix, I mean, my goodness, the number of completions there is through the roof. I mean, it's going to take a few years for that excess supply to absorb. I don't think the secondary markets have seen it quite to that same degree.

• 6:12Speaker 01

  Most, yeah, I would agree. The ones that we are in have not. And actually, some of our best properties are in the most boring markets. I'll give you an example. We have one in a town called Valdosta, Georgia. It's literally halfway between Atlanta and Orlando, right on the freeway, 140,000 people. They haven't built a thing. And our occupancy is always high in 90s. Our revenue is up a few percent every year, just year after year after year. Now, it's also not going to boom, right? It's not going to go up 10%, but it's gone up over the last four years when a lot of the rest of the markets have actually been, like Austin, have been going down.

• 6:49Speaker 00

  Yeah, absolutely. So from an operating perspective, one of the things that we see is a lot of folks that have gotten into the value add play have, they've used the traditional playbook. I'm going to add washers and dryers. I'm going to juice the rents an extra 50 bucks a month, based on having in unit laundry. And sometimes the addition of those amenities works. That playbook worked for, gosh, more than a decade. And in those markets where there is new supply, it's not working because for an extra 50 bucks a month, you can get into a Class A brand new building with all the new amenities for only an extra few dollars. And it's those value add properties that are actually getting squeezed. Are you seeing

• 7:34Speaker 00

  that in your own portfolio? Or are you seeing it in others that are in some of the sister markets that you're in?

• 7:40Speaker 01

  Yeah, it's very, it depends heavily on the market. So I would agree with you that, you know, if you, if you're in a market where there's a ton of new deliveries, and you're buying a Class B lot property, and you're like, hey, I'm going to upgrade, you know, the kitchen and all this, you're kind of bumping up against competing with the lower end of those As. And the problem is, the developer who just delivered 200 units and needs to get them leased like yesterday, they're offering three months free, plus a big screen TV, and the rent's lower to begin with. And so, yeah, the residents, you know, the residents can do the math and be like, well, wait a second, I'll go live over here in this brand new property. Okay, it works out to an extra 100 bucks a month. But yeah, that's great. You put in a washer dryer connection. Well, this one has washer dryer

• 8:25Speaker 01

  connections and an arcade and a pool and, you know, pickleball courts and, you know, all this other stuff. So yeah, you definitely don't want to do value add where you're competing with that. The type of value add that works is, that is working now, is at least in our experience, I'd say called C plus to A minus property in one of those tertiary or secondary markets where you are not competing with new deliveries. And you have like classic units or lost to lease where you can do a light rent, light to moderate renovation, bring the rents up to market, like where they are to, should be today. We are finding that is still working in the markets, again, where we're not competing with new deliveries,

• 9:06Speaker 01

  and where we're able to obtain a property that has not, we had a huge rent boom in 21 and 20, 20, 21, and 22. And then it came down. And a lot of properties actually didn't follow it all the way up. So there's still some lost to lease there. And if you can find that, that is still working. I think by the time we get to 2028 and 29, the version of the value add that everyone was doing five years ago, that'll probably be back. That actually really wasn't value add. That was just kind of spruce things up. And while I'm doing it, the market goes up and oh, look, you know, value added, like, yeah, maybe we did, maybe we didn't. The market made a lot of us look smarter than we, than we actually were. So you have to be a little more careful these days.

• 9:46Speaker 00

  Hundred percent. Talk a little bit about what's driving dispositions. I mean, there's clearly those folks that are selling because they have to sell. Maybe it's because they're upside down, maybe because they don't have the cash to Bring in the additional equity needed at a refi event or at a term limit on a loan. Maybe it is their bridge loan is extended and pretended as far as they can and they can't get into permanent financing. And then there's folks that are aging out of the business. They've held this property for decades and the kids don't want it and they don't have any other real exit strategy. What are you seeing in the market? How's that shaping up?

• 10:26Speaker 01

  Yeah, it's a bit bifurcated. So in the 100 unit plus space, very little is trading in the kind of what you alluded to, what is trading is often forced, meaning you had a three-year loan, you extended it once, you extended it twice, we're done, the bank is forcing a sale. I've seen a couple of foreclosures. I've seen a handful of short sales. What's happening right now is we've been having conversation with lenders that have a loan on a property and they're forcing the sale. And literally this was earlier this week where they're like, well, our loan on it is 121 on a unit. And we're like, yeah, but the market value right

• 11:08Speaker 01

  now is 80 to 90. Like, we can offer you 80 something. They're like, yeah, but our loan's 121. We need to get a... And it's like, well, okay, sorry, we can't buy. So now we're still a bit of a stalemate. Most lenders aren't willing to take that write down yet. I think most of them are going to end up having to do that in the long run. And the cool thing is, is if you're a buyer, a lot of these are great properties. It's just the debt was structured poorly. And so you can pick up some great assets that otherwise wouldn't be sold. For those who look in the sub 100 space, let's say, you know, fourplexes up to 50, 60 units, that's both. That's where you've got people who didn't use debt properly and they're in trouble because of a loan rate reset or maturity. And again, to what you alluded to,

• 11:53Speaker 01

  the people are just getting tired. Operations have been draining the last four years. It was, you know, everyone got used to how it was way too easy the 10 years before that. That's not a normal market. The last four years have been tough. And so now you've got people who are just like, you know, I'm done. I'm out of this. Like, you know, there's, I won't name names, but there was a Texas syndicator a couple of years ago who literally just let go of everything and fled the country. Not quite to that extreme, thankfully. But yeah, you know, for people who are looking to especially hold long-term, there's some really interesting opportunities starting and coming in really, especially in that sub 50s space.

• 12:30Speaker 00

  You talked a little bit about property size. And from an asset management standpoint, if you're below that, I'll say 75 to 100 units, you don't really have dedicated management. The economics don't work. You really need to be north of 100 units to have dedicated property management, which means either you're managing across multiple buildings and hoping to effectively manage it as if it was a single asset, or you're doing third-party management, which in many cases just means you're delivering a substandard product and you're not really competing effectively with those folks that are really doing it at a high level. What do you see? Do you see those 50 to 80 unit properties as being in no man's land? Or are they competing effectively?

• 13:13Speaker 01

  They are a bit of a no man's land, but that's part of where the opportunity lies. We use basically a hybrid version of property management where we have our own like asset managers and kind of entire built out system. But then we do hire a third party to handle day-to-day like admin and payroll and all that. But we lead weekly calls, we do site visits, we're directing the show. So it's a bit of a hybrid environment. But you're right, if you're buying a 40 unit, and that's part of why we try to only buy 100 units and larger is because you can economically put a full-time manager on air and a full-time maintenance person. It doesn't really work on a 30 unit or 40 unit. So for those, the

• 13:53Speaker 01

  way kind of around that is, is if you try to accumulate a few of them over time in close proximity, and then you can hire people to be dedicated to. I know other operators who've built entire portfolios of thousands of units in like just Atlanta by accumulating 20 unit and 30 units here and 40 units there and 10 units there. It's more of a management headache, especially in the beginning. But if you can get past that initial hurdle, the upside is huge because here, you know, in addition to you start getting the efficiencies of management, and we actually do this where we'll buy a smaller property and kind of tack it onto a larger one and sell them together. Smaller properties tend to trade at much

• 14:37Speaker 01

  higher cap rates because of some of the inefficiency that you talked about. If you can buy, let's say, three 40 units within a couple of miles of each other, over time, doesn't have to all be at the same time, even in a three or four year period, and then sell them as one package, 120 unit portfolio, that portfolio, everything else being equal, will trade at a lower cap rate than when you bought them individually. So you are forcing your own cap rate compression, not relying on the market to do it for you. And that is a significant value add, not physical, but a financial value add for the smaller to midsize operator. And again, I really think that's going to be a potential great opportunity over the next, maybe 24 months.

• 15:22Speaker 00

  I love that. And that actually mirrors some of what we did post 08 in Philadelphia, where we built, gosh, dozens of small or multifamily apartment buildings, literally within a 10-block radius of Temple University. And so we were able to effectively manage that as a single asset, even though they were somewhat distributed. But the radius was so small that we could manage them effectively. Well, Andrew, this is great. If folks want to connect, if they want to learn more, what's the best way?

• 15:49Speaker 01

  Best way, the only social medium on is LinkedIn. And when I post, that is me posting and it's not, not AI. And then our website is vantagepointacquisitionsvpacq.com. And direct email is just [email protected] if you have any follow-up questions or anything like that.

• 16:09Speaker 00

  Well, Andrew, great to catch up. And for the listeners at home, definitely want to reach out with Andrew Cushman, Advantage Point Acquisitions. The links will be in the show notes. And in the meantime, have an awesome rest of your weekend. Go make some great things happen. We'll talk to you again tomorrow.