What makes multifamily properties more attractive to investors than single family? Scale is just one key difference. On this episode, Arn Cenedella, Founder of Spark Investment Group, joins the show to make the case for multifamily investing.
Arn also shares powerful insights on finding success in multifamily investing, adding value to properties, and the multifamily landscape in Greenville, South Carolina.
Click the play button above to listen to the conversation.
- Why investors should consider multifamily properties versus single family or other real estate.
- The story behind Spark Investment Group and their mission.
- What real estate syndications are, and how they work.
- How investors newer to multifamily can avoid some of the biggest pain points as they navigate the landscape.
- Arn’s thoughts on current trends in multifamily, and why the Carolinas are so attractive for multifamily investment.
- Successful strategies for adding value to a multifamily property.
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Spark Investment Group helps people invest passively in multifamily real estate syndications so they can create passive income and achieve financial freedom. If you’re looking to build wealth through real estate, join the Spark Investor Club.
About The Multifamily Investor Podcast
The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses attractive offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.
Scott: Hello, and welcome to another episode of “The Multifamily Investor Podcast.” Scott with you once again with another fantastic show on tap. And on today’s show, we’re going to be really trying to answer the big question, why multifamily investing? And joining me to help answer this and so much more is Arn Cenedella. And Arn is the founder of Spark Investment Group and he’s a real-estate expert with more than 4 decades of experience, including 35 years as a realtor navigating the unique real-estate landscape in Silicon Valley, California.
So, there’s a lot to draw from here, and we’re so lucky to have him. Arn, welcome to the show.
Arn: Hey, Scott, thanks for the warm introduction, and looking forward to chatting with you and hopefully, providing some useful content to your listeners.
Scott: Of course, of course. And thank you again for being here. As I said, we want to ask why multifamily. And so, that’s my first question, why invest in multifamily properties versus single-family or other real estate? You know, on your website, you have like five reasons for multifamily.
So, I’m just curious if you could kind of tease out your perspective on that.
Arn: Sure. I hope I can remember all five of them but…so, number one, we all know the United States of America has a housing affordability crisis. In every major metropolitan area, housing affordability is a real issue for many people. So, number one, apartments are kind of the most affordable housing available to most people in this country.
And so, there’s strong demand for affordable housing which multifamily fits. There’s certainly a undersupply of housing. So, between the strong demand and undersupply, it makes a good place to invest money in. So, I’d say that’s number one, it’s affordable housing, it’s a necessity and will always be in demand, regardless of how the world changes.
I think number two is our society is much more mobile today, more global, more mobile than it was 30 years ago. When I was a young guy, you know, I think the American dream was own the big house at the end of the cul-de-sac where you’re going to raise your family for 30 years in suburbia, where I think the dreams and aspirations of younger folks today are, “Let’s live in five different places in the world and let’s travel and we’re mobile.”
And now with hybrid work you can work from anywhere over the world. So, I think we have a more mobile society and I think that certainly plays into more a rental model of providing housing. And then you can get just simply to the fact that interest rates are extremely low. So, if you can buy a multifamily asset, which is a tangible asset, finance it with long-term fixed rate debt, add in a significant amount of inflation, I think the dynamic set up for a good investment moving forward.
And then probably the last one is number one, as you scale up into multifamily properties, you can get more professional, more cost-efficient property management. So, as you scale up, you, as a property owner, you’re able to obtain less expensive and actually better property management than you typically would under a portfolio of single-family homes.
And I would say property management is one of the real keys to how efficient your real-estate investment turns out. Poor management will sink any deal, professional excellent management will make just about any deal sing.
So, I think that’s four. And what else could I say? Oh, let me not forget tax benefits. So, investing in multifamily real estate, you get depreciation through cost segregation, you can use bonus depreciation. So, much of the income you get from real estate is sheltered by depreciation. And then, when you ultimately sell the property, you’re going to be taxed at a lower rate.
So, it’s a very tax-efficient vehicle to invest. And for high-income individuals, tax burdens can approach 50% for many of you between state and federal. So, trying to navigate that tax scene makes a difference.
Scott: Absolutely. And I couldn’t agree more with all of your points there, Arn. That’s why we’re doing this show because multifamily is such a fantastic area of real-estate, specifically to invest in. Now, you founded Spark Investment Group, can you tell a bit about the story behind it and really what’s your mission there?
Arn: Yes, great question. So, I accumulated a sizable portfolio of rental properties throughout my real-estate career. And some were local to where I live, the Bay Area, though now, for the past seven years I’m in Greenville, South Carolina, and love it. But at a certain point, two, three years ago, I decided to move to multifamily and it’s for some of the reasons we just covered, better cash flow, less hands-on property management, better property management, and affordable space.
So, I transition pretty much my entire rental portfolio into multifamily assets. So, to date, I probably invested in seven or eight multifamily deals as a limited partner and I’ve also been the lead sponsor or operator in about five multifamily deals, totaling between the two of them maybe about 1,500 units.
So, I’m sold on real-estate investing. It’s provided me a comfortable life, it’s provided me good work-life balance, I have many passions and activities that I like to pursue. And so, I think my mission is to help people put their money to work best efficiently to them. And the beauty of multifamily syndication investing, the beauty of passive investing is you invest your money with professional real-estate operators and then you don’t have to worry about it.
So, you don’t have to worry about the hot-water heater going out or the furnace blowing up, you simply make an investment, you get regular monthly or quarterly distributions. And, as we all know, life today, 2022, in America and the world is extremely hectic, people just don’t have enough time between their W-2, career, church, family, friends, community, literally dance lessons, time is really the most precious commodity.
So, passive investing allows people to put their money to work, avoid the volatility of the stock market and crypto, which I’ll admit I don’t understand so I don’t invest in crypto, but that’s just me, and allows you to generate some income while you’re sleeping, while you’re not working, and it allows you to kind of live a more complete full life and do the things that really make a difference for you.
Scott: Right, that financial freedom, which is just so powerful and something that so many people, you know, want and would love to have. Can you break down a bit, because you mentioned syndicates, and can you break down what real-estate syndications are and how they really work for those who might be unfamiliar with the landscape there?
Arn: Sure. They’re not as well known as they should be. So, I think, from a broad perspective, a syndication, a real-estate syndication, is basically a group investment. So, let’s say you have a 20-million-dollar apartment building and you can get a loan for 15 million, so, you need to raise 5 million of capital.
You go out to various investors across the country and the world and they each contribute 25, 50, 100,000, kind of whatever they feel comfortable with. And we pool all the investors’ money together to raise the capital to acquire the assets. So, number one, it’s a group investment consisting of…it could be from 20 to 250 investors, just depends on the size of the deal.
So, it’s basically a group investment and, within this group, there’s generally two parties. There are the limited partners. Those who are the investors, those are the people working jobs, raising their families, who invest the money, turn the capital over to the general partners, and the general partners are the real-estate experts who run the deal, take care of buying the property, inspecting the property, renovating the property, running all aspects of the operation, collecting the rent, paying the bills, distributing money to the limited partners.
So, limited partners are the investors, general partners are the ones in charge of the deal. And typically, in a syndication, the general partnership may consist of five or six, seven individuals, all who have a unique skill set. So, like, for example, I’m good at certain things, I’m not good at other things.
And so, the general partnership team is put together with people who are experts in a particular aspect of the multifamily business. It could be acquisition, it could be financing, it could be property management, it could be asset management.
So, you put together a professional team that covers all aspects of the operation of the property. The other reason the term is limited, limited partners kind of have no liability for the investment, meaning they’re not signing on the note to the bank. They don’t owe the money to the bank, the general partners are the ones that sign the note.
So, the limited partners invest, the general partners run the operation. And we typically send out monthly newsletters to let investors know how the operation is going, we’re always free to talk or communicate via email and phone if they have questions. Limited partners invest, the general partners run the deal, limited partners receive regular distributions from the cash flow, and then they receive the lion’s share of the profit when the property is sold.
The general partners will receive a share of the profit when the asset is ultimately liquidated.
Scott: Thank you, Arn. Yeah, that really breaks it down perfectly. And I’m curious, you know, you mentioned that you’ve been a part of a number of deals and you’ve kind of been on both sides of it, both as an LPN, a GP. From seeing both sides of it, are there any, I guess, keys or insights that you’ve seen when you’re looking at a deal in that structure that makes you think, “Hey, this is going great. This has done well,” things to look out for from the investor side really?
Arn: Sure. So, I would say, one, you want to be sure that you receive regular communication for your general partner. Right? Whether the news is good or bad, right, people want to know what’s going on with their investment.
So, number one, the lead operator needs to have a mechanism of regular communication be accessible. In addition, we project that we will make certain distributions monthly and quarterly. So, from an investor’s point of view, it’s very important that the operator perform as indicated.
So, if we close on an asset in December and we indicate to the investors, “Your first quarterly distribution will be in April,” you will want to make sure you get that distribution in April and that things are going as they did. Now, that’s, of course, after you’ve made the investment. Prior to the investment, I think you have a lengthy conversation with one of the lead sponsors.
And I think there you talk to him or her about their experience with multifamily in general but also with the particular location. So, I’m in Greenville, South Carolina, I feel very strongly that I know the markets in the Carolinas but I won’t pretend I’m an expert in Phoenix, Arizona.
So, if you’re investing with me, you would want to know that I know the local markets that I’m investing in. So, some kind of local knowledge. And then also there’s different types of properties. So, you can have fancy, new, downtown, high-rise, Class A, expensive apartments that are brand new.
You can also have a less expensive class-C apartments that were built in the ’60s that are kind of affordable housing, workforce housing.
Well, those are kind of two different animals. How you interact with the tenant that’s paying $4,500 a month for a nice downtown apartment is different than how you might interact with a tenant paying $700 a month. And I’m not saying they deserve different respect, it’s just a different clientele, and, so, it’s a different property structure.
And so, I think you’d want to know that your operator has experience in that particular type asset. So, like, for me, I typically invest in kind of Class B class-C properties, a little bit older, a little bit less expensive, a little bit more affordable. So, if I was, all of a sudden, to come up with a deal on this fancy 70-story apartment condo in downtown Miami, a potential investor could reasonably ask, “Well, Arn, have you run any buildings like that before?”
And I’d have to honestly answer, “No, I didn’t,” so, I might not be the right guy to run that deal but in the 1970s affordable-housing type property. So, what type of property do they run? What areas do they know? And I think the other thing is you have to get a good sense and I think you have to rely on your life experience when you’re talking to these operators, when you’re listening to the webinars, when you’re receiving communications with them, what’s your gut sense that you get for them, right?
We all kind of devise a little spidey sense about how we evaluate people, can we trust them or not? Are what they telling us make sense or does it sound strange? And so, I think I would also encourage potential investors to rely on their gut, their life experience, to evaluate, you know, kind of character and integrity and, “Is this somebody you can trust and do business with?”
Scott: I think that is fantastic advice, not only for multifamily investing but really any kind of business or life. You know, trust your gut, trust your feelings on things. And then when you have sort of the other signals of, “Is there that communication? Is there that experience? Is it a good team? How’s the deal structured?”
All of these kinds of things really go into having a successful experience there. So, I want to ask you, because you mentioned the Carolinas, your multifamily portfolio has a significant focus on the Southeast, what makes these attractive locations from a multifamily-investment standpoint?
Arn: Sure. The Southeast, the Sun Belt, is booming. And basically, when you’re an investor, I think you look at a couple factors. One is population growth, where are people moving? And people usually follow jobs, so, you look at employment growth.
Where are companies moving, open facilities? So, we all know Apple just went to Austin, right, they left. You know, so, clearly, there are going to be people and jobs moving to Austin. So, in the Carolinas, there is a strong net population migration in, so, the population’s increasing, which just increases demand for housing.
Employers are opening here. South Carolina, for example, is the second largest automotive state in the country. We have BMW, Mercedes, Volvo, they provide great, you know, high-skill, high-tech manufacturing jobs, which are perfect for kind of a tenant demographic.
So, population growth, job growth, relatively low taxation in the Carolinas compared to elsewhere, relatively friendly landlord-tenant laws. So, I’m not really aware of any cities in South Carolina or North Carolina that have rent control, for example, where other major cities do.
And I’m not making a political statement, we’re just talking investing.
Scott: Yeah, objectively, yeah.
Arn: Right? And so, I think those are the main factors. Population/job growth, reasonable taxation, and fairly reasonable landlord-tenant laws, and a relatively affordable housing market. So, I think all those factors drive people to the Carolinas and make it a good place to invest.
Scott: You know, anecdotally, I’m from Ohio originally and I can’t tell you the number of Ohioans I know going down to the Carolinas constantly. So, there you go.
Arn: Yeah. So, I’m basically a lifelong California kid but I did spend 10 years of my life in Queens, New York, kind of high school, college, and grad school. And I’ve kept in touch with these friends of mine and, you know, this is now 40 years ago, 50 years ago, and a lot of them have moved either to the Carolinas, a lot of times to like Raleigh, Durham, or Cary, or into Florida.
So, there is definitely a net migration south, and it just makes sense where people are moving is a good place to provide housing.
Scott: Absolutely. Can you expand a bit more on the types of multifamily properties you have? Because I know you were talking about, you know, Class B properties and that but what’s really the size and the unit mix of buildings that you’re invested in?
Arn: Thank you. So, well, let me back up. So, I’m a long-time real-estate investor but I’m relatively new to the multifamily space. So, for 35, 40 years I did single-family rentals, knew how to do that. And within the last couple years, I’ve moved to multifamily.
And I believe there is kind of a fundamental step-by-step growth process where you go up each rung of the ladder sequentially. Right? If that makes sense.
You don’t make a big leap, you try something new, get some experience, and you keep moving on in kind of a steady, determined, upward direction. And so, I say all that to indicate most of my multifamily deals to date have been relatively smaller. So, within my portfolio now I have a 43-unit property, a 30-unit property, I have two 12-unit properties and a 6-unit property.
I have been associated in larger acquisitions, 150-200 units, but on those deals I’m not the lead operator, not the person directly responsible for the day-to-day activity. So, on the ones that I am the lead operator, they’re kind of smaller 16 to 43 units, generally could range in age from maybe 1980 to about 2000.
And they’re typically garden-style apartments, which means they’re one or two-story buildings, sometimes they’re townhouses, but they’re relatively spread out, they’re not dense like urban apartments, they’re more suburban, garden-style apartments. Yeah, all of them are either one or two stories that I own.
Scott: And with these properties, everyone wants to, you know, find out, “How do I add value?” you know, “How do I find a deal that’s going to,” you know, “improve the property and then, obviously, improve my returns as a result?” So, what are some of the successful strategies you’ve seen or maybe even implemented for adding value to properties like those?
Arn: Yeah, great question. And let me make an analogy. Everybody’s familiar with the idea of fix and flipping a home, right? You buy a home that’s kind of a little dirty and dungy and you clean it up and you fix it up and you sell it for a profit and you move on. And really, with apartment buildings, it’s no different.
So, many times we do cosmetic improvements, so, we’ll go in and install luxury vinyl plank flooring, replace dirty old carpet, luxury vinyl plank, put in new plumbing and light fixtures, new kitchen countertops, install new kitchen appliances, paint. So, it’s just kind of basic things, just make it a nicer place to live, give it a fresh new look.
So we have cosmetic interior improvements. And then, of course, taking care of the outside is important. So, make sure your buildings look good as prospective tenants drive up. Freshly painted, the yard should be maintained, the driveway should be sealed, and so forth. And like the way I look at it is people pay good money to rent, right, and, in return, they deserve a nice, clean, safe place to live.
Right? And so, that’s kind of the handshake agreement. And if you take care of your tenants, you get good tenants, you have less headaches, you have a better investment, and so forth. So, those are some of the ways you can add value. I can tell you about one property I own here in Greenville, South Carolina, it was a 2006 build and little one-story cottages, 600-square-feet, nothing fancy, vinyl siding, slab foundations.
And they were built with a separate laundry closet for stack washer dryers. Okay? And nobody likes to go to a laundromat. And in a lot of these apartment buildings there’s no laundry and you go to the laundromat and you put $2.50 in a load and you waste half your day.
So, the prior owner did not provide washer dryers for the tenants. And…
Scott: So, it had the capability but didn’t provide them?
Arn: They had the capability but didn’t provide them. And most tenants are mobile, so, they’re not lugging around a washer dryer when they’re moving, right, particularly a stacked. You know, it doesn’t happen. So, and the other thing, these apartments rent for like $700, $750, $800 a month.
So, for a tenant of that demographic, having to spend $1,400 to put in a washer dryer, it’s a considerable expense. So, we’ve been putting washer dryers in, the hookups were already there, we just had to buy the appliance, put it in, and we get like $50, $75 rent bumps for $1,000 investment.
So, that’s kind of a non-brainer. And so, that was one way we’ve added value. And multifamily properties are valued based on the income they produce. There’s something called the capitalization rate. And essentially, if you can raise the rent on 40 units $50 a month, that’s $2,000 a month, that’s $24,000 a year.
At a 5% cap rate, that’s almost an additional $500,000 of value. So, essentially, we’ve added $500,000 of value to the property by investing, let’s call it, 1,000 times 43, 45,000 to put in the washer dryers. So that’s one of the ways we did that’s successful.
Another way we do is we buy bulk cable contracts. So, we’ll sign up with Charter, Spectrum, whoever the provider is, for the entire building, and it may work out to be $40 a month. And so, we provide it to the tenant and maybe we charge them $55 a month, so, that we get a little additional income there.
And they’re happy because, if they had to go sign up with Charter or Spectrum, it would be $100 a month, right? So, we can buy it in bulk, sell it for a little profit to the tenant, the tenant actually saves money, so, everybody’s happy. So, there are ways to do it and the nice thing about multifamily is you have all these little income sources, right, each door, each unit is an income source.
And what’s the beauty is, is, when you come up with the plan for one unit, typically, you can just repeat it for 50 units. So, you don’t have to reinvent the wheel. Where, if you had 50 houses, every house is different. So, every time you want to update the kitchen, you got to go in and figure it out.
Where, if you have 50 identical apartment units, you know you need 4 foot of counter space, whatever it is. You know what the size of the cabinets are. So, those economies of scale and being able just to repeat the process really make a difference.
Scott: I think that’s really great insight and it ties perfectly to what you were just talking about with, you know, installing washers and dryers. If you had, you know, 50 different single-family homes, they might not all just need a washer and dryer to get a little more value out of them.
Right? So, I think that really, really is a perfect illustration there. So, Arn, as we kind of wind down our discussion here, I always like to look to the future. So, are there any exciting developments or projects coming down the pipeline for Spark Investment Group that you can share, of course, that our listeners might find to be interesting?
Arn: Sure. So, I can’t speak publicly about any specific investment, there are SEC regulations, but Spark Investment Group continues to look for properties. I have one smaller asset in Greenville, South Carolina, under contract.
Another market we really like is the so-called Triad in North Carolina, which is Greensboro, High Point, and Winston-Salem. We have a 50-unit complex under contract in Greensboro. So, we are in the process of doing our due diligence, which means we inspect everything from the roof down to the plumbing, we walk through every unit, you have a team of 7 or 8, 9, 10 people and you spend all day and you just inspect everything.
So, we’re in the process. So, I would hope, within the next week or two, we’ll be able to offer those to investors. And so, we’ll continue to look in the Carolinas, specifically. As time goes on, I hope to do larger-size deals. But for right now, it’s going to be kind of that 50-unit, plus or minus, range.
And hopefully, I can go after some bigger assets later on in the year.
Scott: It’s going to be exciting to see where you all take it.
Arn: Thank you.
Scott: Last question here. If folks want to connect, they want to find out more, where can our listeners go to connect with you and Spark Investment Group?
Arn: Sure, thank you. So, I’m on LinkedIn, I’m on Facebook. My website is investwithspark.com and my email is arn, A-R-N, @investwithspark.com. So, I’m easy to find. Reach out to me. My website has lots of useful information about multifamily investing, specifically syndications.
I have kind of an email educational series. And the other thing I would say is reach out, I’m happy to talk to you, educate you. But I’m not going to pester you, I’ll provide the information and, if it’s of interest, we can take it to the next step and have further conversation.
So, I won’t hound you, and call you, and all of that. So, it’s more for educational purposes than anything else.
Scott: And we will, of course, have links to all of that in our show notes. Arn, thank you again so much for joining us today and sharing great insights.
Arn: Thanks, Scott, enjoyed it. Pleasure to meet you.