They say everything is bigger in Texas, and when it comes to multifamily real estate, the saying is certainly on par. On this episode, Brian Pownall, Managing Partner at GenWealth Capital Group joins the show to discuss the latest trends in Texas multifamily, as well as the benefits of investment in value-add properties. Listen along for his unique insights!
Click the play button above to listen to the conversation.
- How Brian Pownall got into the world of multifamily real estate investing.
- The similarities and differences in underwriting in the oil and gas industry versus multifamily real estate.
- The story behind GenWealth Capital, and what exciting projects they’re pursuing.
- Why value-add properties are particularly attractive to owners like Brian.
- What the multifamily landscape in Texas has been like, and why it’s such an attractive region for real estate.
- How supply chain issues and inflation have impacted multifamily projects.
- Which notable improvements Brian and his team have made to value-add properties.
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Featured On This Episode
GenWealth Capital Group is a multifamily real estate investment firm based in Houston, TX. At GenWealth Capital, we believe every high-income earner should have a portion of their portfolio in tangible real estate assets that hedge against market volatility and inflation and, most importantly, preserve wealth. We aim to provide our investors with tax-advantaged, real estate diversification and above-average stock market returns without personally managing real estate assets. We target booming Texas and Sunbelt markets, operate the assets, and always invest alongside our limited partners. Our investors are our friends, and our friends are our investors
- Visit GenWealth Capital Group’s Website
- GenWealth Capital Group on LinkedIn
- GenWealth Capital Group on Facebook
- Brian Pownall on Linkedin
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 here with you. You’ve got a great one on tap for you today. We’re going to be talking about multifamily investing, of course. And we’re going to be exploring value-add multifamily properties and dialing in on properties in Texas as well, which is just a very important region when we’re talking about real estate.
And joining me on the show to offer his insights is Brian Pownall, who is the managing partner of GenWealth Capital. Brian, welcome to the show, and thanks for being here.
Brian: I guess, since we’re talking about Texas, Scott, I’ll just say howdy.
Scott: Exactly, right? Howdy. I love it. Well, to kick us off here and really start things, let’s start with this location. Let’s start with Texas. What makes Texas such an attractive location from a multifamily standpoint specifically?
Brian: Yeah, they say everything’s bigger in Texas, and it’s, you know, kind of, tongue in cheek, but you know, COVID really accelerated some trends that we saw, you know, from a macroeconomic standpoint. Now, if the listeners Google net migration trends, there’s some pretty fascinating videos that folks have made on the internet, tracking, you know, from data points like U-Haul, right?
And so Texas and Florida just dominate the net migration trends, and you see this huge flight out of California. And so I think, you know, a couple reasons that Texas stands out on that one, it’s a very business-friendly state without going into anything politically. No income tax, so that’s a really attractive place to work.
You know, my wife and I moved down here from Oklahoma about six or seven years ago, and you have to, kind of, account for that in your head. Now, of course, the government always gets the money. So the property taxes are higher here, which multifamily investors need to be aware of. But just purely from a standpoint of employment growth and population growth, I do think the income tax part of it has a lot to do with it. You know, a bunch of primary metros, Austin, Dallas, San Antonio, and Houston, so that you’ve got these large hubs for a variety of companies but also some natural beauty, you know, outside of those metros that give people the ability to live in suburbs.
And so it’s a very unique state but really I believe it comes down to those couple criteria that drive the strength of the state for multifamily and other types of commercial real estate.
Scott: Absolutely. And I think you really touched on some important points there, and I was laughing to myself as you were saying that, because I was just thinking about a conversation I recently had with my wife where she was asking about Texas in general because I’ve worked in Texas before and that kind of no state income tax. And how does that work?
So I think that there are a lot of attractive elements of Texas. And then you, kind of, pointed out, too, just the migration aspect of it. But before we go further, I guess I just want to know a little bit more of the story behind GenWealth Capital and what you guys are really doing.
Brian: Yeah, definitely. My two partners and myself are down here in Houston, Texas. So we’re primarily focused on value-add, classes B and C, multifamily investment. In Austin and Houston, we also own a property [inaudible] currently in Dallas. So, the story behind GenWealth was founded by Juan Vargas several years ago.
Him, Ryan Johnson, and myself bought a property last year in Austin together and realized that we had very complementary skillsets that could, you know, lead to a much stronger team by combining forces. And so we recently made that decision, or we’ve partnered up and are looking for our next acquisition.
Generally, we’re focused on a hundred plus units, all the kinds of properties [inaudible] the sweet spot and call it $20 million range. And as I mentioned, Austin and Houston, but we’ll occasionally look at assets in Dallas or San Antonio as well.
Scott: That’s awesome. And I love, too, how you kind of pointed out that you realized, “Oh, we’ve got some complementary skillsets.” That’s something that’s come up a number of times on this show where folks that get together and they start having success in multifamily, you know, the team is really so important. So, again, just another prime example there. Whether it’s someone considering an investment or what have you, what’s the team makeup and what are the skillsets of the sponsors, right?
Brian: Yeah, no, you nailed it, Scott. You know, so we can get in my background here in a minute if you want. But I think a common misconception or common mistakes that investors make is they jump in and they start trying to do everything. They’re excited about multifamily, and investing, and learning and doing. And they try to go [inaudible] deals, underwrite deals, raise capital, build a brand.
And there’s only, you know, 24 hours in a day. So, in this case at GenWealth, you know, Juan had a bunch of great broker relationships, has more of the multifamily-specific experience, can be boots on the ground. And so that complements well with Ryan’s investor relations and construction background and then my background in finance and engineering on the underwriting and financial side.
Scott: Yeah, could you actually speak to a bit of that, about your background and, kind of, how that fits in, especially when you’re talking about underwriting, which is obviously so crucial when we’re talking about multifamily?
Brian: Definitely. So my background’s in oil and gas. I went down to school at Texas A&M for petroleum engineering, graduated, and joined the industry. Worked up in Tulsa, Oklahoma for a number of years, and then moved down to Houston about six, seven years ago. About half my career in oil and gas is pretty much the equivalent of underwriting. It’s a little bit more technical than multifamily because you’re doing a lot of the reservoir engineering as well.
But at the end of the day, cranking through deals, building out cashflow models, putting together presentations for your board or for your executive team, and presenting those opportunities, and making the decision what, you know, proposed price do you want to make on an LOI, etc. So when I learned about multifamily, which was fairly recently, it was really during the holiday season of 2020.
It felt to a degree like riding a bike, all the, you know, different nuances of units versus wealth and, you know, kind of, a 3 to 5-year timeframe instead of maybe a 10 to 20-year hold. The general logistics of cranking through deals, and kissing a lot of frogs, and underwriting really just, you know, kind of, felt like old hat to me.
And so that was my skillset that I was able to bring, especially as I continue to work my W2 job. love what I do and, you know, have been pursuing this on the side and made it a goal to do two things. Love the asset class. I wanted to invest passively and made a number of passive investments last year in different asset classes in commercial real estate.
And then I also wanted to take down a property as a GP within 12 to 18 months. And as I mentioned earlier, we bought a 138-unit apartment complex in Northeast Austin last year and closed on that about November 1st.
Scott: That’s fantastic. And I actually want to dial in on that because I do want to talk about the, I guess, the value-add aspect of it. And you really have focused on that. I guess what’s your overall investment thesis for the wealth-building potential of value-add properties?
Brian: So I think there’s three things. One is being somewhat realistic. So if I’m going to go out and look for class A property, which I would love to own, you know, these beautiful complexes I drive by, you’re not dealing with institutional-type competition. And so, you know, you drive by, let’s say, a 300-unit apartment building and, you know, that deal may go for 60 million, right?
And so you start to compete against institutional capital that might have a lower return hurdle than many that are looking to syndicate money, a much more competitive process. There’s a recent deal we were looking at, that was a class A deal. Pretty close to where I live in Northwest Houston, and there were 25 people the brokers let into the best and final to give you an idea of just the level of competition down here in Texas right now.
I guess that’s the negative of Texas being such a good place to invest. So that’s really the first part is focusing more on, you know, that class B, class C, the you’re going to have a little bit different competition. The second part of it is really I think it scratches an itch to do something larger and add back to society by adding value.
You’re not just buying a class A apartment and making minor tweaks or raising the rent on those that can afford it. Really, to me, the value-add proposition is a symbiotic relationship with the tenants, and that we’re making true value-add changes on a property that could be—I use this often as an example—new roofs, or rebuilding a fire building that had a fire a year and a half ago, so that’d be nine new units.
We’re going to refresh the pools, new pool furniture, add some amenities like Wi-Fi, package lockers. And so all of a sudden, you’re talking about truly creating a different experience for those tenants and almost all of us have lived in apartment buildings. And I can tell you from personal experience, it’s night and day coming back home after a nine-hour day to an apartment that’s run down, that has some sketchy, you know, tenants versus, you know, one that has an outdoor kitchen and, you know, some bags to play next to the pool and things of that nature.
So that’s for the second piece. And then the third piece is economics. If you look at where interest rates are at today, the first quarter of 2022, we’re all worried about them rising, but they’re still cheap historically. And so a lot of the bridge debt will finance 100% of the CapEx and stuff. You’re going to go make $3, $4 million of improvements at a property, and you can get that 100% financed at, you know, call it 3.5%, 4% interest rate. That’s a really interesting value proposition.
Based on the NOI that you can generate from that for a future sale. So, those are really the three reasons why I’d say we’re focused on value-add.
Scott: I mean, I think those are three great examples of the potential and the opportunity with those types of properties. And obviously class A’s great. But when you, kind of, point all that out, it really does paint the picture. Could you tease out a bit more when you’re looking at a value-add property, what are some of the other, I guess, characteristics of that property that tend to sort of set it apart, especially for investors who, you know, maybe they’re newer to multifamily and passive investing?
And there are just so many different types. You have class A, B, C. You have a small number of units. You have large high rises. So I guess, could you tease out a bit more when you’re looking at a value-add property, what kind of characteristics might, I guess, be associated with it?
Brian: Yeah, so you made a good point. There’s a lot of different classes of properties, and even in the value-add space, almost everybody in this day and age calls their multifamily purchase a value-add. But to my earlier point, you know, for folks that are buying class A or B plus, that might be adding a nest thermostat with you know, a ring alarm or something. And that’s a value-add versus a heavier value-add where maybe you’re 40% occupied today and you’ve got a ton of CapEx work.
You’re putting in $20,000 a unit of interior rehabs, exterior. And so there’s really across that whole spectrum. And so if you believe in efficient market, then those deals that are heavier value-adds due to the property condition or just the sub-market being a little bit lower-income tenants, etc., as a passive investor, you should be looking for a higher projected return.
You know, all things being equal to get an equal risk-adjusted return versus, you know, core Austin class A new build. You should expect to have a lower return hurdle on that. You know, for us, we’re looking specifically at garden style, class B and C. I want to say we look at a bunch of things that are, you know, 50%, 60%, 70% vacant.
We’re looking for a strong submarket that can support our pro forma rent, but maybe needs a couple hundred thousand dollars of exterior CapEx, whether that be roof, refresh landscaping and signage, you know, maybe adding some amenities, whether that be around, you know, a pool area, adding a dog park, etc., and then interior rehab just to bring up that property to some of the surrounding competition.
So that could be granite countertop, depending on the submarket, you know, stainless steel appliances, or at least black appliances, etc.
Scott: Is there a general age that you find there? Obviously, it’s not new construction, but I guess just a range when you’re looking through value-add properties.
Brian: Yeah, really, you know, I’d say we’ve just… Given how many deals you have to look at right now in 2022, we look at everything really from 1970 all the way to call it 2015, 2016. I mean, some of those even newer builds that you would think of. And, you know, let’s say the late 2000s may have been built, and they’re really nice properties that you step in and do an interior.
And they’re, you know, kind of, older-looking wood cabinets. Maybe they have black appliances instead of stainless. And so, you know, you’ve got this more or less brand new property, just a little more dated on the inside. So you really could come in with smart home technology, and stainless appliances, and put in wood flooring, and granite countertop, you know, change up the fixtures and make it feel like a 2022 deal.
So I’d say we bounced around the spectrum quite a bit, and each deal has its own specific nuances.
Scott: Absolutely. And I like the point you make there about, you know, maybe all the bones are great, it’s just older, and you just kind of need to update some of it. And that’ll help you, you know, lease it up and all of that, right, because obviously the tastes of renters, everybody likes new, right?
Brian: Yeah, exactly, exactly. It’s hard. If your apartment looks like a prison, it’s sometimes hard to…you can’t change the foundation or the general structure because that can be difficult.
Scott: Yeah, absolutely. And also, I mean, I think it goes back to what you were saying earlier because so many of us have rented. I’ve rented. And, yeah, if you’ve had a long day at the office or wherever you work and you go home and you’re looking at these four walls and you’re thinking, “Oh man, this is pretty drab,” it doesn’t feel great.
Brian: Yeah, yeah. I lived at a place out in Western Oklahoma the first year out of college. And I kid you not, a guy I worked with had a bullet shot through his ceiling right next to a stack of papers next to his computer. So it does matter where you live. You want to provide a safe, quality, affordable place for folks to lay their head at night.
Scott: Absolutely. So when you look across the multifamily landscape, what I guess current trends are you seeing and maybe particularly in Texas that are intriguing to you?
Brian: Yeah. I guess let’s start at the macro and then zoom in. So, you know, record sales volume, I think it was like $150 billion of multifamily investment sales in 2021. Just, you know, astronomical growth there. You’ve seen a lot of capital entering this space, which has made our job to buy deals tougher, but shows the health of the industry and, you know, the reasons why people are interested in investing in the space.
You’ve probably seen headlines and… headlines on high lease trade-outs, you know, 10% to 20% nationally. By lease trade-out, I mean, if a tenant moves out and a new one moves in, the property owner sees 10% to 20% increase in that lease that they get signed. Occupancies are at record high levels around 95% or 96%. Net absorption, so that’s really your difference in supply and demand.
It’s at a record high last year. The U.S. saw a demand of something like 673,000 units. And so the overall industry is extremely healthy. And then you zoom into the Texas and Houston…you know, here in Houston, which is where I live, set a 20-year record for absorption.
So just a lot of supply and demand being driven by what we spoke about earlier in Texas, which is that migration to Texas from businesses and individuals as well as what you’re seeing happened in the single family home market. So we all, I’m sure, Scott, you do as we’ll, have anecdotes of friends and family that have been looking for a house the last few months.
And it’s incredible what’s happened to asset prices there. And quite frankly I’ve started to price out a bunch of folks that are now going to be forced to rent, which is bullish for multifamily owners like myself. And so really, you know, Texas is, I’d say, one of the shining stars of the Sun Belt in what we’re seeing. So those numbers I mentioned earlier, you know, Houston and Austin are seeing, you know, 15%, 20% trade-outs.
So you’re on the high end of what you’re seeing nationally. You see double-digit rent growth that most groups like Marcus & Millichap, Arcadia, etc. I expect it would still be high this year, call it high single digits, maybe low double digits and, you know, decline over the next few years but still pretty healthy, you know, 3% to 5% long-term.
Scott: Absolutely. And I guess this really connects to my next question. So as you look across this current economic landscape, we’ve got, you know, inflation, costs for materials, and other challenges that are out there, how have you seen this impact multifamily projects, you know, maybe even value-add projects when you’re looking at materials and trying to make improvements? What have you seen there?
Brian: Great question, Scott. We just hammered on a lot of the positives that are happening, but with that are coming some considerations that investors, both active and passive, need to be thinking about. So I’ll give you a couple data points. As a multifamily investor, if you go out and listen to podcasts and read books, you get all these rules of thumb, what to use for things like payroll and repairs and maintenance, and dollar per unit on rehab.
And I really truly want to highlight that potential investors should throw those numbers out the window and talk to boots on the ground and property managers and folks that are doing that work today, whereas in the past, folks may have quoted $1,300 a unit on payroll as a high-end. You know, we’re seeing probably… that’s a low-end, your $1,500, $1,700, $1,800 unit. Your repairs and maintenance, turns, anything that requires supply has been challenged like everything here in the U.S. due to the supply chain, the near 8% record inflation we’re currently seeing, and the CPI as of March 2022.
You know, I’ll give you another example. We were signing up to install Wi-Fi at this Austin property that we just bought. And they kept dragging their feet, and that conversation drug out over a matter of few weeks.
And they came back just a day or two ago and tried to raise the install cost by almost 40%, 50%. And so that’s a no-deal, but that’s a couple lost weeks on the progress there. But their CEO is trying to point to shipping container costs from China that have increased from $3,000 shipped to $22,000. And so we’re starting to see it in multifamily.
Another larger area would be on the interior rehab. If you thought before you could get away with rehabbing interior for $5,000 to $10,000… I was talking to a property manager the other day in Austin. The average right now is probably $15,000 just as the average per unit. So those are major pressure points that investors, you know, on the passive side, need to be making sure to ask potential sponsors what they’re baking in and how much confidence they have in it.
And the other piece I really want to highlight for folks is interest rates. And so generally speaking, interest rates and cap rates, which is really the pricing of a multifamily deal, they don’t follow each other one for one, but they follow each other in a general trend. And, you know, recently, just this week before Scott and I are recording, the feds raised interest rates.
Jay Powell yesterday came out and said he wouldn’t be afraid to raise another half percent. Ten-year treasuries are jumping up quite a bit here in the last 48 hours. So what’s that doing? Well, the majority of multifamily investors and sponsors today are buying deals on bridge debt, which is a floating debt. And so you’re floating off of a LIBOR or some other type of interest curve like that. And I see a lot of beginning sponsors ignoring the fact that today the market is projecting that floating interesting rate to go up to 2%.
And so they might be underwriting to 3.5% to 4%, but in reality, they should be thinking about that as a 6% interest rate a year from now with where interest rates are heading. So, for us, that has probably pressured a lot of deals, and the main reason why we haven’t closed one so far this quarter, after that one, we closed in the fourth quarter last year, is really just a cash…projected cash yields have gotten really tight between the rising interest rates as well as the rising payroll, CapEx, and repairs.
Scott: Absolutely. And, Brian, thank you for breaking all of that down. I think these are such key elements for investors to really keep in mind. And it seems to me, and please correct me if I’m wrong, but I think you guys have a pretty disciplined approach to underwriting when you’re looking at it.
And you’re really trying to dive in and say, “Okay, well, what are the real numbers, right?” Because I think that’s a key, right?
Brian: Yeah. I mean, there’s a bunch of really strong sponsors out there, and I’m happy to provide some contacts for anyone that’s interested offline. But there’s also a lot that I feel are just trying to ride this wave of the strength in multifamily over the last few years. And you’ve got to have a business plan in place that can last through different economic cycles and still protect your investor.
Scott: Absolutely, absolutely. So, is there anything else, I guess, going on at GenWealth Capital that you’d like to share that our listeners might find to be interesting?
Brian: Yeah, I would love if your listeners and potential investors to find us on our website, genwealthcapital.com. We post blogs once or twice a month. We’ll post a podcast recording such as this one. We’ve got an active pipeline. Currently, I’m looking at my other screen right now. I’ve got about 20-ish deals that we’re screening or underwriting. So we’re just continuing to make offers every week, looking to try to close, you know, somewhere around, you know, call it two to four deals this year around $20 to $30 million each.
So, let’s just use round numbers, $100 million. So hopefully we’ll have some opportunities for investors here soon, but we do continue to be, you know, very diligent about how we look at these deals and want to make sure we have conservative underwriting.
Scott: Absolutely. And, you know, yeah, there are challenges in multifamily. There are challenges in all kinds of industries, but I think, kind of, back to the points you were making about the trends and certainly in the Sun Belt in places like Texas, the value is still there and the need. We have an ongoing housing shortage.
We have more people than ever before who are needing and wanting to rent. And so I think that that right there is, kind of, your case for multifamily no matter what the landscape is, right?
Brian: Yeah, I agree. I think the overall…at the end of the day, it’s going to be supply and demand, and you said it right, Scott, there’s an affordable housing crisis here in the U.S. If you look globally, there’s some evidence that suggests that things could get worse over time, which again is bullish for multifamily investments. And then we’ll just continue to unlock new ways of adding value to tenants and capturing that net operating income increased on the disposition.
So we’re a very bullish investment class. We just continue to be prudent of potential investors’ capital and make sure we get the right next deal.
Scott: Fantastic. Thanks again so much for joining me on the show today, Brian, and offering such great insights. And one more time, if folks want to connect, find out a bit more, where can they do that?
Brian: Yeah, genwealthcapital.com is our website, or find me Brian Pownall on LinkedIn, Facebook, or Instagram.
Scott: Awesome. Thanks again.
Brian: Thanks, Scott.