This is an LFI episode and LFI is now part of PassivePockets.
I’m pleased to have Zach Haptonstall with us. He’s the CEO and Cofounder of Rise48 Equity and Rise48 Communities. He focuses exclusively on the Phoenix multifamily market and they have 33 assets acquired, 8 of which have gone full cycle and it might be more. Zach, welcome to the show.
Thank you so much, Jim. I appreciate you having me on the show and look forward to providing some value for the readers.
We’re excited to have you. I want to dig in and talk about Phoenix. It’s an interesting market but before we do that, the way we always start is to hear about your financial and real estate journey. How did you get from where you started college to where you are now?
Quick background on me, I was born and raised here in Phoenix, Arizona. I grew up in a lower-middle-class family. No real estate connections in the family. No rich uncle or anything like that. I don’t come from wealth. Like most of the readers, I was taught to do well in school, get a degree, get a good job and save for retirement.
I had a Journalism degree. I wanted to be a sports reporter. I was a live news anchor sports reporter for Arizona PBS for a short time and hosted a show on Fox Sports Network. It was cool at first and then I quickly realized you can’t make any money in journalism and it wasn’t as fun as I thought. I’m a big sports fan but then when it’s your job, it’s not the same. I was like, “I don’t want to do this. I’ve got all this school debt.”
My parents weren’t super poor but didn’t have a ton of money. They couldn’t help with college. I had to take out school loans to go to school. I was working full-time nights and weekends, while I was going to school to help pay for it. I’m like, “I don’t want to do this. I want to pay off my debt, feel financially stable and at least be in a better position.”
I went into healthcare marketing of all things, simply because that’s what I thought I could make money for. I was delivering medical equipment nights and weekends while I was going to school. It was an odd job I got through this girlfriend’s dad at the time. I parlayed that through him into healthcare marketing working for a hospice organization so I was a marketer. It sounds weird but I wake up in the morning and I drive around cold calling, walking into hospitals, doctor’s offices, assisted living and building relationships with physicians social workers and nurses.
When they had somebody that needs these hospice services or mobile nursing in their home, they call me. I meet with the family and get them signed up. Long story short, I was a marketer, became Director of Marketing and was very fortunate to do very well. Probably, I was one of the top marketers in this industry. By the time I was 23, I’m making $150,000 a year. I bought my first house at 23. I paid off all my student debt. I was following the Dave Ramsey plan, saving everything and killing my debt.
I did that for about four years. I got my MBA and paid off my MBA. By the time I was 26, I was making $200,000 plus a year, had my house, no student debt and felt like I was somewhat financially stable and fortunate to be in that position. I was making more money than both my parents combined by the time I was 22 or 23 but I wasn’t happy. In any sales and marketing position, it’s always what have you done for me lately. Every month, you reset. I was working crazy hours, on-call seven days a week and no longer happy. I felt like I’m not fulfilled.
In January 2018, I had some sweat equity in that company I had earned. I resigned, sold my equity in that company and lived off of savings for a few years. I didn’t know exactly what I was going to do at that point. I knew that I was so unhappy with my W-2 job. I didn’t have any kids and wasn’t married. I had a girlfriend who’s now my wife, Grace but I was like, “I got to figure out something. I want to get control back of my time somehow.”
I knew nothing about real estate. I had gotten my real estate license about two years prior to that as a backup plan. I never used it. I didn’t know anything about investing. It’s like how a cliche story goes. I read Rich Dad Poor Dad and that gave me some insights. I was like, “I’m going to quit this job and figure out how to create passive income somehow through the real estate so I can gain control of my time.”
At first, I was looking at, “Should I flip homes?” I then started to realize that was the same thing I was doing. It’s transactional. If I don’t flip a home, I don’t make money. I started learning about investing, mobile home parks and cashflow. My goal was to try to buy a mobile home park with my cash. I had almost $300,000 of cash, which I had relentlessly saved for four years, making a high income, cutting my costs and then got a pop from that sale of the equity.
[bctt tweet=”If you have X amount of money, put all your eggs in one basket and protect that basket.” via=”no”]
I cold-called around 90 mobile home park owners here in the Phoenix area trying to buy one on a seller carry. We had a handful who answered and called me back but nobody was interested. During this process, I was learning and trying to absorb as much info as I could like listening to podcasts, reading books, going online and trying to self-educate myself.
I realized, “What if I did buy this mobile home park?” I have no more cash. I might get $3,000 a month in cashflow. What do I do? Through that process, I learned about multifamily and syndication through podcasts and books. It clicked for me. I was like, “That could work for me.” What was doing before is I was meeting with physicians and healthcare business owners who have a lot of disposable income but don’t know what they want to do with it and have no time. That could be the value that I bring. That’s when it clicked for me.
Long story short, it was at least 4 or 5 months before I even focused solely on multifamily syndications and didn’t know what I was doing. From the day I quit the job, it took fourteen months to close on the first property. During that time, I burned through so much cash. I went through a ton of personal adversity, emotionally, mentally and psychologically because everybody around me, even my family, my parents were like, “What are you doing? You were making $200,000 a year.” I wake up every morning and don’t know what I’m supposed to do. It’s demoralizing.
It’s hard to know how to move the needle. It’s like, “What do I do? Do I call a broker? Do I listen to the podcasts? How do I move forward?” It was a long process but it took 10 months after I quit the job to finally get the 1st deal under contract. I started going to conferences and met one of my partners, Robert.
Robert had a higher net worth and high liquidity. He lived in Phoenix as well. I did not have a net worth and liquidity. I just had $300,000 of cash. That’s it. I could not qualify to sign on for these loans. I met Robert and I was like, “This can be the net worth and liquidity guy.” We got this deal under contract. It was 36 units, $3.5 million. We had underwritten 40 deals or so up to this point in the previous months and nothing was even close. I was getting more and more discouraged thinking, “I’m too late to the game. It’s too competitive and saturated.”
You don’t even know if you’re doing it, honestly, because you’re like, “Am I doing this right?” We put in an offer and then it gets accepted. We’re like, “What do we do? It’s real.” That was the scary thing when it got accepted. Before that, I was scared to even send an offer but then when it gets rejected, you almost get relieved because you’re like, “It’s not going to work out but at least I tried,” but this one got accepted.
This was an older beat-up property in Central Phoenix. We get it under contract, just Robert and I. We had planned to syndicate the deal. We talked to all these people in the several months leading up to that, “I’m interested.” We get under contract on Robert’s $25,000 non-refundable earnest money. Days go by, nobody’s interested. We’re like, “What are we going to do? The syndication thing is not going to work.” We had to bootstrap it and scramble.
At the time, I had burned through a ton of cash. I joined mentorship programs. I had about $165,000 left. I put $160,000 into this deal, almost all my money all-in because we needed $1.4 million of equity. I was trying to eat up a chunk of that but I was also trying to tell other people and attract them by saying, “Look how much money I’m putting in the deal. I believe in it. I’m all in.” Robert put in $275,000. I was fortunate to find a 1031 exchange investor who had sold a twelve-plex in Seattle and brought in about $650,000.
I had never heard of a Tenancy In Common or TIC structure. I had no idea what it was. I learned what it was through that process. We did TIC structure. I met my other partner, Bikran Sandhu, our CFO, while we were in escrow. I talked him into putting in $150,000. I found a couple of other people to put in around $150,000. We bootstrapped it, put it together and it was a long couple of months of stressful escrow. We had a shady seller but long story short, we got that thing closed. That was our first deal. We closed that in February of ’19.
A lot has happened since then but we’ve been very fortunate to use that momentum. It was a handful of escrow and cash. We had no passive investors. That allowed us to get nitty-gritty into the details of asset management and day-to-day execution of a value-add plan. That gave us experience momentum to then go forward, start syndicating these deals and raising money from passive investors.
Since then, we’ve acquired 34 different properties all here in the Phoenix, Metro worth over $1 billion, over 5,500 units and had around 2,000 investors. It’s crazy how in the beginning it took me 14 months to get the 1st deal closed. It was very discouraging and difficult but then we started to see exponential growth as we continue to carry the momentum forward.
You started not knowing anything and 3 or 4 years later, you’re a very large syndicator that has 30 plus assets. We hear a lot of people that get started in real estate that before they start, they’re on the Dave Ramsey plan. Have you had a mindset shift since then? Ramsey is all about getting rid of the debt, in my opinion, for people that have a lot of the bad debt, not a mortgage but credit cards, student loans and all that. He might be good for getting you out of that. Once you’re out of debt, Dave Ramsey isn’t very useful because it doesn’t apply to people that are investors. Can you talk a little bit about the mindset shift that happens between Dave Ramsey? You could be in the same spot if you’re still a Ramsey follower.
I don’t want to sound like anti-Dave Ramsey but I agree with you 100%. There’s a time and place in your life where Dave Ramsey is relevant. If you’re in a lot of debt, as bad debt, the disciplines involved can be good. At that time, I had a ton of student debt like $100,000 almost. I was making a high income. I cut all my expenses and was killing the principle of the debt. At the time, that was good but once you get out of debt, you need to scrap the Dave Ramsey plan because you will never become wealthy. It’s an outdated plan. Especially with inflation and everything, you are never going to get wealthy.
I even talked to one of my friends and he’s got five kids. I said, “You need to stop the Dave Ramsey crap because it’s not going to help you. You’re going to get buried in this society with Dave Ramsey’s plan because you have to start investing in assets.” The Rich Dad Poor Dad was a good starter for that. I had no clue or idea about multifamily. It was very intimidating because these are large properties and numbers.
Once I started realizing the benefits of cashflow, natural appreciation and tax benefits, I had this epiphany and honestly felt like it was a secret. I was like, “Why does nobody know about this?” I was trying to tell everybody I knew. I was like, “This seems like a secret and it makes so much sense. Why aren’t people doing this?” I realized at that point, “I’m not going to invest my money anywhere else.”
A lot of people say diversify. I disagree. It was Andrew Carnegie, the steel maven in the 1900s who said, “Put all your eggs in one basket and protect that basket. Watch that basket grow.” I agree 100% with that because I’m a perfect example. I practice what I preach because I had a chunk of cash. I said, “I’ve researched this for several months. I believe in it 100%. It’s conservative. Even if it takes me 5 or 6 years to make 2X returns, I believe that will happen.”
My dad, for example, is a director at Edward Jones. He manages a bunch of financial advisors. I used to have a brokerage account with Charles Schwab and I shut that down a few years ago. I told him, “This is crapped out. You can’t do this.” I’m putting his money into these deals because if you believe in one thing, then pound that.
My mindset has switched to where I believe investing in these assets and good debt and leverage is a good thing. I have 100% of my net worth in our portfolio and my primary residence. I don’t have any other passive investments with other operators. Not that there aren’t good operators. It’s just that I believe what we do. I have no money in the stock market. I’m not saying that’s a bad thing. It’s good to diversify but for me, I believe in it so much that it’s a complete mind shift.
That gives confidence to your investors as well. You’ve had phenomenal success over the last couple of years, built a track record acquiring assets and had gone full cycle, which there are plenty of syndicators who have been around as long as you that have not gone full cycle and certainly not on eight-plus deals.
There’s a solid track record there but on the other side, you’re brand new. You’re a young guy and new to multifamily. Now, you’re a major player in a market acquiring these big assets. For me, how do you convince someone like me, which you already did because I already invested with you or educate people on, “I’m new but we got this wired. We know what we’re doing?” Everyone wants a quality sponsor with a track record, preferably prior to 2008. You have a track record but it’s a very short one. How do you communicate that to investors?
A strong market will make anybody look smart. We’re huge benefactors of that. We don’t deny it. We’ve been in a strong market, which helps everybody. There are a few different things that we feel like separates us and why we felt comfortable scaling as quickly as we have. The first thing is our ownership team. Through that process, I probably “dated” 7 or 8 different business partners. It means you meet people at a conference or meetup and you say, “You want to do multifamily? Me too. Let’s start underwriting deals and make offers together.”
Through that process, you start to realize this guy doesn’t work as hard as me. He’s not committed. This person, I can’t get ahold of them. This person owns 2,000 units but they’re taking advantage of me because I’m in a good market and want me to do all the work. I had one guy I was on a nightly phone call with for two months. We got along great together with a strong work ethic but we had the same skillset. I needed a truly high-level analytics finance person.
I have my MBA. I’ve taken high-level accounting classes but I hate doing that. I’m nowhere near the level of Bikran, our CFO, who has an Economics degree and a CPA. He worked at Bryce’s PricewaterhouseCoopers for several years as a Corporate Auditor auditing Fortune 100 companies. He has very elite financial analysis skills and is elite at putting in systems and processes.
Part of that journey that I did go into is I quit the job, bought 4 or 5 deals and owned $35 million of assets on paper but I was broke again because I put all my money in the deals. The preferred return eats up all the cashflow. In September of 2019, I had to go back into healthcare because I was broke. I had a non-compete that ended with my previous company. I went and became the President and Co-owner of a hospice company here in Phoenix. In 18 months, we quickly scaled that from about 50 employees to over 110 employees. It became the fastest-growing hospice in the market here. Meanwhile, I was doing the real estate all night.
[bctt tweet=”Do not start a property management company if you want to make money. They make their real margin from construction management because they’re sourcing and managing contractors or subcontractors.” via=”no”]
Bikran had a full-time job. I had a full-time job as the President, Co-owner of this company. From 6:00 to even or 12:00, we were on a Zoom call Monday through Thursday. I’m going through asset management and acquisitions. Through that process, I learned a lot about scaling a business and putting operations. Bikran is our CFO. Robert is our Chief Construction Officer, a master in Architecture and strong construction background.
I’m overseeing the acquisition and source of capital. We’ve been able to build out infrastructure to where we’re only focused in this one market and vertically integrated with our property management company that we started Rise48 Communities. We have 100-plus full-time employees. We’ve purchased over 5,000 units. We can get to any of them within 30 to 40 minutes of each other.
We’ve intentionally tried to scale our infrastructure here. In our model, the reason why we feel comfortable is that wce’re conservatively projecting to typically double investors’ money over five years with a very conservative stress test. In reality, we’ve been doing that for 1.5 years across these 8 assets. We’re selling three more at the end of July 2022. We’ll have sold eleven deals since we started.
We feel very confident because, in our conservative five-year underwriting model, we’re assuming that right after we buy the deal, there’s immediately going to be some type of significant economic downturn or recession that hits where the organic rank growth in the market plummets and decreases significantly and stays there for five consecutive years. That vacancy increases immediately and stays there for five consecutive years.
Even with that downturn, we can hold through the recession, execute the business plan and sell in year five to achieve the returns that we’re projecting to investors. This is a very risk-adjusted projection. On the outside, it looks like, “Rise48, those guys are buying every deal in Phoenix. They don’t even underwrite deals. They’re throwing money at it.” It’s not the case. I don’t have any data to support this but I would not be surprised if we’re outworking every other sponsor in this market.
It’s because we’re constantly grinding. Bikran and I are here from 8:30 to 9:00 AM to 9:00 or 10:00 PM except for Fridays. I then go home and work on emails. It’s a volume game for us. We’ve been able to build relationships with these brokers. There are 5 or 6 real estate brokers in Phoenix who control about 90% of the multifamily inventory between the $30 million to $150 million space.
I’ve been fortunate to form relationships and have done multiple deals with all of them. The majority of our acquisitions have been sourced off-market with no competition from anybody else directly through these broker relationships. We’re sourcing them on a good basis. We probably lose at least 90% to 95% of the deals we make an offer on. Even if they’re off-market, it doesn’t mean it’s a good deal. We’re losing most of them but we crank the volume. Every week, I’m touring deals with brokers. They promise underwriting deals every week.
Our asset management team is shopping comps every week for deals so that we can finalize our pro forma and make the offer confidently. We’re cranking the volume. We have the very conservative underwriting model and then we’ve been able to build out this infrastructure where we’re executing our business plans faster and more efficiently than what we projected in the model.
All of these factors combined are why we’ve been exceeding these returns in less than half the projected period but we do feel confident that if there’s a downturn recession, which looks like we’re going into an economic downturn, we will still perform and hit our projected return. It’s a combination of our backgrounds as principals from other industries that we’re able to apply to this and then our hyper concentration.
If you look at a lot of sponsors across the country, I shouldn’t say very few but it seems like less than most are living in their market that they’re doing deals. Even fewer have staff and a full-on company. We bought our office building. Our staff is required to come in every day. We have 100 plus full-time employees.
We do have construction management and property management. We buy our materials wholesale. There are different things that we’ve done that gave us a competitive advantage, which is why we’ve been able to perform. In the coming years, to your point, the best operators are going to rise to the top because the market can make anybody look smart across the country in the last couple of years.
Talk about the vertically integrated. Why did you choose to do that rather than outsourcing construction, property management and everything else? Why did you decide to do it all in-house?
We initially started using third-party property management companies. We rely on the property management company to also do construction management. For those readers who don’t quite understand what that means, construction management means that you’re out there sourcing, bidding out and managing the vendors and contractors daily.
We first took construction management in-house at least a year before we took property management in-house because what we started to realize is that all of these third-party property management companies will tell you they can do construction management. From our experience, none of them can. They do a terrible job and cannot stay on schedule or budget.
A property management company, just so the readers know, is a very low-profit margin business. If you want to make money, do not start a property management company. It’s a crappy business to be in, in my opinion. They make their real margin off of construction management because they’re sourcing and managing contractors or subcontractors and then they’re taking a margin on that. It was a disaster.
In our very first deal, we didn’t have any passive investors. This is why we did it this way when we couldn’t get passive investors but it worked out that it was our money. They were not staying on schedule or budget. We quickly had to start taking control of this. I was at the property chewing out vendors trying to organize this stuff.
We initially started first hiring staff and our first hire was our director of asset management. Our second hire was our construction manager. We started sourcing, bidding out and managing all of our vendors and construction crews. All the roofers’ plumbers, electricians and general contractors, we’re bidding these guys out and managing them daily on-site with our staff.
For example, John, our Construction Manager, has three construction coordinators who report to him. All four of them are full-time salaried staff with full benefits. All four of them spend 40 plus hours a week each walking different properties that are undergoing renovations, making sure they’re staying on schedule and budget.
A lot of this stuff gets lost with all types of multifamily. People have to remember that it’s a value-add plan. You have to be adding value. The most important thing for these business plans is to make sure you’re renovating units on schedule and budget. We benefit from this too but a lot of operators can buy a deal and sell without having to do anything or execute on that business plan because the market has seen this natural appreciation and you’ve seen this natural compression of cap rates.
This is going to become even more important going forward as interest rates are rising. We think the velocity of rent growth will have to start slowing next couple of years because you can’t maintain that forever. The ability to renovate these units on schedule and budget, get a good product, push the rents and have your construction management communicating with your onsite, leasing and property management to get these tenants moved in on time and paying that rent is critical.
We first took construction management in-house. We were using a property management 3rd party for about the first 2,000 units and it was going well. By property management, just so that readers know, that means the onsite manager, leasing associate and maintenance. They’re doing all the marketing, lease-ups, tenant issues or complaints, evictions and then routine maintenance. Not like a full renovation but a broken sink or whatever it may be.
We were using third-party management. What started happening was that because of all the unemployment checks and this is happening across the country in multiple industries, there was a depleted labor pool. We started seeing more turnover at our onsite staff level of the property management company. In 5 months, we had 4 different onsite managers turn over and leave somewhere else because they can make more money and better benefits working for a different company. We had other property manager companies showing up on-site of our properties and picking off the staff of our third-party management company and giving them a better offer and they will just leave. It’s crazy.
We said, “Unfortunately, it did not negatively impact the performance of the asset.” We were using our asset management staff to micromanage the PM company and still make sure we’re performing but then it’s showing bandwidth from our asset management staff for what they should be doing. We started getting over 2,000 units and we’re like, “We can’t have this. We have to have continuity and control of this.”
Our whole philosophy of starting our property management company was that we’re going to offer the most competitive compensation and the best health care benefits in the market so that we can not only recruit but retain the best talent. Our whole thing is we don’t need to make money on the property management company.
[bctt tweet=”Construction management is the key. With all the hype about multifamily, people have to remember that it’s a value-add plan. You have to be adding value.” via=”no”]
We want to break even on it because it’s a crappy low-profit margin business. If that makes the property perform well and investors are getting good returns and they’re happy, we can raise more money and keep growing. That benefits our high-profit margin business, which is Rise48 Equity or the real estate company.
We injected about $600,000 of our cash upfront, the three of us, to float salaries. We immediately hired an executive leadership team, a full accounting staff and a controller. We hired our controller from Greystar. We’re giving the most competitive compensation in the market. As far as we know, in this local Phoenix market, we have the most competitive healthcare benefits for all of our employees across both companies.
We cover 100% of all their healthcare benefits, dental, vision and then 50% of all their dependents. That’s very enticing for a lot of staff when they know that their family and kids are getting good coverage. That allowed us to get better people and retain them. We started taking that all in-house. We transitioned all the properties in one week to our property management company and all future properties as well are being managed.
What it did from an underwriting perspective to give people an idea is that it increased our payroll line item at the property level compared to what we were doing before because we’re offering better compensation and benefits but it has given us net savings on the operational expenses. We were getting a budget from third-party PM before for marketing, maintenance costs, admin and turnover.
None of those lines were being hit as we started having more turnover or maintenance issues because the staff wasn’t doing a good job. It’s giving us net savings, even though the payroll item is more because we’ve saved line items and giving us more control and efficiency. It’s been a big part of what we’ve done and has allowed us to have a more robust infrastructure so that we can continue to scale and can have full control there.
I was talking to another multifamily operator and they also brought their property management in-house. They also turn properties quickly. You’re completing business plans in 1.5 or 2 years. The question I have and I asked this to other companies as well is, if you own the property management, does that change your incentives?
When you’re looking to sell, are you going to have to immediately buy something because you have all these employees that are working on that property and get rid of that property or a couple of properties because you don’t have as much capacity but you have these employees? I always wonder, is there something that might influence you to change your business plan because you need your employees to have some work to do?
It has not changed our incentives because the way that we view this internally is that the property management company was created to serve the operations of the property and the investment. What’s very common in the industry because these deals are always selling and trading, whenever one owner sells a deal and somebody else buys it, they rarely keep that same third-party property management company.
The third-party property manager companies are always shifting and losing deals. The onsite staff is very often in the industry getting laid off. That’s why there is a ton of turnover because if that property management company doesn’t have somewhere for them to go, then they say, “Sorry, we sold the property. We don’t have another property to put you on. You’re laid off.” It is what it is. It’s unfortunate. That’s the nature of the industry.
For us, we’re not going to not sell something because we might lose that staff. The benefit that we have is that we’re not focused on the profitability of the management company. We’re truly not. We knew it was going to take about 12 to 15 months to even break on it and we’ve invested a lot of money into it. For us, if there’s good staff, then we’re going to move them to another property. Honestly, it creates competition. If we have an asset under management, you have maybe average or below-average employee there and we’re selling a deal with an all-star leasing agent or manager, we’re going to lay off the person on this other one. Once this other one sells, we’re going to move them over there.
It doesn’t sound politically correct but that’s what it is. It’s capitalism and competition. If you’re a high performer, we’re going to keep you and incentivize you to do well. If you’re not, you might become expendable. One thing that we’ve done is we’ve tried to utilize the 1031 exchange. With these 11 deals that got sold by end of July 2022, we’ll have 1031 exchange with 7 of those. The other four weren’t thinking of that at the time but our goal is to try to exchange everything going forward.
It has worked out to where we typically do have a place to put the staff. One unfortunate thing is that you may not have somewhere for this person to go. As far as the fees and incentives, we have shaved our fee down below what is an industry standard. In the industry here in Phoenix, it’s very standard for any third-party management company or any management company to take a monthly fee of 3% of the gross collections. That’s the management company’s fee. We charge 2.5%. The reason is to make the deal pencil better to have higher cashflow for investors.
Everything that we’re doing with this management company is to try to serve the investor and the operations because we know the more deals that we go full cycle and can show strong returns, we’re going to attract more investors so we can raise more money to buy more deals and bigger deals. That’s where the real money is made.
We as GPs make at least 80% to 90% of our total compensation upon our GP promo or the “sweat equity.” We don’t earn that until we’ve executed the business plan and achieved a capital event like a sale or a refinance. We don’t receive any cashflow from our GP ownership during the hold of the property. The preferred return eats up all the cashflow so it’s 100% cashflow and 100% equity. The deal goes to passive investors for the entire hold period.
Once we execute the plan and sell or refi, that’s where we make our compensation as GPs. We’re looking at how we get to that point and how we execute the plan. You mentioned our high-velocity nature. Our philosophy internally is if we can achieve at least a 1.8 equity multiple or an 80% return to the passive investor in 24 months or less, we’re probably going to look to sell the deal with the goal of doing a 1031 exchange.
Investors have the option to participate or not in the exchange. They can cash out or roll their money but that’s our philosophy because that’s a strong return. That’s hard to find that anywhere else. We feel like if we’re getting less than that in two years or less, we’re probably selling too early. We can squeeze more value but if we can realize a strong return, we’re going to exit, exchange it and go about $1. That’s our honest philosophy of how we’re executing the plans.
I’d like to talk about Phoenix. It has to be, in more than one way, the hottest market in the country. Is it too late? Did I miss it? If I haven’t been to Phoenix, can I start now? How can the market continue to go up? They have seen 15% and 20% rent increases year over year. How is that sustainable? It’s probably not but if it’s not, what are you doing about it? How are you staying in Phoenix and exclusively Phoenix when it feels like it can’t keep going?
I’ll give you and the readers historical data context, current data, what we project to give you an idea and why we are bullish on Phoenix long-term in the next years. We think it will be one of the most insulated markets in the entire country long-term. Meaning in a down market, we think of it as one of an almost insulated conservative market. We think it’s one of the top markets in a strong economy because you have this explosive growth.
The US Census Bureau has said Phoenix is number one for population growth for five consecutive years. Pre-COVID, we were number one for population growth. Ever since COVID, all the fundamentals have accelerated exponentially, population growth, job growth and rent growth. What the data is showing is that people are coming to Phoenix.
This was already happening in the country pre-COVID. Since COVID, even more so coming from California, Washington State, New York, New Jersey and Chicago. They’re coming from high-tax and high-cost living environments to Phoenix. Phoenix is the top five for job growth in the last couple of years. Number one by some rankings in different metrics. They’re coming to Phoenix which has such strong job growth. They might be making the same if not more money than they were making before but they’re at a much lower cost of the living environment, which helps to increase rents.
In addition to that, there is a massive shortage of housing in Phoenix that has been going on for several years and they simply cannot catch up. Ever since COVID, it’s become even worse. There’s a supply and demand issue in favor of landlords and investors because you have all these people coming here. There are very strong diversified jobs. You’ve got a ton of tech jobs.
People were calling this the Silicon desert because you got all these Silicon Valley companies relocating here. You’ve got Google, Facebook and Amazon. All these big companies are building massive data centers and manufacturing facilities here. Taiwan Semiconductor, the largest producer of silicon microchips in the world is building a $35 billion manufacturing facility. All these huge companies are spending billions here, which is diversifying the jobs. Yardi said that Phoenix had the lowest job loss rate in the entire country throughout COVID-19. We saw it firsthand.
Our portfolio surged throughout COVID. We had no negative impacts. If you look at markets like Tucson, for example, they did not do very well during COVID. I know a lot of sponsors down there and it’s because they don’t have a diversified employment base. It’s mostly the hospital, the school, healthcare and then there’s the University of Arizona.
Vegas is a very strong value add market for the last several years and did not do well during COVID. They had a lot of vacancy and delinquency. I know that from talking to owners and property management owners who manage deals there because they’re still heavily based in hospitality and tourism. Phoenix was almost bulletproof during COVID. It’s so resilient and continued to grow. To give people some data, Phoenix is the fifth most populous city in the entire country.
[bctt tweet=”Offer the most competitive compensation and the best health care benefits in the market so that you don’t only recruit but retain the best talent.” via=”no”]
The only cities that have more people than Phoenix are Los Angeles, New York City, Chicago and Houston. Phoenix is number five. It’s growing faster than anywhere in the country for over a couple of years and it’s only increasing. More people and jobs are coming here. Maricopa County, which is where Phoenix is located is the largest geographical county in the entire country. It’s bigger than any county, even in Texas. Most people don’t realize that.
When we say the Phoenix Metro, we’re talking about at least 15 to 20 different cities all in this one blob. When I say we have deals in Phoenix, we own deals in five different cities in the Phoenix Metro. We have them in Phoenix, Scottsdale, Mesa, Glendale and Tempe. If you were to drive in a straight line on the Westside of Maricopa County to the East, you’d be driving for at least an hour and a half straight and be in a city the entire time with no breakup, no suburb or anything.
If you didn’t know the city lines, you would think you’re in Phoenix the whole time but it’s this massive blob. Unlike these other big cities in the country like Los Angeles and New York, the Phoenix Metro is not landlocked geographically. It continues to grow further out Southwest and Southeast, into the desert. It keeps getting developed. There are more jobs, housing and people coming here. It’s becoming this massive metro.
To give people some idea on inventory, as far as the inventory multifamily, there are a little over 400,000 multifamily units in the Phoenix market. We own about 1% of those. Forty percent of those multifamily units are 1980s products, which is our bread and butter for value add. That’s because, in the 1980s, there was a Ronald Reagan tax incentive plan which gave tax credits to build apartments. These builders went crazy and built a ton of inventory.
This is like the mecca of the 1980s value add. With the inventory, there are still a ton of properties out there that have not been renovated and turned over. Relative to all the people coming here, there is a severe short housing shortage but when you look at the ability for us to buy more deals, there’s a ton out there. It’s a massive metro. Most people in the country don’t realize how big the Phoenix Metro is and everything goes on but I’ll give you some data points to wrap this topic up, as far as what’s the runway here and why do we think it’s not too late.
The trailing twelve organic rent growth in Phoenix for April is 21.9%, which is crazy. The trailing twelve organic rent growth in Phoenix has been 20% or more every single month since July 2020. You’ve got 20% or more organic rent growth over the last few years, which is crazy. It’s not sustainable. When we started in 2018, Phoenix was still number one in the country for organic rent growth at 8%. It’s almost tripled that. The average organic rent growth year over year for Phoenix over the last years is 6.2%. As many of the readers know, the trailing twelve inflation in the US is 8.6%. Trailing twelve inflation in Phoenix is over 10%. We’re about 2% higher than the US average.
In our model, as part of that stress test, we’re assuming that right after we buy the deal, there’ll be this recession and organic rent growth is going to plummet immediately from 21% down to an average of 5.2% on average years 1 through 5, year over year. We’re assuming a significant decline of 5.2% on average year-over-year rent growth, which is 100 basis points or a full percentage point lower than what it’s been on average last several years.
Years ago, when inflation was 2%, we were telling investors, “We’re underwriting organic rent growth at 5%. It’s barely over the rate of inflation.” This is conservative. We’re well below the rate of inflation, which makes it even more conservative. What we’re telling investors and our honest thoughts are that we are very bullish on Phoenix as one of the most insulated consistent growth markets in the country long-term because of all the in-migration patterns, job growth and fundamentals. It makes a ton of sense. You have everything in place in the shortage of housing.
With this velocity of growth, which is unprecedented, we think there are maybe another 24 months or so where the velocity will have to slow down. You can’t keep jacking up rents several hundred dollars forever until you hit an affordability issue but even if it slows from 20% back down to 8% like it was in 2018, it should still be among the leaders in the country and it’s still much higher than what we’re projecting. We still feel very comfortable that we can hit these five-year conservative projections because of all the fundamentals and what we’re seeing in reality. That gives you some insight into what our thoughts are on short-term and long-term.
You mentioned natural appreciation a couple of times. Can you explain what that is and maybe how it’s different than the forced appreciation that you do from a value add and contrast those two concepts?
Natural appreciation is the natural increase in rent each year. Some of this is driven by inflation. The Fed wants to get inflation back to 2%. That’s our goal. They’re acknowledging that everything pretty much goes up and it costs by 2%. Historically, across the country, rents will go up every year, a little bit and it depends on the market. Across the country, everything is naturally appreciated but some places are much stronger than others. Based on job growth, population growth and the supply of housing, people start to make more money and so everything around them can justify a higher expense. That’s the natural appreciation as these rents are organically going up because of different factors.
With these commercial multifamily apartments, the way they’re valued unlike single-family homes is that as the rents go up, the revenue that it’s produced each month goes up, which increases the value of it because they’re valued by how much revenue they’re producing each month like any business. That’s that natural appreciation. It’s like when you own a house for ten years. It gains value because everything around it has gone up.
Whereas forced appreciation means that we are forcing the appreciation by executing a value-add renovation plan. We’re looking for these 1980s properties what we call classic units, where they have old original interior finishes. They’ve got old flooring, old countertops, white appliances and old cabinets. We’ll go in there, buy the deal and do brand new vinyl plank flooring, a real quartz countertop with an under-mount sink, modern plumbing pull-down fixtures, subway tile backsplash, stainless steel appliances and brand-new cabinets.
We do a full interior renovation. It looks like a class A luxury apartment but it’s in a workforce housing type of product, which is still affordable and where the majority of the population lives. That allows us to drastically increase the rents, which is forced appreciation. It increases the value of the asset and then gets us that profit margin for the investors.
It’s called a value-add plan. You have to be able to efficiently add value by executing renovations and improving the property to justify a higher rent because it’s all market. Whenever we’re looking at a deal, we’re secret shopping all the comparable properties in that area to see what rents are they achieving for renovated units.
If we buy this deal, we put X amount of dollars into it and then we can increase the rent X amount, which increases the value X amount and gets us that return for the investor. It’s almost on a high level, we’re flipping these apartments. It’s a lot more sophisticated operationally and logistically. That’s the forced appreciation versus the natural appreciation.
The last question I usually ask is what is a great podcast that you listened to? It can be real estate related or otherwise.
The number one show is Left Field Investors. For the first couple of years, I was listening to a lot of podcasts and I don’t listen to them anymore. The first podcast I started to do is Michael Blank. Michael blank can be good. He caters more to passive investors like you. As an investor, you have to understand what your goal is. There are different podcasts that cater to that.
There are podcasts like yours that cater to the passive investor and people who are going to talk more about active general partner strategies but Michael Blank is a good one. Dan Handford has a pretty good podcast. It’s funny because there are a lot of similar speakers on all of these podcasts. A lot of it comes down to the host, their format and the questions that they ask because that can determine the quality of the podcast too.
I appreciate you reading all of our episodes ten times. That helps our download counts. If readers want to get in touch with you, what’s the best way to do that?
You can go to our website, Rise48Equity.com. You can go on there and set up a call with me if you’d like to learn about what we’re doing or you can email me at Zach@Rise48Equity.com. I’m happy to jump on a call with you.
Thank you very much. This was a great episode. It’s focused on Phoenix because it’s such a hot market. To have this opportunity to talk to someone that’s in the market and is super successful there helps us to understand as we’re looking at deals that there is still some room to run and we don’t have to shy away from Phoenix because the results have been so fantastic over the past few years. Thank you very much for being on the show. We appreciate it. We will keep an eye on Rise48 as you continue to grow.
Thank you so much, Jim. I appreciate you having me on.
—
This was a fascinating interview for me. Knowing Zach’s story, he had a high-paying job but he wasn’t happy so he decided to quit. I haven’t always done it but I’ve always told myself, that if I wasn’t happy in a job, I would quit regardless but you don’t always have that flexibility or I don’t always have that courage and Zach did.
After he quit, he started learning about cashflow. That’s how he stumbled into real estate and then started studying mobile home parks because that’s what he wanted to do. Through that, he found multifamily. By studying, thinking and trying to advance himself, he found what eventually led to his success.
What we all end up wondering quite often is, “Why isn’t everyone doing this?” When I first learned about the high cash value life insurance, I thought, “Why isn’t everyone doing this?” When I found out about real estate syndications, I thought, “Why isn’t everyone doing this?” That’s the doubt we all have but then you have to have the courage of your convictions and understand that even though not everyone understands this and doing it doesn’t mean it’s not possible and not a good thing to do.
Zach went off and he’s had great success diving into one market. He talked about diversification but he also says he’s in 1 market, 1 asset class and is all in. That gives an investor a little bit of confidence in thinking that my sponsor, the syndicator that I’m investing with doesn’t even invest in other people’s deals, people’s cities and asset classes. He’s all in Phoenix multifamily and that’s it. He does not have a long positive track record and hasn’t been doing this for very long but he’s all-in and that gives him a little bit more confidence.
In the Phoenix market, which is a place I had doubts about, the market has been going up 20% every month, year on year as he was saying. As he explained it, people are still moving to Phoenix. There is a lot of 1980s vintage inventory that has not had anything done to it. There are still a lot of opportunities there. If you’re forcing appreciation, plus there’s natural appreciation, you can accomplish a business plan.
His business plans are fairly conservative compared to the market. Five percent rent growth isn’t conservative in some markets but in Phoenix, it is. He’s assuming a downturn starts the day they buy the property and ends the day they sell it. His entire business plan is predicated on a market drop or a downturn. That seems pretty conservative to me.
It was interesting to hear his story and how he’s telling it. It all makes sense. That’s why you can’t just look at the broad numbers or say, “Phoenix has gone up 20% the last couple of years. It’s got no more room to grow.” If you talk to someone who’s in the market and that’s all he does, he says otherwise. You need to figure that out for yourself, whether you agree or not but it gives you some confidence with some of the things that Zach was saying. I enjoyed the interview and learning about his story, his journey and then about Phoenix. I’m certainly going to keep an eye on Zach and Rise48 and see where it goes from there. That is all we have for you in the left field.
Important Links
- Rise48 Equity
- Rise48 Communities
- Rich Dad Poor Dad
- Robert Szewczyk
- Bikran Sandhu
- Michael Blank – Apartment Building Investing
- Dan Handford – Multifamily Investor Nation
- Zach@Rise48Equity.com
About Zach Haptonstall
Zach Haptonstall was born and raised in Phoenix, Arizona. He is the Chief Executive Officer and Co-Founder of Rise48 Equity and Rise48 Communities. Zach’s main responsibilities as CEO include overseeing all acquisitions, sourcing capital, and building strategic partnerships. He resides in Scottsdale, Arizona with his wife Grace Haptonstall.
He Founded ZH Multifamily in 2018 and grew his portfolio to $35M. ZH Multifamily founded the organization, The Phoenix Multifamily Association “PMA” where Zach hosted 200+ members and held monthly speaking and networking events. In order to scale and add experts to the team, he retired ZH Multifamily and PMA in 2020 and Co-Founded Rise48 Equity.
Zach’s professional background includes Healthcare Sales and Administration. He is the former President and Co-Owner of a Hospice Organization in Phoenix with 110+ Employees and $9M+ Annual Revenue. He is also a former live television news anchor and sports reporter for Arizona PBS and co-hosted a show on Fox Sports Network Arizona.
Zach holds a Master of Business Administration from the Colangelo College of Business at Grand Canyon University, and graduated Summa Cum Laude with a Bachelor’s in Journalism and Mass Communication from the Walter Cronkite School of Journalism at Arizona State University. He attended Colorado Mesa University on a football Scholarship his Freshman Year of College.
Zach has been a licensed Real Estate Agent in Arizona since 2016. He is also an official member of the Forbes Real Estate Council, a Directors Council Member of GPEC, and is a #1 Best Selling Co-Author of “Success Habits of Super Achievers.”
Our sponsor, Tribevest provides the easiest way to form, fund, and manage your Investor Tribe with people you know, like, and trust. Tribevest is the Investor Tribe management platform of choice for Jim Pfeifer and the Left Field Investors’ Community.
Tribevest is a strategic partner and sponsor of Passive Investing from Left Field.