Hello Mr. Collier,
I hope all is well with you.
Would you mind answering the below questions and sharing your perspectives?
Thank you so much!
What is your philosophy on paying cash for all of your rentals versus using leverage?
I tend to use leverage since I’m in a growth mode and capital is precious and I believe that I can earn a return substantially above the interest cost of debt and the cash flow hit of the mortgage constant (annual debt payment, interest AND principal, divided by the amount of debt). There is no doubt that lower leverage is lower risk.
How much of the surrounding area economics play a part into you purchasing an asset?
Lots. I can turn around/reposition an apartment community, I cannot turn around a neighborhood. Government has ruined more than one neighborhood by sticking a homeless shelter in it.
Have you ever acquired a large asset with the intent to reposition and sell?
I tend to have an infinite hold period because 1) Uncle Sam wants to take a big hunk of your money every time you sell and 2) you just have to find a new place to put your money only you have to make more return than you did the previous investment to make up for the portion of the money you no longer have working for you because Uncle Sam has it.
If so, what would you say led to the success of that strategy?
A good plan well executed by motivated people who know what they are doing and have at least 90% of the resources needed (having to stretch brings out creativity, if have ample resources, temptation is to relax, coast a bit; this is very dangerous, slippery slope).
Do you believe a real estate company of your size can be built again today taking into account how you started and when you started?
There is always a way.
Have you ever had an interest in taking your company public? Why or why not?
No. I’m not emotionally suited to run a public company; I have a long term perspective and do not want distraction or pressure of quarterly earnings reports, you spend more time spinning to analysts than you do running your company plus the legal, accounting, reporting costs of being a public company today are very, very high and the process to go public is long, arduous, and expensive.
Do you believe owning a 100 unit complex will outperform owning a 100 single family houses, quads and duplexes, and triplexes?
Yes. Economics of scale/uniformity.
What kind of person on your team does the physical due diligence on a property before you acquire it?
Generally, someone with a maintenance or construction background would do the physical due diligence, also have to do a lease audit.
Would you say you have obtained more usable knowledge from your formal or informal education? Which one has made the biggest difference in your life?
Apples and oranges, apples and oranges. You can’t become a lawyer or a CPA without formal education and few have the willpower to study hard academic disciplines on their own. Also, formal education of a subject tends to be more 360 degree, informal learnings tend to be more along the lines of wisdom but less comprehensive. You don’t know what you don’t know so you don’t seek it out unlike a well-designed syllabus or degree program which should cover the field.
How do you feel about on-site laundry facilities versus washer and dryers being inside the units?
Washer/Dryer in the apartment is much, much more convenient/upscale.
What reliable resources do you all use for multi-family data in various markets? Do you like Marcus and Millichap?
M&M is a fine brokerage firm, so are ARA, Coldwell Banker, and Colliers International (no relation) to name a few. Bear in mind there is very little audited data in this field (ok, if REITs report them in their 10k or annual reports they are audited but often so delayed so as to be rear view mirror data), no one is required to give out their occupancy numbers and often there is much puffing in reported numbers. Every market is really many, many sub markets and average data across those markets is generally of little use.
Why do you say high net worth individuals like rural areas for multi-family properties?
Did not mean to say HNW individuals liked rural areas, meant to say that they might be more willing to break the rules; perhaps tempted by a higher return.
What’s a good cap rate that I should always aim for?
Cap Rates vary according to the type, age, market, and location of the asset. Cap Rates are lowest for new institutional quality assets in primary markets (5? 5.5? NYC, CA have reported sub 4 caps, go figure), higher for older, C grade assets in tertiary markets (6.5 to 7+?). What can you borrow long term, fixed rate mortgage money for? What return spread do you want over your debt i.e. how much higher do you want your estimated return to be over your cost of debt? Remember that your debt costs are a certainty and your return is just a professional guess. How much of a cushion do you want? What is your tolerance for risk? Currently we can borrow 10 year money fixed at about 220 over the 10 year Treasury. Today the 10 year is at 1.90% so that means we could borrow at 4.10% but within the last few months it might have been 4.40% or 4.50%. Of course you can get variable money in the 3.25 to 3.75% range but that brings a whole other category of risk.
Could the current role you play in your company be outsourced?
No one is irreplaceable and yet an owner’s perspective is unique and an entrepreneur’s energy is precious.
As always, I share what I most want/need to learn. – Nathan S. Collier