Repositioning Distressed Properties

Welcome back to the How To Scale Commercial Real Estate Podcast today we have Brendan Chisholm, Brendan is the founding member of BKC Holding, LLC. A private equity real estate firm focused on acquiring distressed and value-add multifamily and mixed-use communities with asymmetric risk-return profiles. 

 

[00:00 - 05:56] Brendan Chisholm on the Importance of Value Add in Multifamily Investing

• Brendan Chisholm started looking into real estate 10 years ago and acquired his first property in 2011.
• Since then, he's purchased three more properties in under 21 months, all of which have value add deals.
• He says that the momentum and progress he's making is nothing to be ashamed of and that his focus remains on acquiring multifamily properties in high-demand markets.

 

[05:57 - 11:55] Keeping track of your business partners

• Brendan shares that their Distressed properties are class Class C assets that they are transitioning to C plus or B minus Assets.  
• • When they purchased the said property it was completely down and uninhabitable. 
• Implementing interior and exterior trackers to keep track of all capital expenditures
• Creating spreadsheets to keep track of project status and progress
• Using monday.com to keep track of meeting notes"
• Brendan adds that there were 6 GPs that started their first deal and now all of them separately focused on each of their own group of investors to market themselves. 

 

[11:58 - 17:35] We're Still Focused on Value Add Deals and Distress

• Brendan and his company still want to have a full-time maintenance and leasing person on staff.
• Start building out some of the economies of scale on their end.
• They are still focusing on these value add deals as well as distressed properties.

 

[13:59 - 14:57] Closing Segment

• Reach out to Brendan Chisholm! 
• • Links Below

 

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Tweetable Quotes:

"We still think through our business plan.  what we've seen over the past, six months going over now until whenever, it's just to continue buying value, add distressed deals, and forcing that appreciation on the property." - Brendan Chisholm

Connect with Brendan Chisholm by emailing him at brendan@bkcholding.com

Or visit his website www.brendanchisholm.com

Know more about BKC Holdings by visiting www.bkcholding.com

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I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.  

 

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Email me → sam@brickeninvestmentgroup.com

Want to read the full show notes of the episode? Check it out below:

[00:00:37] Sam wilson: Brendan Chisholm is a principal at Bkc Holding. They currently have 169 units in assets under management, heat, capital rates for value add, and distressed properties in multiple southeast markets. Brendan, welcome to the show.

[00:00:49] Brendan Chisholm: Thank you, Sam. It's a pleasure to join the show today.

[00:00:51] Sam wilson: Absolutely. The pleasure's mine, Brendan, there are three questions I ask every guest who comes in the show In 90 seconds or less, can you tell me where did you start? Where are you now, and how did you get there? How did you get there?

[00:00:59] Brendan Chisholm: Where did I start? 90 seconds or less. All right, here we go real quick. 10 years ago, or right when I graduated college 14 years ago, all I wanted to do was climb a corporate ladder. Didn't wanna do that anymore. So I decided to think real estate was the best way to do it.

I started looking at turnkey turnkey pass of single family homes in the southeast and migrated myself up when I realized that didn't really turn equity or turn money as quickly as possible. Started looking into multi-family. , After that, just really jumped into it for a couple years before acquiring my first property.

And then where are we now? As you mentioned, at the top of the show, just purchased my third property in under 21 months. And know that is, that is the plan. The snowball is, you know, officially rolling and keep on keeping the momentum going downhill. Man, that's,

[00:01:45] Sam wilson: That's cool. Three properties in 21 months.

That is momentum. That's absolutely momentum. It takes, , especially when people make the leap into bigger assets, I think it's commonly underestimated the amount of time it takes to get your first deal done. Yeah. I mean, was there, was there an on ramp period for you or was it just, Hey, we're gonna multifamily and you just started acquiring things?

[00:02:06] Brendan Chisholm: It was an on ramp period. As I mentioned, I wanted to look at turnkey rentals cause I thought that would be the easiest path to do at least getting, cutting my teeth there. Then I started going, like, started reading up on bigger pockets. This was four and a half years ago, maybe five years ago at the time.

And seeing what I could do, they're like, All right go to a investor meetup. And the first or second investor meetup, there was a gentleman there that started talking about multi-family and the power of the cap rate. And with my corporate background, I'm like, This is, this sounds.

In theory, just as easy as trying to buy single turnkey assets, Joined his mentorship program for a couple year and a half and finally in February, 2021, I, along with, my investment partners closed on our first apartments indication. so that was, that was my first real estate investment.

And as you mentioned now, it's just been momentum and just sticking to it. This is, this is all I focus on from an active perspective and just wanna keep on, keep on, keep, keep at it, um, and just keep my focus here, right?

[00:03:10] Sam wilson: Hey, man, that's great. One every seven months is, is fantastic. progress and momentum.

Nothing nothing to be ashamed of. Certainly on that front. When it comes to the types of assets you are buying, I know you and I talked a little bit here before we kicked this off, in that you're buying some assets and you're pumping a ton of money into these deals. Can you give me some kind of background on what flavor, I guess, of multifamily it is you're looking at and how you're finding value there?

[00:03:37] Brendan Chisholm: Sure. The team I work with, we focus on value add, distressed investment types. So the value add is putting some, putting capital expenditures into the deal and forcing growth and noi mostly through reduction of expenses and increase in, in income. We're going in. , as you mentioned, it's, it's a heavier value add deal.

The first. Property that we purchased, put about a million plus dollars into the property upgrading the kitchen, flooring, bathrooms, everything as well as the exterior to reposition the property and get it stabilized. Second one, similar strategy that we're implementing. The second property is 70 units in Rock Hills Health, Carolina, and we're doing a $2.1 million CapEx plan on that deal.

Taking it back. I know. but, yeah, , doing a combined $30,000 per unit on both the interior and exterior work. Both these two properties have put in or we'll put in barbecue units, dog parks, playgrounds, completely repainted the, exteriors to give it, that fresh, modern vibe.

And the living units are, , as close to. Class A minus that you, you'll see you go in stainless steel appliances, brand new modern cabinets, modern design to really capture that the market down there in markets that , we see a lot of rank growth in income, growth, population growth, everything that you're looking for in a multi-family acquisition at this this point

what,

when

[00:05:03] Sam wilson: you say value add distressed, what does distressed

[00:05:07] Brendan Chisholm: mean to you? Distressed under 85% occupied. Okay. It was just nine of the units when we purchased the property were completely down and uninhabitable so by occupancy level, you know, and based off of you, well many consider some of the definitions of the multifamily.

That would be what we consider a distressed deal. , if it was fully, if, if it was stabilized above 90% or some, some may say 85%, it could have just been in that value add Strategy, but you know, we're ultimately looking at putting in, , based off of the unit count, , 20 to 30,000 plus dollars per unit.

[00:05:44] Sam wilson: Right. And under 85% occupancy doesn't necessarily scream distress to me. Obviously, there's some operational improvements that might need to occur or there could be some, there could be some strategic reasons why that occupancy is lower. Are you buying like class C or Class D? I mean, pumping 30,000 bucks a.

That's a lot of loot to throw into every single unit. I mean, can you, can you gimme some more color on that?

[00:06:13] Brendan Chisholm: Sure these are class C properties or Class C assets that we're transitioning into a class C plus B minus asset. Got it. Most of the vintage that we're working with is early, mid sixties, early seventies properties.

so those are, the two of 'em are, well, 60, 61, 65 and the other is a early seventies product. A lot of the interior units have been remodeled before, but had more of a 1990s feel to it. Although a nineties kid, I uh, I don't really, I don't really wanna make sure that we're trying to, you know, increase rents by providing that, that type of product to people.

, so that's where, think that answers your question, Sam, of what we're looking at from , when we purchase it, as well as what the units will look like post, post renovations. Yeah,

[00:06:58] Sam wilson: absolutely. Absolutely. Go back a couple of years, what are some things that maybe you're doing differently now than how you were doing them two years ago, or 21 months, I guess, as it is?

[00:07:11] Brendan Chisholm: Sure.

[00:07:11] Sam wilson: Or, I guess the other way to ask this would be say, are there some lessons learned that you would say, Yes,

[00:07:15] Brendan Chisholm: definitely lessons learned we've done some things, ,when we first acquired the property of looking at what our, CapEx budget would be, , going on Home Depot, going on websites to find what , the cost would be, and then try to assign that to a cost per square.

so in our underwriting now when we're looking at our underwriting, we're taking the actual costs that we've have got back from our contractors and being able to apply it on a per square foot basis. So we're seeing how much money it would actually cost so we can be more in tune with our underwriting.

One of the other things that's we've implemented is interior and exterior trackers. For every single project that we're going through it. These are large capital expenditure budgets, so with a lot of different moving pieces to it. And , there could be 20 different items that we're looking to do on the exterior or need approval for on the interior.

So we've created spreadsheets on our team to see where the status is of like, if we're gonna do, like regrading our landscaping, who's making the calls, and landscape architect, where does the bid stand? When was the bid submitted? When and what's the turnaround time? Just so we have more informed.

Asset management calls with our property managers, with our construction teams. And since we're managing in multiple markets, there's different property management companies, so we don't want to have a blur between each deal where we're asking for , this could be something that's going on in property two instead of property one.

So it just helps us stay on track with it too. And it's simple to say. What we've implemented over the past, I'll call it six months for our deals, is if we have a conversation. It's it's a summary of the conversation with the construction manager or the operations team, or the leasing team, or the property management team in general.

That covers what we have just so everybody knows nothing gets lost in the cracks. So it's making sure every single task and every discussion with our business partners are tracked and there's an actionable item from there.

[00:09:14] Sam wilson: How are you tracking those? Is that via follow up email? Is there a platform you're using?

Who, who is writing down the the mid the meeting minutia?

[00:09:24] Brendan Chisholm: Yeah it's first email. Then we use, I use monday.com. And that it helps tremendously , With our follow up and who's the person assigned to the task. And then it's just, we share a OneDrive amongst our team and we have all of these trackers assigned that we've created for each property.

And whoever's in there is looking at it, updating it, and then just updating the Tatum, which we have the discussion. Right. How

[00:09:46] Sam wilson: have you guys, you know, you, you're taking down deals as a team. How have you decided who handles what part of this business?

[00:09:55] Brendan Chisholm: That's evolved over the past 21 months as well.

The majority of us, there were six gps on our first deal. And you know, there's, that's a lot of hands on a 53 unit deal. , Sure is . So it's evolved in which. Each of our strengths are, we figure out what our strengths are, what we like to do amongst now there's four of us who are working together, who likes to do the asset management, The follow up, I'll raise my hand.

That's me. There's other guys who focus more on the acquisition side to allow us to get those 21 units or the three properties in 21 months, and all of us separately focus on, our own group of investors to be able to do our capital raises, you know, market ourselves, market our market, what we're doing.

But one person's more so involved with that on the retail side where our, for us, it's more of just internal family and friends that we're, we're trying to recruit to invest into a deal.

[00:10:49] Sam wilson: No, I think that's, that's great. And I think that's always an interesting I mean interesting, um, just the relationship and how those, those are built out.

Cause I mean, a lot of times we see that here in the space where there are multiple people with multiple different entities coming together to take down a deal, which is one of the cool parts about this business. but then deciding who does what and making sure that everybody stays on track is a unique, uh, Not problem, but just, thing to be solved, I guess. And how people solve that and take 'em down is, is always probably unique to those particular sponsors. So, curious, you know, how that worked out for you guys? What, what do you see in the acquisition pipeline or in the acquisition future, you know, for you guys?

Is it gonna be more the same? Are you guys changing what you're buying? Talk to me about that.

[00:11:38] Brendan Chisholm: We'd like to graduate ourselves into larger deals. so we're the most recent acquisition. It was a 45 unit direct from seller off market. And it was, it hit our return metrics, It hit everything that we were looking for, but we were, prior to that, we were looking at 75 to 150 units in the same markets that we currently have properties in.

We'd like to have full-time maintenance and leasing person on staff. And then, start building out some of the economies of scale on our end there.

We're still focusing on these value add deals as well as well as distress. It's you in a rising interest rate environment where rent growth has, like it's finally slowed down a bit. Just, you know, month on month, not year, on year. However, our business plan. Prior to, the tailwinds that we received from some of the rent growth was to add value to every single deal by increasing the rental income, figuring out if there's, additional ancillary revenues that we can generate in creating operating efficiencies.

And we still think our business plan. through what we've seen over the past, six months going over now until the whenever it's just to continue buying value, add distressed deals, and forcing that appreciation on the property.

[00:12:48] Sam wilson: You mentioned some team members that I would've traditionally thought were part of property management.

Are you guys. In house managing, or do you guys have third party managers on each of these properties?

[00:12:59] Brendan Chisholm: We have third party property managers on all of these properties. We don't have the scale yet in our local markets to be able to do a full time property management team yet. Got

[00:13:08] Sam wilson: it. Got it.

Okay. Okay. Very cool. And I guess , I guess, that's the next part of the business is when you, you start buying bigger assets, but what are you gonna, what are you guys gonna do you think, to stay competitive when you start buying bigger

[00:13:21] Brendan Chisholm: assets?

How do we say competitive? It's through those seller and broker relations that we have. I'm not saying we've gone out and acquired more properties than anybody else, but we make offers on deals, and we've proven we can close on 'em. So, and right now we have, we're gaining a track record of doing well and hitting our business plan.

So I think , when you present that to a broker or a seller, there's a list of references that a company. Each of our, LOIs that go out that, hey, these guys actually can close. We've worked with, you know, multiple lenders now, both on , the agency side as well as the bridge side that say, these are the guys that can close deals.

They go after deals and they deliver upon their word.

[00:14:03] Sam wilson: I think that's fantastic. You mentioned something there I'm really curious about is the debt side of things. What do you see on the, on the debt side, what, how are you guys positioning yourselves right now as it pertains to debt? Is there anything unique you guys are doing?

[00:14:18] Brendan Chisholm: I wouldn't necessarily call it unique, so we're adapting to the changes of what the debt market is giving us. Right. And our first two properties that we acquired in 2021 and early 2022, We're doing a bridge to agency loan. We've executed upon the first one. We got the long term debt set up, the second one, with the floating rate debt.

Interest rates are going up. However, we accounted for that when we purchased the property, we've worked with our lender to make sure that there's a cap on, sofa right now. Right. And we've transitioned into our third deal because , we bought a fixed.

a fixed loan from a community bank rather than a bridge loan. We saved 200 basis points by going fixed versus a floating rate. So there's, you know, some meaningful difference in And having that for your, your monthly debt service than what it would've cost us if we weren't bridge.

Yeah.

[00:15:10] Sam wilson: 200 basis points. That's substantial. What was the downside? I guess when they said, okay, here's, there's always the bait and then there's the hook. So right there,

[00:15:19] Brendan Chisholm: the bait, the hook is, it's a recourse loan. However, Collectively, we feel in our heart of hearts and in our belly that regardless of what's going on, our business plan and the way in which we execute it is sound.

And we were okay accepting that type of, with recourse, there has to be a zombie of pocalypse for us to for like if the, our break even occupancy for that property is 65% on like a, a long. Over the course of many months that happens in the market that we just purchased it at, based off of how quickly they're turning units and how low the days to rent are there's a lot more going on , in the world than worrying about our property being 65%

[00:16:01] Sam wilson: but assuming a recourse loan, I don't, I mean, everything we do in the RV resort space is recourse. Yeah. It's just the way it is. There's not the option for non-recourse, so I don't know that just, and if you're not willing, I'm, This is my contention is that if you're not willing to go recourse on it, then you probably shouldn't be doing the.

Right. I mean, either you believe in it or you don't. And it

[00:16:23] Brendan Chisholm: That's a big thing. We believe in it. We believe in every single deal we do. We invest right along with our limited partners, and we're putting our money where our mouth is. The second, thing that they put us with was there's, the prepayment penalties are a little higher on, on the first three years.

So it's, it's a three 22. Right.

[00:16:40] Sam wilson: Okay. So for three years you have a higher, you have a higher prepayment penalty, but again, if your business plan is longer than that. Yeah.

[00:16:48] Brendan Chisholm: Okay. Our, yeah, our business plans usually are, plus years, hold and do the execution within the first 18 to 24 months.

Right,

[00:16:56] Sam wilson: right. No, that makes a lot of sense, Brendan. That's, that's super cool. I love the way that you guys have found a way to get into some of. I'm gonna call 'em smaller deals. Initially outta the gate. You know, some stuff that needs some heavy value add, you guys haven't shied away from. You found a way to pump a ton of money into the deals and yet still have them make sense.

And I think one of the things that we talked about off, maybe we didn't get the chat about here was just, and I know you briefly mentioned it, is that you've had a refi on one, if not two of these properties go down. And it's come out looking, looking very, very nicely for you and for your investors.

So I love. Love the way you guys have had such fast progress here in the last 21 months. And then, you know, looking forward where you guys you know, you're looking to do larger deals here in the future, so that's absolutely awesome. If our listeners, Brendan, want to get in touch with you or learn more about you, what is the best way to do that?

[00:17:46] Brendan Chisholm: Sure Sam, appreciate that. You can reach out to me in my email, brendan@bkcholding.com my website, bkc holding.com, at brendan chisholm.com. Love having conversations about real estate and what's going on in both the debt and equity markets or just general operations. So feel free if you just wanna talk just to gimme a call.

That's

[00:18:04] Sam wilson: awesome. We'll certainly put all that information there in the show notes as well. Brendan, again, thank you for coming on. Certainly

[00:18:09] Brendan Chisholm: appreciate it. Appreciate it, Sam. Have a wonderful day. Thank you.