Hanh D. Brown: today’s guest is Kimberly Radaker
Bays. She and her business partner Will Crozier founded The Exponential
Property Group in 2010. Exponential Property Group specializes in
repositioning value add, multi-family assets throughout all major Texas
markets. Through professional asset management and a high level of
integrity, Exponential Property Group has increased the value of
properties while dramatically improving the quality of life for its
residents. They started with 2 employees in 2010 to now 150 employees,
operating over 7000 units. Hi Kim, thank you for being here, so Please
tell me your story and how did you get your start in this business?
Kim Radaker Bays: Sure. It’s kind of a funny story. I was working in the retirement plan field and, so I kind of had a finance background and everything, but, um, one day I was going to the grocery store and the Rangers game that I was listening to you went on rain delay and they put on a real estate investor radio show as a replay during the rain delay. And, so I listened for a little bit and heard their recommended book lists. And, so one of the things they recommended reading was “Rich Dad, Poor Dad.” And, so I went and got it from the library, read it and I don’t know, five or six hours. And it was like, okay, this seems like something that I should really look into. So, I went to the free seminar thing that this real estate group had, and so got more information there and decided, you know, for $500, all I find out is that I don’t ever want to deal with all this real estate stuff. At least I’ll wake up when I’m 70 and know that I looked into it and it wasn’t for me. And it took a bit of a different path in that. So, I started in single family and in the first year that we were involved with this real estate group, but seven single family homes, based on certain lending things and whatever. This was in 2007, so before any of the market crash, but still I was self-employed. And, so in order to getting some of the loans on the houses was a bit complicated, and so we actually paid cash for the houses, then did the renovation and then put the mortgages on afterwards. And that group to be a great thing because it got a lot of the money back out of the houses in order to allow us to buy more. So, we were able to buy seven and got all those refinanced. The seventh one got the refinance done about three days before Countrywide shut down their cash out program. And that was pretty much the last game in town as, as 2008 was hitting.
Hanh D Brown: That was a booming time, a great opportunity for the local market for multifamily, as well.
Kim Radaker Bays: Absolutely. So, that was this kind of the single-family piece of it. At the time, my kids were little, they were about six months old when I joined the investor group. They spent their first Halloween in a title-office, signing paperwork on the first rental house. And were about one and a half, I guess by the time I’m almost too, by the time we were done with the single-family rentals. And so it was getting a lot harder to bring them into, you know, into houses with no flooring and that sort of thing. They wouldn’t just stay put like they would when they were little. So, took a little bit of time off and just manage the seventh and rentals that we had. And then about two years after that, I was talking to another mom at the school that they were going to, and she asked what I did and I told her, you know, had rental houses and whatever and she said that her husband was in real estate too. And, so I met him, and his background had all been flipping houses out in California and then a little bit in north Texas. And, so we spent an afternoon at the Starbucks where I was trying to get some flip knowledge to get a little bit deeper capital stack to work with. And he was trying to get some rental knowledge to figure out how to get some cashflow and we decided to join forces and flip apartments. In 2011 we bought our first property, which was a 77-unit property and was about 68% occupied at the time that we bought it. We managed to renovate it, raise rents, lease it up and sold that one for a 136% gain in 15 months. From there, just 10-31 into the next one, which was a 244-unit property. The year after that we bought a 444-unit property and then it’s just been growing from there. So, at this point, uh, inception to date, we’ve acquired over 7,200 units. They currently own a little over 4,800 now, so we purchased 20 properties and have sold six of those and have 14 currently. So, everything has really grown exponentially, which I guess is just desserts for naming the company Exponential Family Group.
Hanh D Brown: Real estate can be an alternative for those who are not able to withstand the volatility of the stock market. It is also a better investment for those investors who wish to take an active role in growing their capital, rather than passively putting their money into a fund to be managed by someone else. Rental property investing is the preferred investment strategy for those investors who want an additional source of monthly income along with …. slow but steady appreciation in the value of their portfolio.
Kim Radaker Bays: I think so. I think that’s where it started from. So, all our initial investors were from that group. But, then, we kind of moved on from that group, because it’s targeted a little bit more towards smaller operations than what we have grown into. So, once we kind of left that group, we didn’t have any of the restrictions that they imposed on it. Now in addition to all those investors that we were working with before, we also have most of their brothers-in-laws, next door neighbors, down the three offices, mothers, all those kinds of things. So, a lot of their kids have started to invest and so it’s really grown a lot since that time. So, the first property only had six investors and the 2000-unit portfolio that we bought last summer I think had about 183, if I remember correctly.
Kim Radaker Bays: So
yeah, lots of smaller investors. And, it’s been really, cool because
what we do in addition to making the properties better and giving people
a better place to live. As we’ve grown, we’ve really been able to
provide a good place for people to work. And our investors have gotten
some good returns that have enabled them to do things that they wouldn’t
otherwise be able to do from trips on their bucket list or you know,
allowing their kids to go to college and paying for it so that they can
graduate without student loan debt. It’s been a cool process to watch.
Hanh D Brown: Passive ownership of commercial multifamily real estate can be a great way to create stable streams of passive income. You can invest in multifamily real estate either actively or passively. Active ownership is synonymous with being a landlord, more so in residential rental ownership. For people want to be investors, not landlords, then passive investing is probably a better fit. As a passive investor in multifamily real estate syndication, you partner with a stellar team that has a strong track record, invests your money in a prime piece of multifamily real estate, and generates high returns, all while you expend minimal effort. So Kim, tell us about Mana Cedar Creek and do you have a lot of experience in this neighborhood? Tell us why there was an exchange of ownership and the impact of having a good property management in the repositioning?
Kim Radaker Bays: Yeah. Mana Cedar Creek was the one that we bought last Monday and it’s 650 units in Dallas. It’s in an area that we are familiar with. We’ve owned another property that was about a mile south of there and several others that are a few miles to the west. So, it’s an area that we have a lot of experience in. This property needed quite a bit around innovation. It had been purchased about three years ago by a group that’s great, but they didn’t hire the right management company on the first go-round. And so, the property really slipped. They did some renovations but never what they intended to do on the projects because the occupancy had dropped so much, and so that cut into some cashflow and had created some additional issues and by the time bought it, um, they switched management companies and it was on its way up, but the partners had decided to split up their partnership. And so that was the primary reason that they were selling then. And it gave us a good opportunity because a lot of the renovation they had intended to do didn’t get done. And there was still a lot of management correction that could be done as well.
Hanh D Brown: For those without expertise nor time, Passive ownership of real estate can allow you to invest successfully in multifamily apartments. You can leverage the specialized knowledge of a sponsor/syndicator and invest alongside with them passively.
This way, you can enjoy the benefits of direct ownership without the responsibilities of management. You get their percentage ownership of the cash flow, the tax benefits, the appreciation, and the amortization.
The goal for the passive
investor is to create stable streams of passive income (while you are
asleep) and to grow equity without the headaches of management. I see,
so working with a credible team and earning a reputation that you are a
closer ALL are key in getting your offers accepted by brokers and
Kim Radaker Bays: Well, I think a lot of the time we’re really able to get offers accepted over other groups just because we have a proven track record of doing what we say we will do. When we offer a price, we don’t go back and re-trade and cause hassles and argue over silly things. So we’re easy to work with on the transaction side. And so I think that makes the big difference. In this case, it was sort of an interesting story. While we were in the best and final section of the, um, kind of contract and offering period, there was a conference locally and I ended up being on a panel with the seller, one of the two partners that was selling the property. So we got to know each other a bit that day and then have gotten to know each other better through this whole process. And, you know, really become friends and allies and a whole lot of things. So that’s been a cool experience. So that probably having met him is probably a small piece of why we were able to win out over others as well.
Hanh D Brown: In making an offer, the investor must make sure there is Positive Cash Flow, Cash and Cash Return is in the Double Digits, Deal Must Have Upside Potential, which means that you have the ability to raise rents over time and the ability to reduce expenses. You might even can chargeback tenants for utilities. All three of these things are going to increase your NOI. The Property Must Be in a Stable and Growing Neighborhood with a growing JOB market. Brokers will know a valid offer when they see one. Before making your offer, what were the financials and how much did you raise?
Kim Radaker Bays: Sure. The raise is about 14 and a half million. We were able to get a favorable 75% loan to cost from our lender. And we were able to get a fixed rate even though it is a bridge loan that has a good deal of flexibility to exit any time after three years. So we got fantastic terms on the lending. Our target, uh, when we buy this property is to hit at least a hundred percent gross capital gain at the time of sale, which should be in about three to five years in addition to some cashflow along the way. So we look for properties that because their rents are under market or there’s renovation opportunities or various things we can, you know, cut costs and improve it in order to hit those capital gain targets. And this particular property, like I said, it had had quite a few occupancy issues. A lot of that was kind of cleared up by the time thing’s closed, but it struggled for a while. And so that impacted a bit what the price was that we paid for it. And then also kind of what our processes for working through the financials now that we own it.
Hanh D Brown: Most people are familiar with earned income. It is the income you derive from working at a job or owning a business. Earned income is highly taxed and, even more costly, you must trade your time to get it. The average worker trades 40 hours a week, 50 weeks a year, and does that for 30+ years in exchange for an income with highly taxed dollars. Passive income is different. It is derived from only one of two sources. It is from trade or business activity that you do not materially participate in OR from rentals. Kim is a successful multifamily syndicator/operator who now has generated passive income for her investors and for herself once she repositions the asset.
Please share with us your inhouse management team.
Kim Radaker Bays:
We do. We use external contractors for the exteriors of the property
because they’re artists, so many good groups that play in that space.
But we’ve always had a difficult time finding groups that really could
manage the interior upgrades well. And so, years ago we brought that all
in-house and so we have over 30 members on our rehab team that are
direct employees of ours and go from site to site and work on the
upgrades, you know, adding granite, if necessary, glass tile
backsplashes, replacing the light fixtures, really kind of cleaning
things up and giving people a fresh new place to live. Even though it’s
a, oftentimes the 1980s built property.
Hanh D Brown: What kind of upgrades are you doing?
Kim Radaker Bays: Well, I mean, it really depends on the square footages. Um, some of them are, you know, 500, some of them are 1300, so the costs range quite a bit when we, depending on the size. But typically speaking, we’re putting in all new vinyl plank flooring throughout the property. Sometimes adding granted, depending on exactly what sub-market the property is in and whether we want to do kind of a premium upgrade on it or not. All new door hardware, all new light fixtures, adding ceiling fans to the bedrooms if they’re not there, sometimes replacing electrical panels, if any of them have the Federal Pacific panels, sometimes resurfacing the tub, but oftentimes replacing the tub and the tile in the surround so that it gives a whole lot longer longevity moving forward, replacing faucets, the vanity lights, putting new toilets for water conservation. You know, new full wood blinds, glass tile, back splash. It really looks sharp when it’s all done.
Hanh D Brown: What is the classification the community and neighborhood?
Kim Radaker Bays: It’s probably a BB minus location, I would say. Kind of not just a little bit west of Garland, a little north of Mesquite. So I mean it’s in a decent area, but certainly not anything fancy. Workforce housing type project. But even workforce housing really wants a nice place to live in somewhere they can be proud of and have friends and family over and have nice surroundings.
Kim Radaker Bays:
So, typically speaking we would get without granite and with the new
cabinets, usually about a hundred dollars more per month for the one
bedroom. Then for two and three bedrooms, it can easily get to be 125
one 50 even sometimes 200 depending on the size and the market and
what’s going on there and kind of go for a more premium thing and
usually that costs us between about 3,500 and 8,000 and that’s including
new stainless-steel appliances and the flooring throughout. We have
some significant cost savings by having the renovation crude on in
house. And, also, probably the biggest cost savings is that years ago
when we bought the second property, it was only 50% occupied. And so we
had to renovate a ton of it all at once and we realized we were going to
need 200,000 square feet of vinyl plank flooring. And so we went with
one of our investors—it’s a Chinese national over to China—and started
sourcing our own materials. And so at this point we also have the
materials import business that sells both to our properties and to other
people’s properties. But we pass through a lot of the savings to the
properties that we have. So, we’re able to renovate for less because of
that value ad import. So we import all the light fixtures and the tile
and all and a lot of those things that I was describing.
Kim Radaker Bays:
I mean it can make sense. It’s getting all the logistics and the supply
chain figured out and finding the right vendors and things—it’s a
process to do that. But there, there are some good savings that can be
had by doing it. And then we also do sell, like I said, to other
investors. So, there’s a lot of other groups both in town and a few
nationwide that will buy from us and we do kit boxes. So, you get one
box that has everything you need from the ceiling fans, the faucets,
everything is in the one box. You can just take that box to the unit. We
already have the counts for our clients’ properties and have everything
all in one place. So, we already know if you ask for an A1 box that you
know, this is the number of cabinet poles but need to be in there. And
so, we’ve gotten that kind of all figured out now. And so that’s, that’s
a good way for some of the other people in the area to save money. Not
obviously as much money as if you are doing it all yourself. There is
still obviously some markup to support that business, but that’s been a
big value-add help for a lot of our other customers and other investors
in the market as well.
Hanh D Brown: The difference between earned income and passive income, is that, with passive income, you don’t have to trade time for money. You can earn it while you’re at your kids’ game, having dinner or while you are sleeping.
Passive income isn’t you working for money; instead it is your money working for you.
you create enough recurrent passive income to cover your monthly
expenses, then you are financially free and can spend your time as you
Are you managing 3rd party properties?
Kim Radaker Bays: At the moment we’re not doing any third party. At some point we may consider it. We would obviously be very selective about what owners do want to work with because it’s very important to me that our staff is treated very well. And so, making sure that all on the same page with ownership if we were to ever do third party management would be very important to me because I don’t ever want some of our employees to feel like second class citizens if they’re at a third-party property instead of the one of the ones that we own. But you know, that stuff, it is something that we’ll look into in the future. I’m sure. Basically, we started the management company from the very beginning, and you know, it’s been a little tempting from time to time to go third party management. My former partner was more of that mindset. But for me I just really like having the visibility and control and being able to make small changes before you end up in big problems. And so, having it in-house and having people that I know and trust at all different levels has made a big difference. It gives us a lot of visibility because we have access to all the software. Sometimes that’s a little more limited on a third-party arrangement and it allows us to make small changes like on occasion you have to find a better maintenance tech or various things. But without having to entirely change management companies, which could mean changing software and bank accounts and all kinds of other things, it’s been a huge difference to have it in house and really be able to be hands on whenever needed.
Hanh D Brown: You’re using software to screen tenants and how are you tapping into social media?
Kim Radaker Bays: We have some software that’s for the screening. We have Natasha, my director of operations, is just amazing and she loves the marketing side. The finance side is much more my side. And so, that made us a great team years ago when she came and joined us. It was like, it was a good split of duties as far as me getting to spend most of my time on the spreadsheets and her getting to spend more of her time on marketing ideas and whatever else. But we do have a lot of different marketing that we do. We do some through some of the bigger websites. We’ve also done some keyword marketing for different sources and we also do a lot of kind of grassroots out in the community, make sure we were meeting with employers that are nearby, getting referrals from local businesses, uh, places that are residents would shop or eat or whatever. We try to really have good connections there and that gets us a lot of word of mouth as well.
Hanh D Brown: What has been your greatest success and setbacks and what did you learn from it?
Kim Radaker Bays: Sure, I mean…there’s been a lot of, a lot of cool successes. We’ve grown from two employees back in 2011 to over 160 now. And so it’s been an amazing journey. We’ve grown our investor base from six people on the first project to now across all the different projects, probably 360 or so unique investors. And so really getting to meet so many cool people and interact with so many people has really been probably the greatest success of all of it. And then setbacks, I mean, there’s always little stumbling blocks along things. You know, there’s some deals that you don’t win even though you wanted to, but I’ve always kind of looked at those, you know, just roll off and move on from it quickly because that obviously wasn’t the one, we were supposed to have. And we’ve had some awesome projects and awesome things to work on over the years. We’ve really kind of improved a lot of properties and a lot of units and given a lot of residence, a better place to live. So some setbacks, I mean obviously, you know, have more through a few different partnerships, but, um, that’s always been a good thing and everybody’s always, uh, moot, gone their own ways as friends. I guess it was more just changes in what we want to do to do once we got to a certain place and yeah. So, my former partner just wanted to spend time being a bit more retired at a much younger age than what I was looking for. So, we’re still very close friends and you know, do various things together and yeah, he’s still invest in my projects, but you know, just in a different level than this past year has been a really interesting, when we went from right around the 2000-unit mark for where we had been for a year or so and moved up to where now we’re over 4,000, almost, almost 5,000. And so, it’s really doubled in size in the past year. Last April, we had 80 employees. Now, we have 160. And so the biggest struggle that we have right now, and it’s just something that we’re working through and paying really diligent attention to, is making sure that everything, that everybody is going in the same direction, that everybody’s growing in the same direction and that everybody at all levels throughout the company knows what we’re about, why we’re here, what we’re trying to get done, and understands the care that I have for all of them. Even though we’ve now grown to a place where there’s a lot of times that I can’t see everybody frequently. So those, that’s probably the biggest struggle at the moment. And it’s just something that we worked through and learn some new skills and rituals, some processes, because some of the processes that work really, really well when you only have to do it for three properties, don’t work as well when you have to do it for 14 so it’s just a constant growth and learning opportunity.
Hanh D Brown: Knowing the real estate markets intimately and being able to correctly identify the phase each market is currently in, is the key to recognizing what is a good investment versus what to pass on. Where do you see us relative to Recovery, Expansion, Hyper Supply, and Recession?
Kim Radaker Bays: I mean, prices are certainly high. I don’t think we’re going to continue to see like higher prices and at least not anymore cap rate compression probably—would be my general guests. But, at the same time, the fundamentals still steam very strong, especially here in DFW. The job market’s so great, there are still businesses moving here all the time. And so, while I know it’s late in the cycle and everybody wants to talk about what inning is, we in, most of the fundamentals around here are still very strong. And so, I’m sure it will end at some point, but I’m not sure really when, and I think probably
Hanh D Brown: Great advice, what would you say to investors who are digging into this.
Kim Radaker Bays: Really get to know the market. You have to be careful. There’re some very good deals out there, but you have to dig for those quite a bit. And so, you need to be a little bit careful to not go after something that isn’t going to work. Make sure you really pay attention to your numbers. Other things is—I don’t know if this is true in other parts of the country or not—but certainly, here in Texas, you know, buyers need to be prepared for the fact that most good deals are going to have hard earnest money day one. And the big thing is you have to build your reputation. So especially on that first one or two deals, the reputation has been valuable to us. And so my biggest advice to somebody that’s just buying a property for the first time is if you figure out there’s, you know, an extra $10,000 expense that you weren’t planning on because a building needs foundation work or something like that, I’d probably just hope that you’ve got room in your numbers and manage to make it
Hanh D Brown: Credibility, reputation
Kim Radaker Bays: I mean, really, it’s been a huge impact in terms of what we’re able to do. I have twin boys that both have autism and so this business has given us the funds available to, you know, get in the best school district and, you know, cover private therapies and various things as time went on that we weren’t able, that we would not have been able to do otherwise. Obviously, this business does take a lot of time, so that can be difficult. Sometimes it’s a little hard to get away and spend as much time with the kids as I’d like to, but it really has made a single-family in terms of what we’re able to do. And fortunately, it’s a flexible business as well. So even though it does take a lot of hours, especially when they were little, I was able to really move, shuffle stuff around so that, you know, some of the work hours that I did
Hanh D Brown: What do you look forward to 2019?
Kim Radaker Bays: We are continuing to evaluate opportunities and looking at properties. There’s a lot of stuff out there that isn’t particularly good deals
Hanh D Brown: How can listener learn more about your business?
Kim Radaker Bays: Well, they can send an email and request to be put on our list for future offerings. My email is [email protected], which is short for Exponential Property Group, and we can put them in touch with Amanda, who is our investor services person and handles all of that, can get them set up on our investor portal so that they will know about future offerings. Obviously, historically we’ve mostly done by with six B offerings. So it is, they would need to kind of build a relationship with us. We need to get to know them a little bit in order to include them on the investor list, at least for those offerings. Unless we decide to do a 506 C, which then would allow more broader marketing at some point in the future.
Hanh D Brown:
Utilizing passive investments in commercial multifamily real estate is a
viable proven way to invest in real estate without having to become a
landlord. You can leverage professional expertise to create stable
streams of tax-advantaged passive income that can buy back your time
from work so that you can do the things in life that matter most to you;
and that is what makes passive income truly priceless.
Thank you so much Kim, appreciate the opportunity! Look forward to next time.
Kim Radaker Bays: Thank you so much for the opportunity. I appreciate it.