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140: Multifamily Mastery and Infinite Returns with Janet LePage

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Buck: Welcome back to the show everyone. Today my guest on Wealth Formula Podcast is a rock star. She won’t admit it, but her name is Janet LePage and she is the founder and CEO of Western Wealth Capital, simply one of the best multifamily operators out there in my opinion and a group that because of that I work with closely and my investor group the Accredited Investor Club works with closely. In 2017, Janet was named Entrepreneur of the year in the category of real estate and construction by Ernst and Young. In 2016, Janet was named one of Business in Vancouver’s 40 under 40, of course that means she’s younger than me, which and with she was also awarded the I don’t know the the French pronunciation here but the Veuve Clicquot, sounds like a champagne, Canadian new-generation award which recognizes young female entrepreneur. Janet welcome to Wealth Formula Podcast.

Janet: Thank you very much for having me.

Buck: So it’s great to have you on. Let’s start talking about a little bit about your background I mean you kind of skyrocketed into this world and have just blown it up. Where do you come from Janet? I know you’re a Canadian and how did how did you end up getting into real estate?

Janet:  Okay let me see if I can I get this started. I grew up in a really small town and came to Vancouver British Columbia for school I have a double major in computer science and business as well as a project management professional certification. You know I think back when I was 23 I told my dad that I wanted to be the largest mobile home park owner in North America and you know as a mother now I think back and he went alright Janet good idea. At the time I was you know I had started my corporate career you know always with the some of the biggest companies in Canada, Tellus is the second largest telecommunications company and moved through my career in for a decade in really large corporations, but there was something about the passive income, there’s something about you know I watched these other folks and really I wanted to be the CEO one of the largest corporations in Canada, that was my goal at that time as well as apparently you know owning a lot of mobile home parks, but what I saw from that was when you don’t go to work you don’t get paid, right? And you learn that very quickly. And so I wanted to be able to go to work or not go to work but always get paid and that’s really where I went I need to find a way to have passive income. I bought a house when I was young and never really paid attention to it, I was thinking was about 20 to 23 and a year later you get that property assessment and I look at it and like the value of the house had gone way up and I thought you gotta be kidding me. I’ve done nothing here but all of a sudden I have this value. So I took a line and credit and I got a real estate coach for a year, we went once a week and we went through everything you could imagine with real estate. It was tax liens to commercial retail, multifamily, flipping, holding, being a shark, and his real model was Janet everything’s a deal. Everything’s a deal, but what makes it a deal. So he he didn’t let me ever pass on a property we could never pass on it, we had to make it such that a structure that it was a deal. And we would meet and we probably walked over a hundred different properties together as we go through this and one of the best things that I learned from that is often when we’re negotiating an asset I’ll walk away and we walk away a lot, but I’ll get it to a point where I go if I got these terms if I got this price, this is a homerun deal and I’ve always approached it that way. So that was a great learning. Moved into 2008 market is what we thought the Canadian dollar was at prime, you know with the US dollar and I wanted cash flowing homes and off I went to Phoenix and I bought two and I thought they were great deals at the time, they weren’t, but from that about six months later I went to the auction steps and I flipped my first multi-family home. I had done my research, I had seen it happen and I believe that if I could get on there, buy a house and flip it and put it back on the market for the exact same price as the foreclosure right next door, there were still first-time homebuyers, there were still people buying houses and they would buy mine over the one next door. And so I used my last ten thousand dollars I had, put it on the auction steps, won a house, borrowed the rest at 18 percent interest, and 20 days later I flipped that house. And that was sort of the beginning of my true real estate career, all while I was growing in my corporate job.

Buck: So you ended up, obviously you had an interest in mobile home parks.

Janet: Still do, I still do.

Buck: Yeah me too. I gotta talk about that because that’s something that we need we really want to get into, but right now you know it’s primarily it is a multi-family business that you have created alongside with your partner Dave Steel. Tell us a little bit about why multifamily, you know obviously you started with single family house, presuming there’s scale as part of the issue but then there’s the mobile home parks, why multifamily right now?

Janet: Why multifamily, I’m going to answer both. Why multifamily anytime and why multifamily right now. What I saw with the houses is that when you have a single dwelling or a smaller number of people, if someone’s in there they’re paying rent, they’re covering your mortgage. If they’re not, there is no income, there is no coverage. It’s either it’s a zero/one, go right back to computer science, it’s either you’re making money or you’re feeding the pot. When you move over to a multi-family property, you know you will always have vacancies, but you can have a number of people moved out or not in that property and you’re still covering all your expenses. You do not need to feed that pot. And that was a very good learning when I was flipping those 58 homes over just over two years before I got into the multifamily it was like, gosh you know I don’t want to be in a risk position of a zero or one, I’m either making it or I’m not. In the multifamily you know in all real estate spaces and multifamily and mobile parks very similar you know you’ve got a lot of residences on this one parcel of land, is just the reduction in risk and so much of our program and so much of why we go in multifamily is because I’m very risk averse, it’s something I go I can control this, I can have this many people not in my property and still make all of my expenses and still cover everything and I’m not in a risk position. Multifamily right now, you know what I say should you be buying multifamily everywhere? No. I mean I wouldn’t buy it everywhere.  But in the cities where where we are buying, it’s on the premise of people need jobs and if there’s a job they need a bed they need a bed that need a roof over their head. So if there’s more jobs being created then there are beds available you have a supply and demand issue. In the single-family housing market that means the housing value goes up because more people are bidding on it, in the rental space it means more people need to rent from you than is available. And why I really like certain cities for for rental properties is when you layer on top hey there’s a lot of job growth what kind of jobs are going there and what kind of people what kind of housing will they need. And when you’re looking at service level industry, when you’re looking at long term rent or when you’re looking at first-time renter, you know before they can buy a house, if you can marry that in that growth that’s exactly what you’re looking for in Phoenix as an example. Forty percent of your in migration of people getting jobs our service level industry or first-time renter. So if you can go and buy the product that aligns with that, you are continuing to keep yourself in a really strong demand for red position. So that’s why I like multifamily because it’s the lowest risk real estate space and second when you can align that job growth with the type of product you’ve really protected yourself from a lot of outside influences that you can’t control.

Buck: One of the things that I really like about the way you guys do this and is obviously stems from your background is it’s scientific. This is not a willy-nilly kind of let’s, I think we can do a value-add situation, how much of that approach that Western Wealth Capital has taken stems from your background as really a computer scientist?

Janet: You know it’s funny I must be able to touch and feel. A has to equal B or a plus C equals you know a plus B has to equal C and I can touch it and feel it. In the buildings that we buy you know I have competitors or other groups go yeah if you paint the building you’re gonna be able to raise rents. I go yeah of course because people are gonna think it’s more attractive, but how much? How can you quantify that this building being painted is going to get you at. So I do not model the extra things we do, whether it’s paint, playground, nicer pool, some fun barbecue or common areas, I can’t put a value to that. I know that it’s gonna make the place more desirable to live, but I do not model a value increase. Where I do model a value increase is, if I do a washer and dryer, I am going to make $50 increase in rent. That person I’m going to spend somewhere between 2000 to 3000 dollars installing that washer and dryer and they’re going to pay me $50 a month, that’s going to translate to 600 dollars a year and that’s gonna translate in value increase in that property somewhere between 12 and a half to $15,000 a unit for spending two to three thousand dollars. It’s black and white, I do about a hundred a month the product across our portfolio, we’ve done thousands of them over the last few years and I know it. So I can model that in with certainty and that’s the same with an interior upgrade, you know new appliances, fixtures, flooring, countertops, blinds, a two-tone paint, I know that if I do that I get anywhere depending on the package that I put together seventy-five two hundred and fifty dollars for a span of about five thousand dollars. And so if I do that enough times, no matter what I do to the rest of the property, I don’t need to model in a growth. I know if I do a hundred of those, I’m going to make this much in return and that I can say to my investors look them in the eye, because I’m doing it every single month in those exact same cities with a building just down the street.

Buck: Right and you know and that’s it’s interesting the way you talk about that because I think you know a lot of people think about real estate and I think in less scientific terms than that, but ultimately what we’re trying to do here and what Western Wealth Capital is trying to do here is to create value and to be able to put that into terms that is really not, there’s strong data that you can use to do that and it and the more you do it you can work work out the kinks over time and then sort of hone in on a formula that works and that sounds like kind of the approach that you’ve taken over time is that fair?

Janet: Without question. Almost to a detriment, I’m so, and I agree with you it’s your background and training that I need to be able to touch and feel it because I have to sleep at night and know I can make this happen. And so when I put values or numbers to it I can see it tangibly and feel it and then I can sleep because I know I can perform that. When you know I’ve had groups go and go but yes you can make money off putting a spray fountain and I just think to myself, probably, but I don’t know that number exactly and if I don’t know it it doesn’t go in. It is a very scientific approach we take, very much. The art of it is the speed in which we execute. Because when you talk about risk, everyone talks about risk so we’ve touched why multifamily and why you see that the risk by having so many units and people covering the rents as things fluctuate, but the other part is the art in which you create the value. You could create the value very slowly by only doing one or two washers and dryers a month. So there’s really the science of a multi-family and when you talk about it, you have to think about risk and we’ve already touched on the multifamily part of risk where the asset space makes sense because if you have less tenants or a few vacancies they’re still covering your expenses so you’re not risking your money of having to feed the building with financial. So that’s great. But the second way to de-risk your investment is the speed in which you can create value for your investment. so if you go very slowly and only install one or two washers and dryers a month, you’re going to very slowly increase the value of your property and you’re exposing yourself to risk from the value purchased it at to the value it is right now. But if we can bring in that value very, very quickly and move that property to a new net operating income or an exponentially increased value by installing those washers and dryers very quickly, upgrading units very quickly, doing it while people are living in the unit, forget waiting for them to move out, then you have also on top reduced your risk of your investment very quickly by increasing the value of it without worrying about is the market can depreciate, are we gonna be able to increase rents just naturally, forget all that. Our models work without that. More modeling rent growth, we model it at about half of what the market predicts is going to be because we don’t need to do that, but that’s the art and when you look at many of our competitors or even when I was starting out, I would say I wasn’t as fast. Speed wasn’t an aha moment until somewhere in our 10th or 15th deal was going gosh well if we could do this in half the time, we’re gonna increase the value of the building in half the time and we’re going to de-risk ourselves. So we continue to hone and hone how quickly we can execute. So that is our art, the science is the black and white, you spend A you get B you increase the value C. The art is how quickly you get to the C so you could tangibly realize your results.

Buck: Yeah and also the speed also as you say, adds to that idea of taking risk off the table, particularly for passive investors, for these accredited investors who are working in these deals if they have money in the deal. Why don’t you talk a little bit about sort of your typical, because it’s a very stereotypical business model. I’ve referred to this as the infinite return model because in part of the getting your your money out of the deal and into the next deal kind of approach that passive investors can take. Can you talk a little bit about what makes that possible?

Janet: Sure. So you know as part of this, when you purchase that asset, when we’re able to move it to a new much higher value without waiting on the market, without waiting on rent growth because we’re moving that net operating income or increasing that income by putting in those washers and dryers, by putting in those interior upgrades, so we’re moving the value of that asset at a pace that’s not normal to market, but with that then we have what’s called supplemental financing, so as part of our loan agreements we can go in and at the day we get that loan they say okay will lend you actually up to a hundred percent of the purchase price of the property, but right now because of your debt constraints or where the income’s out today, we’ll give you seventy percent loan to value, but every 12 months you can or anytime after that you can come back to us and say hey look at our new value and we will give you back a portion of your proceeds or we’ll increase your debt at that point and refinance that money back to you to continue because we have moved the overall value of the property up. And what we do is we’re able to return that to our investors and I have investment partners that literally have used the same money on their original deal and they’re into their fourth investment with the same money they had given us back. We’re averaging about 20% return of equity within, actually I’m wrong sorry it’s about 50% within 20 months.

Buck: Wow. So let me just because I am very familiar with this, let me recap, because this is what I find just you know fantastic, we always talk about these terms Janet you know in this show we talk about velocity and leverage. Velocity is how quickly you get your money back. Leverage is obviously using Bank money and whatever other source of money that you can use to increase your returns. So what Janet is saying here is that just to recap here is first of all, typically what you see in models a lot of times, and it’s not uncommon for a group to say okay we’re gonna create these value add components and then five or six years down the line we’re gonna do a refinance and that, because we’ve added so much equity, we’ve added so much value to this property and the net operating income goes up, we’re going to return the capital to the investor, they still have ownership, but they might get most of their, if not all of their capital off the table at that point, rendering w things it’s taking that initial risk off the table for the for a passive investor, but the other thing is it allows that same money to get deployed into the next deal and therefore creating a tremendous amount of velocity of money. And what Janet is pointing out is something that’s really unique and I had never seen this before, which is a type of loan that allows effectively you don’t need to refinance, all you need to do is you get appraisal. So to Janet’s point about speed, the quicker you can just create value, you can start pulling out equity based on how much value you’ve created and what she’s telling you is that instead of waiting typically five or six years to get your money back at all, in about twenty months they’re averaging half of your money back in your pocket, well guess what that can go right back into a deal. Did I get that right Janet?

Janet: Yeah you did. You know we’ve had, and every deal does a little bit different, but we’ve had as high as 75% of our money refinanced in one year. Sometimes it’s twenty four months before we go to it, it really depends on the business plan. But yes we’ve had great, great success and it’s a big part of our program and it’s really neat to watch our investment partners that we’ve had for four years now seeing them actually continue to put that money that’s the Warren Buffett model, infinite wealth is using that same dollar, continuing to have your ownership in the first asset and buying your next and your next.

Buck: Yeah absolutely. So that is in a nutshell the market. The last time I saw anything the average annualized return because of this model was about thirty two percent annualized return which is phenomenal, obviously past performance does not dictate future, but is something worth noteworthy to talk about. The other thing I wanted to talk to you about was you know obviously there’s a great track record here, you’re someone who has lived and experienced through 2008 and you know I don’t think anybody thinks that we’re gonna have another 2008 per se, but there are market cycles, there are cap rate compressions and decompressions and you’ve alluded to this a little bit but talk a little bit about that because that’s a question that we frequently get from people saying you know a lot of a lot of groups a lot of people or investors have for the most part decided that real estate right now is too expensive to buy in any market and so they’re waiting for cap rates to decompress, for market cycles to turn. What what is your sort of your rebuttal to that argument and what is the model do to help buffer some of that potential downside?

Janet: Yeah it’s interesting I mean it’s funny you know you hear the constant thing about the cycle and where we’re at. When we’re buying what I think a lot of people don’t see or what I know is what we don’t buy, what we walk away from. If I was just entering a market where I was you know a nobody or we’re the second-largest multifamily owner in Phoenix and in the history of Phoenix, no one’s ever entered that market and within three years become really a nobody where I could barely get a broker to return my call to being the second largest owner, and that’s really fair to us very well and not only Phoenix but the other four markets that were in, it shows that we’re here to play and so we’re able to go in and look at a lot of potential opportunities and we walk away from more than we ever have before. So that’s number one you have to find the diamond in the rough, you add a kiss a lot of frogs, I do of course where the title is you know you got to kiss a lot of frogs. And people don’t see that you only see the success stories that come out of it, but how much time energy and front-end work is put into finding the right deal especially at this time you have to be that much more diligent, so that would be my number one thing. Number two is, when we talk about washers and dryers and when we talk about interior upgrades, this has nothing to do with where rent growth is. This has very little to do with you know yes cap rate compression if you believe in that, but our ability to take this unit and move it to this price, forget all other factors, is true. That is black and white. And so what we have to find is assets where majority is untouched, what I call a classic blank slate ready for us to do our program on. And we’re able to achieve those returns. We also model in increased interest rates which I believe are much higher than what we’re gonna be. We model in much higher vacancy rates than they’re predicting or even exist. We model in you know all of these other places, higher delinquency than is ever there. We model in half the rent growth that there that the markets predicting so you’ve got all of these, I call it like the lemon tree. So you’ve got never squeeze all your lemons dry, but when I’m modeling I’ve got lemon over here lemon over here lemon over here lemon over here that I have not squeezed to or anywhere close to what the markets performing to. So if I’m wrong on one assumption that’s okay, because I’ve underperformed on all these other assumptions so really my model is padded all over the place for what I don’t know to be, but what I do know to be is I can get fifty dollars in that rent increase, I can get the rent increase for that Union increase. The other thing that the metric that I didn’t share which I do believe plays into all of this we’re talking about is basically your affordability index. Every time I go for dinner with another group a large group similar to us and I say guys what do you look for when you’re you know picking your markets? Because I’m always curious what metrics other people’s follow. What are you underwriting for? What what’s your prediction and in interest rate increases we talked about these things and one of the things that’s always prevailing is affordability index. What that actually means is how much a person has to pay for their cost of living out of every dollar they make in income. And if you look at the cities that we’re in, they’re many of the lowest affordability or highest affordability if you will on on the index. Phoenix is 22 cents on the dollar, whereas the United States is over 40 percent, so a 40 cents of a dollar goes to paying for your housing. So in the cities that we’re in there is a lot of room for people to be able to afford better housing. Those rent increases that you know I get these investor you go but people can’t afford the rent increase cycle. Actually when you look at all these other cities they could live in, their affordability to be able to pay more for housing is absolutely there. and so that’s another piece that’s not talked about in this big global maybe there’s going to be a downturn, maybe there’s not. We’re picking cities we’re really there’s a lot of room to go in affordability and people have that to pay at this time as we’re seeing you know this job growth.

Buck: Yeah and to that extent, if you’re adding value, if you’re increasing rents, if you’re increasing income on the property I mean I guess in that scenario the worst-case scenario is you hold on the property and then sell it when you get a better price right I mean isn’t that kind of the downside?

Janet: It is especially at the speed at which we go from point A I just purchased it to point B is this whole nother level where you’ve got this much more increased cash flow, this much greater value, absolutely you can ride the wave. If you just buy something and do nothing and now of some prices go down, well now you’re at a loss on your basis, but if we go from here to here, we’ve already pulled a huge amount of that risk out, yes maybe we go back a bit in value but we haven’t introduced risk of loss, which is the biggest thing. Maybe you will make the 32 percent or or the 20 percent that we’re you know showing in our Performa, but we’re also really far from a loss position. That’s a great place to be.

Buck: I always kind of explained this in a way that I think what I like about the model is that it’s fairly moderate leverage on the inside, right thirty two, thirty three percent on average from what I’ve seen, but then immediately what you’re doing is you’re creating value and what that does is effectively helps to deleverage further. So you’re taking moderate leverage and then you’re immediately going into value-add which deleverages further and that creates this buffer that you’re talking about.

Janet: Correct, exactly.

Buck: So obviously I’m a big fan of what you’re doing. Tell us a little bit also about some of the there’s some really good things that Western Wealth Capital has done in the communities that it has touched. Can you talk a little bit about that and why that’s important to you?

Janet: You know the real estate industry has operated the same way for a long time. It’s about making money. And I can’t tell you how many properties I’ve walked on to and you look at it and the current owner doesn’t care one bit about who lives in unit 101, could care less, and worse as a mother as a female, doesn’t care that the lights are burnt out so that when she’s got her kids and it’s after dark and carrying her groceries, doesn’t care that it’s scary, it is scary, as a female I know this, doesn’t care that there’s not a you know a cover over the playground so in the summertime the kids are burning and you’re supposed to sit somewhere and watch your children, doesn’t think about those things. And when I came on and started doing this, at first it was about making money for me and don’t get us wrong we’re here to manage the wealth of our investors, partners and increase that wealth. But what I saw was you can do both and not only can you do both, but if you do one well, you’re gonna create greater wealth. And so what we have at Western Wealth Capital and you know many companies that call the three-legged stool. One of them is you know creating wealth for our investment partners without question, but the how is what I’m here to show the real estate industry that you can do it differently. You can do this on human terms and not just term sheets alone, and this industry I’m hoping is part of who we are can start to see what we are doing and follow lead and do it on a more human what I call more human terms. So when you start putting in the lights, when you change those playgrounds, when you make nice safe and a place where you know these lifetime renters or long-term renters have pride of renter ship they tell their friends and they don’t move. Do you know the single greatest expense you have on a property is someone moving in and someone moving out. If you can increase the rent for the person currently living in that property without them moving, you are winning all over the place. And to do that you need them to have pride of rentership and you know what when they move out the walls aren’t going to be kicked in, they cared about the interior. So even when we do have to turn that unit, it’s not beat up because they were proud to live there. So that’s one piece and I’ll talk a little bit about the programs we have for that. The second one is you know property management the people that live every day and work on those properties and do the plumbing and do the landscaping and pick up the property and have to interact with these residents every single day they’ve hard jobs. They have hard work. We are in cities that are hot in the summer and you’re outside all day long. And you’re not recognized very often by the owners of these properties, so your morale overall generally speaking it’s not very high in property management. But just imagine if we gave them a workplace, an environment where they could go home and tell their children hey I was recognized today. I have maintenance staff on some of our properties where when someone does a great job it’s recognizing an email goes out to the Western Wealth Capital Executive team recognizing them along with the owners of the property management company, the regionals of the property management company and we all reply and say wow thank you for what you’ve done. And we’ve had comments back where I’ve done this for 28 years and I don’t have a single owner that has ever even shaken my hand, said thank you, that you know it’s unbelievable think of how much that person makes such a difference in your overall expenses in in making our residents’ property a better place. So if we can show that you can do these things and you can we’re proving it. Our results are at the top of the charts. I can’t tell you how many brokers when I come in and they go to look at our properties to sell and they go how are you operating this sheet my gosh you have some of the highest rents and I said because I’m just treating people well and being focused on them. But the programs that we have on top of that, we have two flagship programs, one is called we’ve got your back and in the summer every property on the same day from four to six provides we make available a backpack with the local school supply list for that property stuffed with all the school supplies they need so each child can start the first day of school off on the right foot. And we don’t buy those. The management the property management employees on that property go they go to the Walmart. They pack them themselves because this is a gift that they can give to these children and these families that they see every day and if they can’t afford that backpack or they could use a leg up we’re able to hand it to them so we’re creating a community and we are also creating the possibility that a child can show up confident and we all know that if they’re confident we’re making space for them to learn and that’s an unbelievable thing that we’re able to get both but the payback to our financial wealth is unbelievable at the same time as creating the right thing to do. The other thing is rent free Christmas. So we allow the management staff to get together when they have exactly two minutes to pick a family on a property that could use free rent in the month of December so that they could take that money and create a Christmas memory that they otherwise and wouldn’t be able to have. Now what does that do and why do I say two minutes because that staff knows they know that family they interact with them and they’ve seen them they’ve seen their hardship. You know one of the families was a mom with three children and she became a widow within six weeks unexpectedly this year so she’s she’s trying to figure out how to be a you know a single mom, how to you know heal herself, never mind her children and try to get through Christmas and afford everything and we’re able to give her this gift and what that does with our community our property management community is they feel like they’ve been part of helping someone and you know how hard they work on that property because of that. It’s a win all around and so over the last three years we’ve been able to get back to our properties over a hundred and seventy thousand dollars in giving that’s created tremendous heart really help people in need and also drove financial gain for our investors and to me that’s the perfect three-legged stool it’s a win on all fronts and it’s a way to show this entire industry that you can do this on human terms and not term sheets alone.

Buck: Truly a win-win situation. Janet again I want to thank you very much for being on Wealth Formula Podcast today.

Janet: You’re welcome. Thank you for having me.

Buck: We’ll be right back.