Buck: Welcome back to the show everyone. Today my guest on Wealth Formula Podcast is my very good friend and partner Tim McLeary from Western Wealth Capital. Tim has been involved with the financial services in real estate industries for 25 years before joining Western Wealth Capital. His resume is extensive including oversight of more than a billion dollars in assets at TD Bank Financial Group and that was of course before our current run at Western Wealth. Now he is Vice President of Investor relations at Western Wealth Capital and he is obviously you know the face that many of you who have been an Investor Club already have seen and met in person if you’ve come to our meetups in Phoenix in Houston and of course he’ll be in the next one as well. Tim, welcome to Wealth Formula Podcast man.
Tim: Yeah thank you Buck.
Buck: So you know obviously you know we’ve been talking within investor club and you know pretty much every day with regards to properties that we’re looking at etc, but it’s great to finally have you on the program to kind of you know expose everybody who’s not necessarily part of the investor club to what you guys are doing. So everyone you know obviously people in the investor club already know at least you through the webinars. They may not have seen your pretty mug like you can on the video version here, but tell us a little bit about your past and you know how you ultimately ended up from you know these positions where more traditional financial market into multifamily real-estate.
Tim: Well this is always a common theme and I’ve always worked in an environment dealing with or connecting with people and institutions anywhere from as you mentioned TD which is you know institutional money management business development leadership with the major chartered financial banks. So again the common denominator is the ability to connect with people and my last position from my last job you know I was pretty darn comfortable feet up you know not being challenged, golfing a couple times a week sometimes I would play these sound like their president real calm and actually wanna one of my good friends a gentleman I used to play a little hockey with in the past because that’s what we do up here in the frozen tundra is play a lot of hockey, he was the CFO of actually a very large local developer and he had just joined this small little firm in Vancouver called Western Wealth Capital and at the time and I think this nuts he went from you know CFO of again one of the largest developers in Vancouver just real estate company called Western Wealth Capital and out of the blue he gave me a call and introduced me to the CEO of Western Wealth Capital, Janet LePage and that meeting I basically sat there and said I’ll do whatever it takes to come and work with his organization. I just knew it was a rocket ship, she’s an amazing lady and then I met David Steele the other co GP and that was two and a half years ago and I loved every day and I’m learning as we go as well too and it’s been a phenomenal ride and I’m looking for the next 10 or 15 years.
Buck: So you know obviously you’re smart guy and you’re heavily involved with day-to-day operations and yet God you know really your pulse on every part of this business so when you look at it from that perspective and you know what’s going on in the economy etc, why multifamily real estate right now?
Tim: Well you know multi family is kind of the darling play in that real estate asset class right now you know more and more people and groups are running to this asset class and there’s you know a couple simple reasons you know one there’s you know multifamily is a very low risk profile asset class you know you look at the stock market and the fluctuations you know I’m still a junkie I look three or four times a day to see what the Dow and Nasdaq are doing but they’re basically up and down with the Dow and Nasdaq and you know the market that general market that really depends on I say it is moved from a fundamental market to an emotional driven market you know it depends on tweets from certain people then also you know market move one way or another you know where as you know multifamily is just it’s boring it’s a real boring asset class but again it’s also something you can touch and feel it’s not emotionally driven it’s you know it’s real property it’s something you can touch and feel and then you know also plain and simple, people need a place to sleep and a multi-family provides that. You know there’s a thousand people moving to Texas a day, they need somewhere to sleep and you know and this is the reason why we love Dallas and Houston you know there’s more and more employers moving from the west coast you know to you know to these states such as Florida and Texas and Arizona and all those new new workers need to need a place to sleep and multifamily provides them affordable place to live you know it’s very much workforce housing and that’s what we look for. And then lastly cash flow I mean you have a low risk profile asset class and and then you’re receiving a yield I mean it’s basically the best of both worlds.
Buck: Yeah I mean you know I think the the thing that you said that really resonates with me in general and I’ve said it on the show number times recently is that boring is good right, it’s good boring is good this is and take it from a you know a serial entrepreneur type guy myself I mean I’ve chased enough shiny objects and what’s always amazing to me through that period over the last decade is that through everything that has failed and that has gone well, one thing just keeps doing well it’s boring but it’s called multi-family real estate and that’s been my experience you know. So again just advice to just general advice not financial advice don’t stay away from something cuz it’s boring. Don’t go chasing things because you look bright and shiny they look exciting because weather exciting there’s inherently more risk. Boring is good. But let’s talk about the Western wealth capital because when you think about the Western Wealth Capital model you know it is quite opposite from some of the more boring ideas of when you think of REITs and stuff, it’s actually pretty electric. I mean Ken McIlroy who we you know we had this meet up as you recall it was about a year ago in Phoenix Scottsdale and Ken was there and Ken was obviously has known Dave Steele for you know a very long time and they’re friends you listen to what you know Dave had to say and he called it a quote money machine right, and that’s pretty high praise from a guy like Ken you know and a lot of people trust can I trust Ken. So what exactly is it you know that makes this machine what it is? I mean it’s annualized returns of 30 percent for investors through all divestments and you know the speed at which things are working. What is it that makes this different? What is this money machine?
Tim: Well firstly I mean that super high praise from a guy like Ken I mean he’s had massive success in this space and you know as you mentioned Dave Steel can go way back and that’s huge praise from Ken and that was fantastic when he did say that. Our model you know is pretty simple you know what buck really what it comes down to his execution of her plan you know. I’m a big believer and you know you may have the best business plan on the planet the best digit whatever it is but if you can’t execute guess what it’s useless and you know our our system our process is repeatable scalable we execute on day one and that means day one of take over when we take over a property but before we take over a property you know we already know what color we’re gonna paint the building, we know what the pool furniture is going in, we know what the monument sign is gonna look like, you know the Landscaping’s been you know taken care of, the leasing office is basically going to be remodeled as well on day one you know we’re putting fliers under the doors of the tenants and we’re saying hey do you want an ensuite washer and dryer you know all the statistics that we read that that was the number one ask from tenants is an actual ensuite washer and dryer and it’s mind-blowing to me that property owners out there that have pre plumbed washer and dryers but actually don’t put watch her dryers and you know we simplistically threw a flyer on the door and said if you will it would like a in-suite washer and dryer you know for an extra forty or fifty dollars a month just to let us know we’ll install it and on Tuesday you’ll have a washer and dryer, the balance a month no charge but you know as of the next month you know there will be a forty or fifty dollar charge and you know what you got to look at is that the installation that washer and dryer for for you know four-year $50 a month based on a cap rate it works out to about an increase in equity on a per door basis of about ten thousand dollars. And again like you said it comes down just simple math and then you know we throw in our goal start renovations where you know we can turn a unit and about you know eight days at a cost of about 60 to 50 to turn that and you know if we’re charging a hundred and twenty-five dollars for that goal style renovation you know based on a certain cap rate buck you again that per door you know equity in valuation has gone up by $30,000. So it really what it comes down to simplistically math and the ability execute and that’s something that we’re good at both.
Buck: Yeah you know the way I think about it in and tell me we think of this analogy because you know, listen at the value add real estate is not a new concept you know there’s a lot of opportunity for a long time, but to me what the difference when I look at it is that most value add operators and I’m talking about even you know a lot of well-known ones they’re really operating at a boutique type level of business right, I mean they’re sort of like the you know the if you look at in terms of restaurants they’re the cafe around the corner run by the mom-and-pop and you know they’ve got an idea and they you know they run it well they get some good stuff going on they get nice ingredients but the reality is there they may not be infinitely they may not be running it quickly and as profitably as it can be. What’s remarkable to me when I look at what you guys have put together there is you’ve got effectively a you know a McDonaldization right like a you’ve taken something, a substrate like apartment buildings you know 25–30 million dollar 70 million dollar apartment buildings and commoditized the turning of those in such a manner that it literally reminds me of a Mcdonald’s type you know or you know some kind of industrial boom boom boom boom get it done kind of thing and whereas you might think well that’s not gonna you know result in as good a product, the reality is the repetition the repeating the same thing over having the same type of you know operations over and over make you better and better and faster and that I just don’t see anywhere else and I’m curious kind of what if that’s the same you know what you see is the difference from others.
Tim: Yeah we’re constantly working on our processes and you know you said it’s repeatable and scalable and you can call the McDonnells ism theory but you know that that’s what drives us very much and again you know it does come down to execution as you mentioned you know there’s a lot of syndicators out there that really say they’re in our space or they’re in the value-add space you know but they really don’t spend that equity they don’t have that team in place that can actually execute and that’s one thing that’s different about Western Wealth Capital is you know Jan and Dave do spend the money we do have the right people in all of the asset locations that we are situated and and we’re not happy with six out of ten you know we live in a world where ten out of ten makes make sense.
Buck: The other part that I think is really different is speed right, because and again from from the standpoint of a guy who’s interested in looking at things from you know mathematical way I mean I like equations I like things that have definitive you know ways of looking at things, the one thing that people don’t usually think about is speed right. So you’re going to do this at scale you’re going to turn this you’re gonna get so much you know increase in apartments and net operating income but if you can contract the amount of time it takes to get there you’ve effectively doubled your return and that presumably is a you know that that’s why you’re getting the kind of returns you are I mean don’t you think that speed is probably the variable that is most unique?
Tim: Very much so and how I look at that is you know we’re a very conservative organization all of our models are they’re cookie cutter we were big believers and under promising and over delivering you know Janet’s math background she’s a computer scientist by trade exactly you know it’s very math based you know we have a Wow program we had a while but 1.0 we now but while 2.0 but so what we’re trying to do is just increase the speed of how you know how quick we execute and really what that comes down to Buck is you know for our investors is we’re you know we’re de-risking their investment from day one. We’re increasing the value of that property so quickly that we are literally moving the cap rate from let’s say by a five to six or six and a half because of the execution of our business plan.
Buck: There’s another part of that speed and you know that that that’s really pertinent to investors and that is the idea of getting your money out of the deal we always talk about in terms of Western or in terms of the Wealth Formula you know mass times velocity times the leverage so velocity being like how quickly you get your money back out of a deal. One of the things I think is really interesting is the use of the supplemental loan program. Can you explain kind of how that works to people who don’t know about it and you know some of the advantages of doing that.
Tim: I mean just very high level you know when we buy a property and we’re gonna use some round assumption numbers here but let’s say we buy a building for twenty million dollars you know we’re typically using agency debt, the lender will actually provide us with a loan you know 100 percent valuation of that property loan to cost and so let’s say the full twenty million dollars however they will not you know of course fund us that full amount. Typically it ranges anywhere from you know based on our models sixty five to up to seventy two percent you know of that LTC. Then as we create that value in that property as we execute and at the speed that we do or you are you know we creating value quickly we can go back after twelve months to our lender and instead of doing a whole refinance package which typically is quite expensive we just go back and and have our lender revisit the financials and basically pull a supplementary, so again if that building goes from 20 million 25 million, they will release anywhere between 65 to 70, 72 percent of that additional five million dollars in equity that we’ve created what we do with that equity well we give it back to our investors. So our whole model is and we’ve again under-promise and over-deliver here but you know what we pro forma is to return 50 percent of the investors equity between a 24 to 36 month period and then another 25% so up to 75% between a 36 and 48 month period and then up to a hundred percent of their original equity back between a 48 and 60 month period. So they still retain their original percentage ownership in the building the same number of units, however as you just mentioned Buck what it does do is it puts money back into their pocket a lot quicker. They can in turn reinvest that into something else and you know again the velocity of their money is in the velocity returns.
Buck: And that’s really the key you know is that the cash out refi model is nothing new, but you usually don’t see it for about five years and then you get you know maybe you get a refi and hopefully you get your capital back out of the deal and you’ve got what we call infinite returns but what we’re talking about here is really unique because I know you mentioned 24 to 36 months just looking over the history it looks like the average has been about 18 months where investors are getting about 50 percent of their capital back and then you know a year later whatever they’re getting over the next year or two they’re getting the rest of it back. By the way the model does not allow for a split until then so in other words the operators not getting paid you know and any part of the equity until a 100% of capital is returned. Well what that does is it allows you to take you know not wait for years but wait you know assuming it’s 18 months 24 months whatever and if you get if you invested a hundred grand take 50 grand back and put it into something else now you’ve got an opportunity to make money in two places at the same time with the same capital and that’s where the numbers really go off the hook right that is kind of the the thing and then as Tim mentioned it’s also derisking. So tell us a little bit about like you know kind of your track record in terms of doing this kind of stuff.
Tim: Well I mean I’ll tell you a little story about one of our investors you know he started with us it’s actually five years ago now we’re six year old company but it took about a year of research for him to give us his his first dollar but so it’s been about five years ago he started investing with us he spread $750,000 you know throughout a couple of deals he started coming in and you know we do the dip your toe in with a certain amount and then you know the investment level got a little bit larger and so his total investment you know with Western Wealth Capital was $750,000 and you know he’s funny he comes to offer wine and cheeses and he basically said I’m not gonna give you any more money I’m done but I promise you this what I’m gonna do is every single penny that you give me I’m gonna reinvest it. So you know through all of our refis are just divestments dispositions which we’ve had 31 to date so every penny he’s given back to us he’s actually equity level and ownership of properties with us is just now under four million dollars five.
Buck: So seven hundred and fifty thousand dollars total investment over like you know spread over several deals or the last five years is not worth about four million bucks.
Tim: And he’s just continuing to roll it yeah he’s doing. Actually should I should ask him and I show the top the pin but he loves to talk probably I should take him on tour with me.
Buck: I want to get him on the podcast. That comes out to roughly an eighty nine percent annualized return on capital. Well what’s interesting to me is that with you know these kinds of returns people assume there’s got to be a lot of risk right I mean how do you hit thirty percent annualized returns how’s this guy get a nine percent annualized return, but in fact you know the two elements and you’ve alluded to this before that tend to theoretically make these opportunities even more stable than most offerings is that first you know you’ve obviously got a heavy capital expenditure budget because this whole thing is about turning you know really neglected properties into really high quality properties, if anybody’s ever been on a Western wealth tour you’ll see it’s just amazing, but so it’s a huge you know it’s a it’s a big investment up front that’s raised from the capital from the equity. But one of the beautiful things about that is hey you’re not you know we’re not gonna just try to expect that we’re gonna generate all this income from the property right and that creates this level of cash that’s sitting up front. That is one thing that in my mind significantly de-risks the opportunities is that there’s a huge capital stack sitting there waiting, but then there’s also the other idea that where as we’re driving equity into this and we’re making a profit hopefully by driving cap rates up dynamically in real time, you’re essentially creating you called it de-risking the property right I mean those are the two main elements, is that kind of how you see it in terms of mitigating risk?
Tim: Yeah hundred percent I mean not only mitigating risk but also you know it comes to returns you know when we model a property and then when we send her a basically executive summary though you know we’re not showing 30% returns and that’s what we’ve actually achieved in our past, we’ve had 31 dispositions for an average hold period 29 months for an average return of 30 percent annualized so we’re not showing that you know what we’re basing our math typically is working out between 17 to 20 percent annualized returns based on the property very conservative based on how the performance exactly you know when we have a property with say 200 units we’re not saying we’re gonna execute our value add proposition on 80% 85% we’re saying we may do sixty sixty-five percent. And that’s where we come up with these 17 to 20s you know plus our refinance of 50, 75 and a hundred you know but again the whole goal Buck comes down to is again under-promise and over-deliver and as well as you can and under-promise and over-deliver but you better be able to execute and and the speed and again we’re very good at we’re obsessed actually that’s the word we use we’re obsessed with execution.
Buck: That’s pretty obvious. How big, because we talked about how this has been, this has been a lightning bolt of a business in terms of growth. How much how much property is under management now?
Tim: We’re just under 16 thousand units.
Buck: And what does that come out to in dollars? I’m putting you on the spot but you move so quickly.
Tim: So last year actually 2018 we purchased 16 buildings. In 2019 we purchased 19 buildings. Our goal this year is 24 you know however you know we do have you know different sources of that’s gonna be a billion dollars we’re nowhere well we’re over 2.2 billion 2.2 billion.
Buck: Okay so we’ve got all this good stuff going on and there’s skeptics out there and for good reason that say well gosh you know what’s you know what are you gonna do when the market changes I mean we talked about some of the things that you can do to de-risk that like you know you’re decompressing your own cap rates by creating this dynamic you know driving of net operating income but what happens in that scenario and typically you know a cycle like that might last a couple years. If you have a situation where you decompress cap rate so and you you’re certainly in a position to be safe because you got about a bunch of money in the bank you know you’ve driven up your income, but then what do you do then to to you know to try to maximize yield? Do you just you know hold on to the property and and wait for better days or what do you do?
Tim: I guess the worst-case scenario is as you mentioned you sit in cash, again, we’re a bit unique we don’t have to borrow our capex we raise our capex so you know we’ll sit on a lack of cash you know if required we can still continue implementing our value-added program because again you know in a crunch period of time try and get money from a bank or your agency you can’t so all of a sudden syndicators just have to stop we raise that capex so we can keep going if we want but I mean worst case scenario is is we sit in cash flow you know but we also what we look at is in the markets that we deal is you know or where we have assets for the markets that we really like is you know we take a real look at the A type of properties existing or being built and you know we love buying buy a right you know a C or C plus type of building right beside an A because you know the individual is that you know that’s paying 20 to 50 a month for an eight hundred square foot a type of property you know when that market does change you know are fifteen hundred and fifty dollar 1100 square but newly renovated unit plus completely upgraded and amenities is it gonna look fantastic and save that individual seven hundred dollars a month. So you know again it comes down to de risking and your investment and you know that’s one of the aspects that we look at is that a type of property in the area but again worst-case scenario is yeah yeah we stuff it full only cash flow.
Buck: So I mean just to be clear we’re talking about C-C plus you know probably now what you guys call C me it’s probably more C plus moving it up to like a B-Bplus in it you know like you’re in a area or something like that is effectively the idea you know speaking of the markets though one of the things that I think is how you know when you right now I’ve been saying one of the most critical aspects of buying real estate right now is picking the markets because you know when times when things are hot and things are you know markets are flying that’s when you get like these you know you get these tertiary markets that are people start chasing yield where in situations where you know if the market turns there’s really no natural growth there, there’s no not new industry there’s not that I mean how much of that goes into market selection can you kind of talk about your process there?
Tim: Yeah you nailed it Buck you know we’re seeing a lot of other firms you know chasing yield, chasing returns, there’s a lot of equity out there but there’s also a lot of kind of startup syndicators trying to make a mark and so they’re trying to chase returns and and what they don’t see in what we see with we know over a hundred transactions maybe, they don’t see the deal flow that we see you know we’re seeing 22 to 30 deals in about twelve different cities a week but you know we see other firms you know buying in those first rate markets and that you know we’ll never do that you know you know. So when the market does correct you know the place to such late such as you know Dallas, Houston, Atlanta, Phoenix these these markets that are in your top five to ten type markets for economic growth when there is a correction, yeah they may correct a little bit however if you’re buying in a market at right now is ranked number fifteen fifteen sixteen seventeen and it’s there now just because it’s kind of you know, when the market does turn guess what’s gonna happen it’s gonna go from fifteen sixteen to thirty thirty-one. You know our philosophy isn’t you know we don’t buy and cross your fingers and hope that the market goes up you know that is just not our value proposition again we’re going to markets that are stable strong economic growth there’s companies moving there and then basically it comes down to executing your model.
Buck: Yeah and you know and I think that’s an important thing. There is this constant sort of tension between finding yield but also staying within markets that have strong job growth and you know population growth. And so the nice thing about you know major markets you know you know Houston and Phoenix and some of these markets that are you know they’re not New York and LA but on the other hand they’re growing like gangbusters they at the end of the day even if you have a change in sort of the overall real estate market you have this this other opposing force which is the growth in population and that isn’t gonna presumably that’s not going to stop people are moving there for a reason. Tough economic times they’re only gonna make them move there even more.
Tim: Just a funny story Buck I was talking I was in Calgary last week which is a part of Canada, talking to a farmer last week and he explained this this way Tim he says I have a chicken and I want to make sure my chicken is laying eggs but in the long run I want to make sure my chicken’s safe at the end of the day. It’s so simple and you’re giggling but really that’s what it comes down to. I want my eggs but I want to make sure you preserve my chicken and that’s definitely Western Wealth Capital.
Buck: Capital preservation. For a group that’s plugging out those kinds of numbers capital preservation you know being part of the equation is a nice relief as well. So tell me what’s the plan again for this year 2020 west from wealth capital? What Mark do we looking at? What’s the goal?
Tim: Well I you know we’re currently in five markets I just discussed San Antonio, Dallas, Houston, Atlanta, second largest owner operator in Phoenix there’s about twelve cities that know we followed very closely our goal for 2020 is to add two new cities so that means not you know not to have assets and five to have have them in seven you know the type of you know type of markets we’re looking at is you know whether we’re looking to Nevada so we’re looking at Vegas we’re looking at Denver of course at Denver Florida many centers and Florida as well to you know Washington, Washington State, Seattle, Portland, Nashville as well too. So you know we have a six member acquisition team and we always joke I’m not sure who lives in airports more of them or them or myself but we’re kicking a lot of tires, but the goal is again here to be into you know two new cities we just don’t move in a city unprepared we do a lot of homework we do a lot of back check. We don’t you know we actually are before we move in a city we don’t want to buy one building we’re gonna go in and typically buy three buildings you don’t you know we want to get you know we want to have a thousand fifteen hundred units.
Buck: That’s part of the exit plan too. I mean and and that’s one of the things that I think is important to one of the reasons that you end up getting paid more for these is you’re not selling when building at a time you’re wrapping it up to like seven or eight buildings at a time and selling it at a premium to a big you know to a big institutional buyer.
Tim: Yeah and for numbers we’re probably looking at I gained one a month so probably twelve twelve deals this year so for on a deal full perspective so another ambitious ambitious goal first rate.
Buck: I’m just curious one thing and I don’t know how much you’ve actually looked into it but it’s funny that you mentioned Vegas behind I brought that up too because I remember the economist that we had at our last meet of in the growth in in in you know just in people moving into Vegas is insane right, well the question is is it real this time right?
Tim: It is you know you look at the the jobs I believe it you know not that long ago over sixty percent was you know in that hospitality sector I believe that’s under forty percent now you know so that just shows that there is there’s other types of opportunity now in Las Vegas and it’s not solely dependent on the casinos and you know and again it’s you know it’s another state.
Buck: It’s just one of those things where it’s like what’s the difference between living in you know in a climate wise say Las Vegas Nevada in Phoenix Arizona and people are in Phoenix is growing very quickly and then Vegas all of a sudden now they’ve got a you know they’re gonna have a football team they have an NHL team it’s starting to seem like a normal thing to live in Las Vegas.
Tim: It’s like anywhere Buck, it’s any state or city you live in there’s tremendous opportunity in great pockets I’ve I know a lot of people that live in Vegas and you know you joke the first question is about the strip and it’s like any city you live in they all just kind of chuckle and say you know we may go this trip once a quarter you know it’s like me going downtown for dinner with my family it’s right you know it’s the same concept.
Buck: Well Timmy I don’t want to keep you too long. It’s been great to have you on the show and for those of you who want more of Tim you can read about them you know Western Wealth Capital website otherwise you can join Investor Club if you are an accredited investor and that’s where Tim frequently does webinars for us. Tim again I want to thank you it’s great to have you on the show finally.
Tim: Thank You Buck, I really appreciate it. Thank you so much.
Buck: We’ll be right back.