Make a Killing in High End Real Estate Markets with Preston Walls

Taylor   0:01  

What's going on guys, this is the passive wealth strategies for busy professionals podcast. today our guest is Preston walls. Preston is a real estate syndicator based in Seattle, Washington and doing most of his investments in the Seattle Washington area. Today we're talking about value add strategies that he is using in his business to earn a return in that high end expensive market of Seattle. then strategies that they're using in his business to manage those invested investments, manage those properties and really earn that return on the back end as well and throughout the operation of the property.

these are important for both active and passive investors to know and understand because even if you're going to go passively invest in a syndication, you need to really vet that syndicator and make sure they have strategies and structures and experience in place so that they can execute You on their value add plans and by learning from experienced syndicators experienced investors, you can learn what to look for in syndication opportunities and syndicators when you're evaluating them.

there's some great lessons in this one. Thank you for joining me. I'm a real estate investor real estate syndicator. I buy real estate with passive investors and split the return. Happy to be bringing this conversation to you. We are now live streaming on YouTube.

if you're not following us on youtube yet, go to YouTube type in passive wealth strategies for busy professionals and give us a subscription is much appreciated and you'll be able to catch us live and ask questions of our interviewees moving forward. Thanks for tuning in. Once again, here we go with Kristin walls, Preston walls. Thank you for joining us today.

Preston Walls  1:52  

Thank you for having me. Taylor, excited to be here.

Taylor   1:55  

Great to talk with you. Could you tell us a bit about your business and what you do before we get into talking a bit about value add strategies and everything that you've learned so far as an indicator. Tell us about your business.

Preston Walls  2:07  

Yeah, so I invest in business real estate investment based in Seattle. I buy properties and renovate them. I've got a construction team construction management team that handles renovation, a property management team that handles management and some third party management for other clients to asset management and leasing maintenance all in house as well.

Taylor   2:36  

Awesome. full service sweet. You're doing the whole thing there in Seattle. That's great. we're talking right now during the Coronavirus pandemic. we're all dealing with that and today I wanted to discuss with you your value add strategies because even as passive real estate investors syndication investors, we need to understand the plans that are sponsors have how they're going to execute those and you know, we're getting an inside scoop from an experienced value add real estate syndicator.

tell us about the walls model in your value add strategies.

Preston Walls  3:15  

Yeah. my model is looking for unutilized or underutilized space that can be reclaimed, repurposed into a more efficient use, a higher and better use of space. rather than looking at it on a property basis and look at it on a per unit basis or unused space, storage rooms, carport, parking spaces where were zoning allows for those to be converted to dwelling units, laundry rooms if you're converting the building to Indian and Washington dryers that could be added to two units. A schema model is looking to find a more productive use for space throughout property.

Taylor   4:10  

Okay, and digging a bit deeper into that I can see the market really determines whether or not this or how well this strategy works because for example, you're in Seattle. But if you were in a market where carports, for example, were very highly valued, then would you agree that turning that carport into another unit would maybe not be an ideal situation? Or have you found across the board that if you can turn a carport into another unit that is pretty much across the board a good solution, good, good free value add strategy?

Preston Walls  4:48  

Well, yet it's very much local, locally dependent and part of part of what's created or driven it is in being in In a dense urban market, there's there's this Yeah, this premium for, for space for well located space and a space to live is significantly is worth significantly more than place to park your car or your belongings. part of it even with the cost of converting it to a habitable space that that delta is what I'm looking to capture.

Taylor   5:31  

Hmm, okay. Now in executing the strategy, I mean, there's some inherent risk and it was always inherent risk, but there's inherent risk here in what assumptions you make about space that you can convert, you mentioned zoning, things like that.

But there's a trade off right when you're looking at a property thinking about acquiring it and to just keep harping on the car, car park.

Whatever, whether or not you can really turn that into units, can you really be 100% certain that you're able to do that before you buy the property? Or is that something that you have to use experience and knowledge and really take a calculated risk? Like how do you balance those two factors and, and really mitigate the risk of the zoning guy coming in and saying, Now, you can't do that because of this obscure line in the code that I say no or whatever?

Preston Walls  6:33  

Yeah, that's, that's a really good question. This is where the art part of the equation factors in with it. you know, step one, in that in that question, is have a good architect. 

initially in my, in my early days of getting started, I was my own architect and  I read through the land use code and found all the reasons That I could do it and I  went down to the, the, the planning, and I sat with them and  we hashed out on what, what could work and what what couldn't and you know, eventually that that evolves into outsourcing that that piece to to a professionals whose lives in that code all the time so I rely on architects tremendously for for initial due diligence feasibility. Here's what I want to do.

here's, here's my here's my vision for this property, can it work? And the answer is usually some, some qualified, yes. Oh, yes. But if you want to do that scope of renovation, you'll have to add a sprinkler system to the building.  I might decide all right.

That's, that's cost prohibitive to do or add the building's going to be open anyway. not that much more relative to the increase in value. yeah, it very much depends on the, the, where the asset is the zoning and the characteristics that go into it.

Preston Walls  8:36  

Yes, absolutely. If it's in Seattle, there's a lot around parking. you know, in some areas you can eliminate parking entirely. There's some incentives around transit oriented, transit oriented development to reduce parking spaces and create more density around those nodes. In other kinds of transitional areas, you can reduce half of your parking and then in other areas there's no parking mitigation. where it falls in that and and there's some some blurry lines with that for ambiguous lines that that I rely on architect to help help delineate

Taylor   9:29  

interesting Okay, so I mean if folks wanted to get into that business, for example, I mean, sounds like you're gonna be dealing with this architect a lot and I'm curious how the cost structure usually works. I mean, how deeply did they really need to dig into it, like how much of a sunk cost do you have on just evaluating the deals compared to then going and executing them? when  I imagine there's some interplay to where you're at sending this architect work, then they'll probably look at stuff for free for you to a certain extent. you know, where's the how much you really invested in a deal before you say I know I'm not gonna do it or let's move forward.

Unknown Speaker  10:13  

Yeah.

Preston Walls  10:15  

An architect and suddenly an architect that you've worked with before and have a history with generally give you a, cursory indication on it for free. you know, get in touch with them, hey, here's what I want to do. Here's the address. Here, the building plans if you've gotten them from the city, what's feasible here and they can give you you know, probably an 80% guidance.

then that, that takes me far enough to say make an offer, get a property under contract and then once it's under contract, can spend some money maybe it's $500 for more detailed feasibility analysis, and that, that gets me through feasibility.  to to add

to convert to convert a space to a habitable unit, just the architectural fee is probably seven or eight grand for that to do the permits and or to do the plans and expedite the permit.

Taylor   11:36  

Okay, so that's not too bad and I wanted to get a little bit deeper into the specific projects that you're doing and kind of the scale of them too because a lot of times right now when when folks think about value add say multifamily syndications, they're buying an asset with 150 units is somewhere in the Midwest and doing a few thousand dollars per unit worth of Work and then raise the rents a little bit and calling it good but it sounds like the amount of work that you're doing to these units is more considerable you mentioned about the sprinklers example you're opening some of these up and when you're adding units and everything it's adding up in the cost.

Can you tell us more about specific projects that you do and what typical value add you know dollar per door things look like? I imagine it's all over the place but what does that mean in your business?

Preston Walls  12:32  

Yeah, and and I imagine there's gonna be some sticker shock here if you're comparing it with

Unknown Speaker  12:38  

this yeah

Preston Walls  12:42  

yeah, I mean, and to be to be clear, I models evolved on each deal you do you get a little more confidence. You learn a few things that you do differently. There's new amenities. that seem like they're too far fetched like heated floors for example.

Right It's a nice amenity and, but once you know when the floors up and the walls open, it's not that much more to run the conduit from thermostat down to the floor and put the heat mat under the tile. it's a lot of those that add up.

But my my typical budget if I'm just thinking about purchasing an existing building and renovating, renovating it, um, I'm budgeting anywhere from 100 to 125,000 per door for existing units and it probably 150 to 175 to construct to construct a new unit in in an enclosed or semi enclosed space, so  there's there's some variance on the size and the site conditions and, and all that, but but those are the the rough, rough parameters that I work with.

Taylor   14:15  

Okay. is that in addition to acquisition cost if you buy an existing structure and you're adding units, it's another I think you said 125 a door, in addition to the whatever per door you paid. I just want to make sure I'm understanding those numbers.

Preston Walls  14:31  

Correct. if your acquisition cost is 400 a door and you're adding 100,000, your cost basis is then half a million dollars per door. Wow. Yeah,

Taylor   14:44  

sticker shock is right, but it's a completely different market. I mean, the real estate I buy in much lower income markets so that the price per door is correspondingly a lot lower, people are paying a lot less in rent. it makes sense that the numbers scale up, it's just interesting to hear how high up that they can go.

In doing these projects, I also wanted to talk with you about your management team and what you do with your  asset management and construction management of those projects and how you handle it, how the handoff works. When you get to the point where it's ready and you're good to then you know, management, manage it in house and hand it off to the property management team.

Let's get into that a little bit, how your management structures work, our construction management team, asset management team, property management team all we're all together we all share, share, same same space and meetings. there's a lot of just fluid dialogue that happens among those teams so that that handoff and communication can happen. As fluidly as possible.

all those teams are involved from the beginning. The property management team is very involved at the beginning.

Preston Walls  16:11  

Right? What are the pro forma rents? What are other buildings in the neighborhood that we've renovated? What rents are able to achieve in those buildings and that helps drive some of the construction budget. How, how nice Are we going to turn this property into if it supports it? And on the asset management side  financing is, is kind of always playing out, through this cycle. There's the construction financing, and draws which require communication with the construction team and then as it's getting stabilized The asset managers look for permanent financing for the takeout.

Taylor   17:06  

Okay. You mentioned finance is very important. You mentioned before we're in the Coronavirus crisis right now and one of the things that I've noticed as a purchasing existing assets and other markets is  financing is a lot harder to get right now than it used to be it ever Yeah.

However, like what have you seen so far, especially in construction financing? I mean, are bankers even willing to have conversations right now like how have things changed?

Preston Walls  17:36  

construction financings interesting I have an infer permit on a 58 unit. building some new construction ground up

and

from a local, local lender community bank. There There's been some some good interest in financing that and they've they've hung in there through all this it's it's not done yet but yeah, that that market that just in this one instance has been easier it's gotten it's gotten more attention than refinances have stabilized buildings the the stabilized refi process has been really really challenging just did one through Freddie Mac

It started well before Corona was an issue and kind of fell apart in the middle and they came back with the with new terms which which was higher debt service coverage ratio, one year of principal and interest mints held in reserve and kind of some some other things at the margin, but it was it made it made it more challenging I've seen a lot of lenders just pull out of the market entirely and or if not pull out essentially pull out by increasing underwritten vacancy reserves on mixed use buildings are the same underwriting of commercial space at 100% vacant so essentially giving you no credit for for commercial rent in properties.

Yeah, the financing markets have been tough and I wouldn't expect it to get any easier going forward. Especially if rents decline very much.

Taylor   20:03  

That is tough. I mean, if they're assuming a hundred percent vacancy that's gonna really kill the purchase price or any, any contract that is assuming if there is a tenant in there, you're paying for that existing tenant. another thing we've seen, kind of across the board in this crisis is both residential tenants and commercial tenants,

Taylor   20:29  

you know, paying less rent basically, or infrequently paying rent  economic vacancies going up. What have you seen so far across your portfolio and how are you going to mitigate any of these negative effects moving forward, at least until we get on the other side of this thing?

Preston Walls  20:47  

Yeah, that that part is part has been really, really fascinating. It's played out much differently than I expected. are our April delinquency was, was considerably less than I expected we, we ended ended the month of April, just just about three and a half percent delinquent, which  it's still higher than March but not as bad as expecting, May May so Fars is tracking two and a half to three points above April's collections on a day by day basis, compared to, to those those data points in the previous month.

yeah, incrementally more challenging. In May, and, yeah, it's hard to know where the month will shake out. I'd add some optimism initially our share of prepaid rents going into May was was actually higher than than April but the delinquency rates

also turned out to be a little little higher as well.

Taylor   22:16  

Interesting. Yeah, I think it's because we don't have a light at the end of the tunnel yet. until that happens it seems like it's just gonna get tougher and tougher, hopefully. incrementally tougher.

Preston Walls  22:31  

Yeah, it's it's so hard to know

where this ends and and what getting back to back to work or getting businesses back open. Looks like just because they're open, doesn't mean people will come and you know, if a business is operating at 50% capacity, are they able to pay the same rent that they were previously. It's not, it's not boding Well, for

for the near term or through the end of the year.

Taylor   23:14  

out on that very happy note. We're gonna take a quick break for our sponsor. All right, Preston, I've got three questions. I asked every guest on the show. Are you ready?

Preston Walls  23:27  

I am ready. Great.

Unknown Speaker  23:29  

First one, what is

Taylor   23:30  

the best investment you've ever made other than in your education?

Preston Walls  23:36  

The best investment I ever made was the first syndication deal that I did. It was a building block from my office and I was early on in my career. I didn't have the money to buy it on my own and I've got a dozen of my friends. together and we pitched in and still own it today.

Unknown Speaker  24:05  

Nice nice was that

Taylor   24:08  

toward the beginning of the cycle like what about when was that?

Preston Walls  24:12  

So purchased it in 2006

Taylor   24:19  

right right at the right before the peak and you still have it which is a great sign.

Preston Walls  24:26  

Yes. At the time, it was just a funky deal that no one really wanted. It had an easement with the neighbor on it. at at the time I purchased or not purchased I mean agreement with with the neighbor a first right of refusal to purchase their space and I we were acquired acquiring the neighboring parcel in four years ago 2016 so now we control this the central piece of a block in a dense dense neighborhood it's a one story building zone for eight storeys. Wow. the, the land value is has

increased tremendously there.

Taylor 25:27  

That's awesome. That's great. On the other side of that we had the best investment. What is the worst investment you've ever made?

Preston Walls  25:36  

The the worst investment I made was

breaking your investment criteria to to venture outside of just the tried and true model I it had a lot of characteristics that I thought wouldn't make it get great it was the worst building on a fabulous street kind of a marquee, retail street in Seattle. Also close to my office, I could walk there.

But the challenge with it was it, it had it had two different historic overlays on the building. I figured the work that I wanted to do was interior and it would not be hindered by these historic historic overlays but ultimately it was.

It was too challenging to get the permit to do the work on it. I held it for a year and put a lot of time and energy into it but Ultimately sold that building.

Taylor   27:03  

Ouch. Well, it's a pretty proven strategy to buy the worst building in a nice part of town. It usually works out but it doesn't always work out. My favorite question here at the end of the show is what is the most important lesson that you've learned in business and investing.

Preston Walls  27:26  

Yet the most important thing it's, it's about control, the more of the asset you control, the more decision making you control, the better your chance of a positive outcome is going to be. it's why I've structured my business to include construction and maintenance and property management.

much of it is being able to To to get the contractor there and and knowing what they're they're telling you is is accurate Same thing on on leasing all all the areas that go into making a successful project, the more the more control you have over each of those aspects better it's gonna be

Taylor   28:23  

nice. I like that and yeah you guys have all your management in house so you are exactly taking that control over the business. I really appreciate that. Preston, thanks for joining us today if folks want to get in touch with you and learn more about your business and your syndications and things that you're doing Where can they get in touch with you?

Preston Walls  28:45  

You bet Thank you for having me on the on the show I appreciate it. Companies wallspropertymanagement.com  and wallspropertyGroup.com on the the syndication side

Taylor   29:00  

Do some investments in Seattle. I think it's still going to continue to be a growth market in the future at least once we get past the Coronavirus.

definitely some good potential opportunities there. Thanks for joining us once again, to everybody out there. Thank you for tuning in. If you enjoyed the show, please leave us a rating and review on Apple podcast that helps other people learn about the show.

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