4 Red Flags Your Apartment Syndicator Is in Trouble

Steven Weinstock (00:01) Today's guest stepped into a 977 unit apartment community in Atlanta that was only 60% occupied, and he took over day-to-day operations before he even closed on it. I did that once. Okay, we'll talk about that. Nate Armstrong is the president of Home Invest. He has been in real estate since 2007 and has done more than one thousand transactions. I asked him on because he's going to walk us through some red flags that tell you a real estate sponsor is in trouble and how you can spot them before the bad news shows up in the investor letter. If you invest passively or you raise money from investors yourself, this one is for you. Before we get into it, I want to say thank you. Thank you for watching. Thank you for listening. Thank you to everyone who has subscribed. Thank you for all the negative comments. Yes, I thank the people with the negative comments because they seem to be the most passionate. Nobody ever leaves a positive review at a restaurant. They only complain when they get upset. So, all you negative ninnies out there, thank you very much. I appreciate it. You're the reason why the show keeps getting better, and I actually really enjoy what you send. If you're getting value from the show, hit subscribe right now. It's free, it takes one second, and it helps the algorithm show my show to more people. I also wrote a book called The Wealth Clock. The Amazon Kindle version is 99 cents. Because Amazon does not let me give it out for free. But if you buy it, send me a DM or a message, tell me you bought it, and I will send you a free copy, no shipping, no postage of an actual copy of the book. Thank you very much. And welcome to the show, Nate Armstrong. Nate Armstrong (02:39) Steven. Pleasure, man. Steven Weinstock (02:41) Okay, so Home Invest. What is it? What do you do? tell me about this almost thousand unit deal you did in Atlanta or near Atlanta. Give me some details. Nate Armstrong (02:54) Yeah. So I started the the reason that's called Home Invest is I started flipping houses. I was a target employee working as a as a young manager right out of college and then I started buying properties, some rentals on the weekends and then flips. And I kept doing that over and over again and got fairly good at it to the point where I I think I had a little bit too much pride. And then there was a big opportunity that came up. It was a development project a couple states away over in Chicago. And I wanted to get in on it. And so I'm I'm looking at it and I'm telling my wife about it and she says, You don't know Chicago. You don't know development. What what are you thinking? And I said, Well, I'm the head of the household. This is what we're gonna do. We're gonna we're gonna do this. And so I signed the paperwork, I co signed the loan, I put in some cash, and then fast forward six months later, I got a phone call from the developer who said, We're upside down. I'm out, I'm walking. And and I'm like, what do you mean? This is real estate. Let's finish this thing. And he's like, No, I'm out. You can come get the keys. So I'm ripping duffel bags from the house. I'm loading up the car. I'm taking my wife and my newborn child. I'm selling everything I got in Minnesota to move down to Chicago to take over this thing. And we did. And we got it finished. Worked on it tirelessly for over a year to get it done. But then when it got done, all of the contractors that hadn't been paid came and filed liens. And then the bank came and squeezed me one more time. And literally I ended up going through bankruptcy, something I hope no one ever has to go through. In that bankruptcy period, I'm on my knees. Like I'm not wasn't a very spiritual guy before this, but I'm on my knees and I'm like, where did I go wrong? How how is this possible? And and and I didn't hear an audible voice, but I I feel like I got the nudge that this wasn't just about me. This is about making an impact in the world. And and I needed to change some things. And so I started working hard again. I found a deal. And it was a distress deal. My bankruptcy attorney pointed me towards it. And and I ended up getting it under contract. I brought it to another investor. And that person paid me forty thousand dollars to take over my position. I kept doing that over and over and over again. And within a year of that day, we had our first ever million dollar year. And the reason 100% glory to God for this, but the reason that we were able to start finding unique deals is because I understood the distress side. So especially right now we've got this this whole thing where there's a bunch of multifamily loans that have come due or they're past due. Understanding the distress signals is what's made me w what I am today, one hundred percent. And I think that right now, for the next maybe eighteen months or so, we've got a a heck of a window to go out there and pursue it. Steven Weinstock (05:38) Wow, so you're working at Target. This is back in 07, I think you said. Nate Armstrong (05:44) Yeah. Steven Weinstock (05:44) So the internet is still not as filled with BiggerPockets and other you know, podcasts, I guess there were forums back then. How'd you how'd you make the leap into real estate? You know, when when people say it today, you know, they the algorithm gets them, they see it, HGTV, they're watching TV, everything looks great. But in two thousand and seven, how'd you ha you know, why real estate? Is it something in your family? Did you see something online? Did you have any help, any mentors? Nate Armstrong (06:17) Three things. One, I did watch HGTV. I watched Than Merrill. Too many episodes of flipping houses. Number two, Dean Graziosi forever in my heart. I will hold a special spot for him because he had one of the first forums in it on the internet for real estate, DeanGraziosi.com at that time. And so I got a lot of data and I paid for a mentorship through there. And then number three, as a child, my dad used to take me to auctions. My dad was a mechanic and so he would buy snowmobiles. I'm from northern Minnesota. So he'd go buy these broken snowmobiles during the summer, fix them all summer long, and then I'd be in the garage helping them, and then the he'd sell them at first snowfall. And so I learned how to, how he bought these broken things, restored them, and then profited from it. So 2007, it was the very front end of foreclosures coming, at least in my home state of Minnesota. By 2008, foreclosures were starting to be a thing. By 2010, they were everywhere. And so I was scooping them up. and reposition them as fast as I could. Steven Weinstock (07:19) So you made the transition from smaller properties, fix and flips, got into this development deal that ended in disaster, I guess we could say. some would say it was the best education you ever got, and maybe even cheaper than a Harvard education, depending how much money you lost on it. but you learnt a lot, obviously. What was the first step back into ownership. I know you said you, you know, would find a good deal, you'd sell your ownership stake, so to speak, you know, flipping the contract. But what was the first deal you came back and, you know, purchased? What what kind of property was it? Nate Armstrong (08:04) Yeah, I had a chiropractor client on a four unit building who this is a small multifamily property and he didn't want to have anything to do with the headaches of on the ground operations. So I brought the deal to him, but he's like, Well, I I'm not gonna, you know, manage contractors and things like that. So I said, I'll do that. No problem. And so he threw in the cash and then I'd handled everything on the ground and repositioned it, got it into a good spot, and then went to a bank and refinanced it. Got him some cash back and then kept going. Steven Weinstock (08:35) How do you how do you structure that? I know structures are so important and you gotta keep everybody happy, everybody fair. Wha what kind of structure did you have without trying to give away too many personal details? Nate Armstrong (08:48) yeah, no no, I'm I I I I'm an open book with any of this, so you can ask any question, but in my early days everything was fifty fifty, that's how I did it. Now fast forward today, which I'm dealing with much larger properties, much larger dollar amounts, these are usually seventy thirty splits, sometimes eighty twenty, depending on how the capital is laid out. Steven Weinstock (09:07) And when you're doing these larger deals that are seventy thirty, I'm assuming you're talking a GP LP model to general partnership, limited partnership model? Nate Armstrong (09:16) Yeah, for for example, we we bought the one that you mentioned. It's 977 units. That one is a GPLP relationship. So my team takes the GP side and then we have limited partners that come alongside of us with some cash. We put in our cash, we sign all the bank paperwork and then we manage everything day to day. And then investors came alongside of us as the LP. Steven Weinstock (09:38) Now this 977, that is not one parcel, I would assume. Nate Armstrong (09:44) It's 99 acres and it's two two large tracks. They're almost touching one another. There's a street that divides the two, but it's two large tracks. Steven Weinstock (09:54) And th this is development or this these are units that are already built? Nate Armstrong (09:58) These are already built, built in the eighties. Eighty four was the first phase. There's three phases. They finish it in eighty eight. Steven Weinstock (10:07) how's the rental regulation in that part of Georgia? Nate Armstrong (10:12) Off regulation, it's it's medium. There's some states that I really love, like Florida as an example. It's like one of the best in the country. And then there's some states that I really don't love. Minnesota I no longer love because they passed so much regulation. Atlanta is right in the middle. It's still on the more favorable side for landlords. It's a little bit of a time period for evictions, but other than that, it's it's fairly good. Steven Weinstock (10:36) Yeah, you're preaching to the choir. I'm here and living in Brooklyn, New York, so New York City is a nightmare to be a landlord. when I started in two thousand and one I couldn't buy in my backyard. I had to go across the bridge or two bridges, to New Jersey and I had to buy a single family home in 2001 Two thousand and one I paid thirty two thousand dollars for it, put down ten percent, and all of a sudden I was a real estate mogul after that. But New York is i extremely tough. I own some, you know, four unit types of properties in a part of Brooklyn and I did well with it in terms of appreciation when I sold it. And this is from like 2003 to 2006. But being the management, being the landlord was so difficult. So so much regulation. You know, these tenants literally have you by the you know They they they own you almost. And some of them know it, some of them don't, and it's just very, very tough. And till this day I'm really afraid to be a landlord here in New York. I always say New York, you have to be extra, extra talented to do well here. Nate Armstrong (11:53) Mm. Steven Weinstock (11:54) And buying property in other states, you don't have to be that talented. You have to know how to buy it well. Hold on to it for the long term for the most part. And you know, next thing you know, after twenty years you're an overnight success. Nate Armstrong (12:07) Mm-hmm. Steven Weinstock (12:07) obviously when you're buying some of the larger properties, you know, a thousand units at a time, some real talent comes in and some real networking comes in. You mentioned you're the GP on a deal like this. Tell me what role the GP has and what role do doing and let me rephrase that. When you own a four unit house, you could be the one old you know, it's owner operator. You could do everything. When you have a thousand units or more You could be great at sourcing deals, you could be great at raising capital, you could be great at operations in terms of management or asset management, property management, you could be great in construction. There's so many different a factors, so many different important pieces to the puzzle that with some GP teams it's made up of many different partners, many different jobs, and if the deal is big enough, there's enough money to go around where it's worth it for everybody. So tell me how how are you involved? What what are you doing? Are you sourcing? Are you collecting rent? Are you you know meeting contractors? Nate Armstrong (13:23) Yeah, my my main role is on the ground ops. So my my business partner, a fellow GP, he handles the majority of finance and it it l allows me to go on the ground. So I'm literally there meeting with the team. I fly in and out all the time. I'm working with our I've got a couple of our employees that are handling the churns. And so I'm working with them a lot. Almost daily, I'm looking at their spreadsheets, I'm talking to them, I'm figuring out how many units we're gonna churn, for example. This month as we're here together we've done forty five unit churns and so I'm keeping tabs of that. I know what our costs are, but my job is the ops of it. Steven Weinstock (14:00) What is the average cost of a unit turn? I'm assuming these units are not down. And when I say down, you know, they're not cut to the studs. Probably had a tenant that lived in there. Maybe they trashed the apartment, maybe just needs a update, a a fresh update. But what are what are some of the average amounts that you're spending on a unit turn? Nate Armstrong (14:24) Yeah, so it depends on the square footage naturally. More more square footage, more flooring, more paint, etcetera. But we're twenty six hundred to forty two hundred. Forty two hundred would be our biggest square footage unit. Steven Weinstock (14:36) Wow. And what's the wait, forty two hundred you're talking about dollars or forty two hundred square feet? Nate Armstrong (14:42) Forty two hundred dollars. Steven Weinstock (14:44) Got it, yeah, that's what I assumed. Okay, good, good. And obviously there are times where it could could cost more because you need all new appliances, you know, everything is needed. and then sometimes, you know, somebody leaves the unit in good shape and it just needs a a fresh coat of paint and you know, maybe a new refrigerator. What about some of the common area renovations? Nate Armstrong (15:05) Yeah, the there's a second clubhouse or lease it used to be a leasing office at one time, and that is a big thing. They filled in the pool with dirt because they didn't want to fix the plumbing repairs that were needed on it. So now we gotta dig out that pool. We gotta redo the face of the the pool and then we're probably gonna have to redo the plumbing for the pool too. The inside that clubhouse area there's pickleball they're not pickleball today, but they're old racquetball courts. And we need to restore them. We're gonna make one of them do pickleball court, one into a basketball court. But this is a pretty big building and we need to update that entire building. What happens when you know this better than anybody, but what happened for for anyone listening, what happens in when buildings start going down is that owners stop putting money in, and then the maintenance team that's on site, they're trying to do their best to keep the property alive and they start cannibalizing. So what that means is that when a furnace goes out on unit A. They'll go to unit C that's vacant and they'll take parts out of that furnace to come over and fix unit A. And that had been happening on this property for a year plus. So we've walked into a lot of that. We knew that going in, but we walked into that and so we're having to restore a lot of it. But that clubhouse alone, that's gonna be about two hundred and fifty thousand. Steven Weinstock (16:19) What's the unit makeup? Is it one bedroom, two bedrooms, three bedrooms? Nate Armstrong (16:23) Ones, twos, and threes. The majority are twos on site. Steven Weinstock (16:28) Wow. Okay, so you have a a big project ahead of you. Good luck on that. where else are you invested besides in the Atlanta area? Nate Armstrong (16:36) Yeah, so Oklahoma City, we took one very similar to this. It was actually much uglier. It had fifty percent of the roofs were bad. We had literally they had down a whole building that was down on it. But the Oklahoma City one, it took us fourteen months from start to finish to go in, fix all the problems, and then get it up to ninety five percent occupancy. So we're projecting something similar on this one. This one might go eighteen months 'cause there's more units. But Oklahoma City and then the state of Kentucky, we've got Louisville. Lexington and then a little tiny city north of Lexington called Georgetown. Steven Weinstock (17:11) Tell me some red flags that tell me that a sponsor is in trouble. Nate Armstrong (17:16) Yeah, number one, distributions pause. That's always the first sign when distributions stop that they were expecting. Now if they were if they went into the deal telling everyone we're not doing distributions until stabilization, that's different. But if distributions all of a sudden stop, then obviously something popped up that they weren't planning. And then next in line is what is the actual cash flow look like? Is there cash flow coming in? I think very few LPs actually read the statements if the operator or sponsors publishing them. another one is making rookie mistakes, I'll just call it that. For example, on this 977 unit property, a couple years before they got in trouble, they put a second loan on the property. They had enough equity in it where they went to a Fannie Mae loan and they got a second position. And with that second position, rather than putting it back into the property where it should have gone or held for reserves for the property They did a early distribution to investors and then they found themselves year and a half later just in trouble, tumbling down and down and down. Steven Weinstock (18:25) Wow. So are you seeing a lot more of these red flags today than a couple of years back? Nate Armstrong (18:31) Absolutely. An another big one 'cause I'm I'm walking five buildings right now. It last Friday up in Atlanta. I walk five five buildings and I'm doing all my underwriting and stuff right now. On that one, I went in secret shopped the property 'cause it's very close to our property. And as a as I'm sitting there with the leasing agent, they're offering me three months off move in special and I only had to have a two point five income multiplier, meaning two point five times whatever The rent is had to be my income. And you and I both know like three is the line. Like you start dropping below three, you're you're heading into trouble. And I asked the leasing agent, I'm like, what happens if I miss a payment? And he's like, Well, no, no, we're not worried about that because we have this bond insurance program where you're gonna pay the bond insurance company and then we'll get our rent covered either way. And I'm like, Wow. And so I kind of knew that that property was in trouble. So I figured out who the owner was, got in touch with the owner, and now we're in talks about us buying that property from them. Steven Weinstock (19:36) So you guys you really like these hairy deals where that need a lot of work. Nate Armstrong (19:42) Steven, after I got my butt kicked, I I learned that real estate, it can be glorious, but it can also have the downside. And for me, I'd rather buy on the downside. I'd rather buy at the extreme discount, knowing that I couldn't even build it. Like this, this appraised for 122 million. We bought it for 71 million. And so even on a bad day, as long as I fix the vacancy issue, as long as I do my job. Even on a bad day, I'm gonna bring the health of that building back up to a hundred million all day long. So I I f I prefer to buy with hair to start at the lowest basis possible. Steven Weinstock (20:21) If you were investing passively tomorrow, what are some questions you would ask a sponsor before sending them even a dollar? Nate Armstrong (20:29) I'd wanna know if the sponsor has been through all seasons, meaning have they seen a downturn? Have they seen what it's like when interest rates stay higher for longer like they are now? W what happens when tenants are going through pain? Right now the market is weeding out the ineffective operators, the people that can't handle high interest rate environments, they can't handle tenants that are living truly paycheck to paycheck. Like we're literally we're to the point now, David or Steven, that we have An on-site coordinator that's literally they're doing resume building workshops, they're doing after school programs with the kids. Like we're helping them find jobs because it's so important for the community to have income naturally. We think it's the right thing to do. But we're we're to the point where we want to make sure that the community succeeds. So if if someone's not willing to do that and dig in that deep, then operators can be crushed in this kind of Steven Weinstock (21:26) Any states you wouldn't invest in? Nate Armstrong (21:30) Steven, other than New York, I you guys your your mayor up there has pretty much scared me from ever wanting to do business in in the state of New York. And any state that mirrors that. So my original home state of Minnesota is off limits now too. They've they've had too much go in the wrong direction for too long as well. So I I I take money from investors and I wanna be able to be I wanna be Sleeping well at night knowing that I can deliver on whatever I promised. And it's harder for me to do that when there's uncertainty with the government. Steven Weinstock (22:03) So you're bullish in Georgia. You obviously are liking Florida. I know you told me offline you're in Florida. where else where else do you see some bright spots? Nate Armstrong (22:14) There's a sleeper city, this is Green Bay, Wisconsin. Steven Weinstock (22:19) Wow. Nate Armstrong (22:19) And you're you're not gonna get the hockey stick growth out of Green Bay, but what's happening up there is that in last year they won an award top ten for high income earners, the number of high income earners that moved to the city. Steven Weinstock (22:33) Really? Nate Armstrong (22:33) So the measurement was on two hundred thousand dollars per year annual income, and they had the second highest in the country. Which was fascinating. So, we really like it. We bought a a beautiful building on the river up there and we we got it for what I would consider a a really good steal of a price. And every single unit that turns over, we're bumping up the rents on it and we keep climbing on that building. Steven Weinstock (22:56) Well I I don't know the I'm I'm not a a a pro on the geography over there. I know you have Milwaukee, which is about two or three hours from Chicago. And Nate Armstrong (23:08) Yeah. Yep. Steven Weinstock (23:09) I and I know you have a lot of people in Chicago who, you know, vacation in parts of Wisconsin. You know, they might have a lake house and you know, it's part of the the suburban as you will, or the c the campgrounds of Chicago. Wha how far is Green Bay from this area? Nate Armstrong (23:27) Yeah, another so once you get to Milwaukee, then another two and a half to three hours. Steven Weinstock (23:32) Of driving. Nate Armstrong (23:33) Yep, driving. Steven Weinstock (23:34) Got it. And you said it's on a river? Which river? Nate Armstrong (23:37) So I don't know the name of that river, but it's on the Great Lakes. Steven Weinstock (23:42) Got it, got it, got it. I had a good time talking to you, Nate. You're easy to talk to. You're fun to talk to. tell my audience how they can reach out to you. What if they, wanted to invest in some of your deals, what they could do to ask you questions about some of your projects you're working on. I'll put it in the show notes, but you go ahead. Nate Armstrong (24:03) Okay, cool. So we we put together a guide and it's fivelandmines.com/Steven, or you can do fivelandmines.com/wealthclock. Either one, it'll take you to an article that we wrote that literally outlines the five biggest things that go wrong on deals like this, and so how you can spot them as a potential investor in them. Steven Weinstock (24:25) Okay, and I like how you had this slash Steven and slash wealth clock. That's so interesting because my name happens to be Steven and the podcast is called the Wealth Clock. So whoever your IT guy is who probably came up with those URLs months ago, wow, what a coincidence. I appreciate that. Nate Armstrong (24:43) Yes, sir. Steven Weinstock (24:45) Nate, thank you very much. I appreciate it. Good conversation. I really liked it. I like your optimism. I like your mentioning of working at Target. I'm not sure I'm happy you mentioned my mayor. he sort of put me in a down mood. So because of that, I think we're gonna end this podcast. if you enjoyed this podcast, please subscribe. Please tell your friends about it, please reach out to Nate. And tell him you found him on this podcast. Nate Armstrong, thank you very much. Nate Armstrong (25:20) Yeah.