Hello everybody, Michael Quarrels with the Michael Quarles Real Estate Show, I have with me today Albert Berriz and we’re gonna chat about residential multi-family. Now, I know I’ve chatted about it before, but I have never chatted with someone who has succeeded at it to the level Albert has. This is going to be an enjoyable conversation, I can already tell that I’m going to be a little frustrated with myself, because I have arrived at a level that I enjoy but it is certainly a long way from the level that Albert has arrived at. I need to get to work, that’s all I have to tell myself. So I’m gonna invite him in and let him talk with us and educate us on multi-family. Welcome to the show, Albert. Tell us about yourself.
Thanks a lot for having me on the show today. My company is called McKinley, we are based in Ann Arbor, Michigan, and we’re a national business. It’s a $4.6 billion family-owned privately-held business in that we own and operate 35,000 multi-family units in about 20 million square feet of mostly shopping centers and some offices as well.
So, $4.6 billion?
That’s correct. We are a national business and we’ve been in business since ’68, and my partner and I have been together since 1982.
That is, I have to say, a lot of money.
Well, it’s taken us a long time to build it and we’ve built it from the ground up. We’ve done it ourselves and our focus has been multi-family income-producing property, and that’s our core portfolio. All of our assets are generational, they’re financed long-term and so, like a lot of your readers, our focus is cash flow. So we don’t have any other sources of income other than the cash flow from the assets that we own. So we are, unlike others, old-fashioned on our operators, which means we’re very flat, we’re in the field. Our family members are actively involved in learning the real estate. My partner and I did that for many years, of course. Now, we have a second generation that’s doing it quite effectively, but make no mistake, we’re our own operator, we’re not a financial manipulator, we’re not simply owning assets, we’re producing the cash flow from the results that we make happen every day.
What was your first deal?
My partner and I started the business in ’68 and we started as student-housing operators in Ann Arbor, Michigan, which is the home of the University of Michigan. So like a lot of people, we started with syndication funds, we didn’t start with our own money, and we bought a building that was close to campus and we went from there.
So for those of us that are reading that may not understand syndication funds, tell us about that.
At the time, we didn’t have any capital, so we borrowed money - the equity - from friends and family. In exchange, we gave them preferential returns; we gave them advantages to their capital, and we took a carried interest as a result of our work because we didn’t have capital in the deal. That was our starting formula for many years. About 1989/1990, we switched and essentially got out of this syndication business because we had a created sufficient capital to go on our own. Since about 1991, we have done all of our deals without any outside partners.
That’s amazing. How large was your first property? How many units was it?
It was twelve units.
That was not my first property. Mine was only a single duplex, so you had me beat.
Well, I always tell people that this single duplex in our business is the very best way to start. In fact, I have a nephew in South California, he’s started and he’s building a very nice portfolio, he’s a lawyer by profession. So what I tell people and what I like about the duplex as an example, and you’re an example, is you get to live on one side and you get to rent out the other. So it’s the hard work, it’s the sweat equity, it’s the producing the cash flow, on the sense of the other side. One of the great things about the business that we’re in is that the tenants and residents who are living in our building are essentially providing the cash flow that will pay off the mortgage over time in the buildings that we own. So I love the duplex as an example, it’s really a great example for people that are reading.
Very affordable for them. You’re absolutely correct. Now from 1968 to 1990 — if I’m doing my math right — is that thirty-two years? No, twenty-two years.
At what point in that first twenty-two years was the ‘aha’ moment that you’ve arrived? You guys are successful, you know what you’re doing, you’re not afraid of real estate, and you just went for it. Was that the beginning? Was that the middle? Towards the end of those first twenty-two?
I think we remain today and we always were active on our operators, so in a sense we created our own destiny from that perspective, that our result was either gonna be good or bad based upon our own work. The difference for us wasn’t the operational excellence because we knew what we were doing operationally. The difference for us was accumulating capital, and quite frankly when we started, we probably didn’t have any capital. We just decided to go because we wanted to have the freedom of not having partners, so for us, it was more a matter of independence than it was that we thought we had arrived financially.
In fact, it was a very difficult time. 1990–1991 was a very difficult time in the economy, it was ruining the real estate business and we almost went out of business because of the liquidity issues that for companies like ours who were very serious and there wasn’t a lot of financing available in the marketplace. It was one of the most serious collapses other than 2008 that’s been recorded in what I’ll call recent real estate history. So for us, it was really more independence, we probably wouldn’t like you to do it financially, but we did it anyway because we thought we had to do it at some point. We did and we just charge our own course. We bought very little in those early years when we didn’t have any outside partners and we had bought a lot with outside partners because we just didn’t have the capital. But eventually the cash flow from the building that we own gave us more cash flow to be able to acquire more assets. We grew quite substantially before the end of 1990s and certainly of the last fifteen years.
What was the turning point for that substantial growth? Was it just the track record? Were the properties becoming free and clear, if they ever did, and what was the turning point?
Well we have a very committed and loyal group of commercial banks that support us and we were religious about paying them back. So what we would do, every time we borrowed money to do a deal, we would pay them back ahead of our expectations of when we said we would pay them back, and that gained a lot of confidence. So we went from having very few people willing to finance us to having a lot of people waiting in line and wanting to finance us. So that switch, if you will, where our ability to prove what we did in the financial marketplace is really what changed the paradigm for us. So even today, when our capital capacity and liquidity is much different, we pay back early. So for us, having those banks supporting our ability to grow and they fueled our growth, and they continue to fuel our growth has been an essential part of our success.
Outstanding! I remember around ’81 or ’82, it felt very, very comfortable because banks were competing for my business at the time and it was a different era of lending way back then than it is today. It was awesome. I wish that that model of lending that we had was still here, but it left us like some other things. Now do you build your units, or do you buy your units?
Our primary business is acquisition rehab or we’re distressed buyers, but we do build as well. So in today’s McKinley, we do three things: we build ground up - it’s a small portion of our overall business model but an important one - in the exact same markets that we are operating in so they were adding to the critical mass that we already have; we acquire distressed and turnaround assets; and we also acquire what I’ll call a niche portfolio of historic rehabs that are more urban locations in downtowns that we have significant market dominance. So those are the three things that we’re doing today at McKinley.
On the distressed seller, can you share with us how you find those opportunities?
You know what, I think part of it is market-driven so right now, it’s a terrible time to buy. We’re out of the marketplace right now, what I’ll call traditional garden apartments - those 3-6 unit buildings that’s the core of our company because they’re too expensive. We expect things to change, so as an example, 2009-2013 we bought 5,000 units in three years because it was a great time to buy. We were buying deals at 12% and 14% cap rate that are probably trading today at 4% cap rates. That’s one factor - the market’s a big factor - and the other thing is relationships. We have great relationships particularly in the banking community. So when those banks get upside down, which they will in tough times, we are able to move quickly, close very quickly, liquidate, and pay them off, and be a resource for them because otherwise, they have the distressed debt. So, we’ll buy debt, we’ll buy buildings, we’ll buy all of the above to get to the asset and eventually control, own and operate the apartment building, in our case.
In my industry of single families, one of our major prospect groups are hard-money lenders. For that very reason, they’ll do a lot of lending in a period of time and then all of a sudden, that inventory starts going back to them. They need their asset back, which is their capital, and they’ll become a very, very good seller because they bought it right, so then, they’ll have a lot of skin in the game. They want that skin returned to them. So, I imagine the banking is very similar.
What’s identical in your example of hard-money lenders of course exist in the multi-family as well, and by the way there’s a whole universe of people and I just used banks as one example, but all of the universe lenders that would wanna liquefy - just like in your example, they wanna liquefy the home because you’re correct - their business is not of owning and operating single-family homes, their business is controlling and lending out money and making a return.
So in our case, it’s the same thing. So whether it’s a hard-money lender which we worked with, for an example, in our business as well, or commercial banks, or life insurance companies, all of those people when things are going south are examples of why we’d prefer to have cash built on buildings. So whether in your case a single-family home, or my case a 300-unit apartment building, being able to close that home or close that apartment building quickly is a huge advantage. You have the relationships of course, and so do I. In times like this even though you can’t do a lot of deals because the market’s a little bit strong, what you can do is really foster and grow and deepen those relationships because there’s gonna come a point in time and you wanna be able to strike.
There’s absolutely an even flow to the market and you’re right: those relationships, I think, are crucial. I’m constantly telling people to work what I call their center of influence; to work that relationship because it will reward you. If I were gonna enter the large multi-family industry that you’re in, what are the first three things I need to do?
Well, I think you need to develop a business strategy that is very coherent, very thoughtful, and finance-able. In our case, we only go to certain markets; we only acquire big garden apartments, we don’t buy ultra-luxury. When we go to the markets that are tertiary markets with major employers, they will never go away. When you speak to our lenders, they can repeat that business strategy verbally and even without my presence in the room. Having that coherent strategy is not only important for and your team, but people important for raising capital, so that’s number one.
Number two is the team - and the team is actually more important than the real estate. In our case, we have a very committed team. We have a team that’s been around a long time: family and non-family members that have been around for a long time, but they’re pros. Again, access to capital people; you know whatever we say we’re gonna do is something we actually deliver. I would say team is number two.
Then number three is the quality of the assets. In our case, we have really focused on extraordinary assets and making sure that they’re able to last for the long haul. Coherent business strategy is one; team is two; the real estate is three. I really think that real estate is secondary to the team and the business strategy because you can’t do anything without great people.
But wait, there’s more!?
This post has been adapted from The Michael Quarles Real Estate show. Listen to this past episode for more on the inspiring story of ALBERT BERRIZ!
Michael is an accomplished real estate broker, contractor and expert specializing in residential real estate. He bought his first property before age 20 and has contracted thousands of deals since then. As an active and current investor, Michael understands what it takes to be successful in today’s market.
Follow Michael on Twitter at @michaellquarles. We welcome your comments.