When the pandemic hit the world, everything seemed to slow down, and most things were on pause. But not for the real estate businesses. In this episode, Sam Wilson talks with John Casmon on the current state right now and why the market is still good. John shares what the past year looked like and what the business has achieved even without acquiring anything in the first half of 2020. Learn how he bounced back and dealt with the challenges that came his way and his success after overcoming them. He launched Casmon Capital Group to help busy professionals invest in real estate without a second job. Make sure you know what you’re doing and why you’re doing it. Learn more about leading the asset management side, closing deals, building relationships, marketing strategies, and creating a business plan.

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Finding Growth Opportunities In Real Estate Investing Despite Uncertainties With John Casmon

John Casmon launched Casmon Capital Group to help busy professionals invest in real estate without taking on a second job. They’ve helped families invest in close to $90 million in multifamily apartments to create passive income, reduce their tax obligation and foster generational wealth. If you want to learn more about John, he came on this show for episode number two. If you’re going to go back and hear more of his story, go back then where we can get some more groundwork of who John is.

John, welcome back to the show.

Sam, thank you for having me back. Being episode number two, I got to ask who’s number one?

A buddy of mine here in Memphis. You got episode number two. The honor was mine. Starting out a show, it’s tough. People don’t probably think about that. It’s tough out of the gate to go, “Why does anybody want to talk to me?” When this goes live, I don’t know where it’ll be 340, 350 or so episodes in. It was fun. Thanks for the gamble on the beginning and then coming back again here.

I’m glad you stuck with it.

It’s been one of the best things I’ve done. I want to dig in. The last time we spoke was 2020. 2021 has been a wild ride for everybody. Can you walk us through what the year has been for you guys? What lessons you’ve learned? The floor is yours. Kick it off and tell us about 2020.

When COVID first hit, everyone, hit the pause button, trying to figure out what in the world was going on. What’s going to happen? How will people react? What we found is overall, the market has done pretty well. Some of that is driven by some of the government regulations, stipends and things like that that have been put in place. If you look at the multifamily industry, it’s performed extremely well. When you look at the current state of things, we’ve got inflation on the rise and we have low demand for properties. We’ve got a global crisis still playing out.

Multifamily has the trifecta of providing cashflow appreciation and tax benefits.

Apartments are a good bet. Why? They’re US-based assets so people from around the world are looking to park their capital in places where it feels secure. You’ve got to keep in mind that, in some of these countries, there’s different corruption and different elements that come into play where you may not want to keep your money sitting in the bank.

People like to have money in US-backed real estate assets. You have investors from Australia, France and Canada and all over the world who are looking to invest in US real estate. Keep in mind that US real estate, in particular, multifamily has the trifecta of providing cashflow appreciation and tax benefits. There’s a lot of demand for these properties.

I set that up to say we took the back half of 2020 to assess what was going on and what we wanted to do going forward to see how things played out. We didn’t acquire anything in 2020. It’s the first year in the last five years that we didn’t buy an asset. We waited to see what was going to take place. We had some deals in motion. Pause and delayed some other things but we got back on to it towards the back half of the year.

Coming in 2021, we’ve hit the ground running a little bit more. We closed an 81-unit property in Florence, Kentucky. We’ve got 104-unit property in Louisville, Kentucky. We’re continuing to grow and look for new opportunities. Those two deals were about $20 million worth of real estate, which for us it’s still a pretty good size. We’ve been a general partner on a lot of deals.

We’ve been the B roll in the passenger seat or the back seat of the car. We’ve been on the driver’s side a little bit more. We’ve done some JV deals where we drove those deals. We understand where we want to go forward. For us, it comes down to two different ways of doing business. One is these deals where we are in the driver’s seat. We’re leading the deals. We have a part that likes to lead the asset management side and work with the property managers.

We take the lead on the investor relations side, business plan and making sure that the marketing strategy is all tight. We know what we’re doing. We know why we’re doing it. We understand everything that we’re going to do from the implementation. We partner with our folks to make sure that that vision is executed.

On the flip side, we do like being a general partner where we can get exposure to different markets. I’m in the Midwest, I’m in Cincinnati and I love Indianapolis, Columbus, Louisville, Florence, Kentucky. I love these markets but we know what’s happening around the country. There are great opportunities, great population growth in Florida, Texas, Georgia, the Carolinas. We want to make sure we provide that exposure to our investors as well. We do still like to partner with other operators who are doing deals and finding opportunities in those markets. That’s where we’re at and where I see us going in the foreseeable future.

I love that two-pronged approach because a lot of times, people get stuck in one way or the other. There’s only one way to do that. What gave you some confidence at the latter stages of 2020 to then say, “This is what we project and this is what we want to do in 2021?”

Real Estate Investing: Different elements come into play in some of these countries where you may not want to keep your money sitting in the bank. People like to have money in US-backed real estate assets.

The biggest thing is looking at rent collection. For us, the biggest concern was what would happen if residents stopped paying? This business is pretty simple and straightforward. We offer a product, which is housing. For that housing product, people pay rent and we collect the rent that comes in, you subtract the expenses and what’s leftover is the cashflow. If people stop paying rent, we’re going to be upside down or we’re not going to have enough money to cover all of our expenses and cover the debt service.

We’re concerned with rent collection for a few months there. If you go back to April 2020 and May 2020, we paid very close attention to rent collection. June 2020 was supposed to be the month. That was going to be the month you fell off the cliffs. We waited for June 2020 and it was okay. July 2020 was okay. At that point, we felt more and more confident as we got to the latter part of the summer early fall. We felt that we could operate with confidence that people who could pay rent were going to pay rent.

One strategic change we made. In the past, we focused on anything from B-plus to C minus and we felt pretty comfortable with those types of properties and locations. To explain what I mean with B-plus. I’m talking 1980s, 1990s property, maybe even early 2000s property, a solid location where the household income might be in the $70,000 to $85,000 range. Desirable, a place where people want to live. They can’t buy there. They’re happy to rent there but solid schools. That was the top end.

On the lower end, maybe a more of a blue-collar, a little rough around the edges neighborhood, median income in the $35,000, $45,000 range, workforce housing. Not exactly desirable but a place where people felt comfortable. Not war zones, we’re not talking that but a place not exactly where you would put on your top ten places to live but you got to live somewhere. That was on the list.

What happened coming out of the pandemic was one of the shifts we’ve made is we decided to play in that B-class area so B-minus up to B-plus. Our rationale is this, from a resident-based standpoint, the people who suffer the most when we have these economic shifts are the lower economic side of the scale. We don’t think it’s right to hammer that person and try to jack a risk of $50. $50 may not seem like a lot to a lot of people but when I was a kid, I didn’t have $10 to go on field trips. $5 or $10 was a lot of money.

I understand what increasing rent by $50 means to a family. I’m not trying to be altruistic or anything like that. I’m saying that it’s tough to operate a business where you’re squeezing people and they can’t afford it. The margins get tight. There’s a human element that goes into it. It’s a little harder because a lot of these people are losing their jobs. If you’re working in a service industry and you can’t operate or if there’s another shutdown that takes place, will all these people have the money to go work?

There’s a lot of uncertainty there. For us, that turned us off to the lower side of the market. The other thing is cap rates continue to compress. If you think about how you create value and the way cap rates work, if I’m able to create $10,000 worth of value, increasing the net operating income by $10,000, if I do that on a higher class property where there’s a lower cap rate, that’s going to create more value than a property that’s on the lower end of the spectrum, where the cap rates a little bit higher.

We also have to look at how much do I want to be rewarded for the effort and the work that I’m putting in. You are seeing more and more people decide to shift up and say, “Let’s buy a better-quality product for that reason.” Also, let’s say the market does take a change and if it does take a big shift, I’d rather own a newer property that doesn’t need as much CapEx, maintenance and to go in and redo all the plumbing.

We like the properties where there’s a good mixture of that cash flow and appreciation potential.

I’d rather own a property like that if I have to hold onto it for 5, 7, 10 years than a property that was 50, 60, 70 years ago. I’m constantly plugging holes or patching up things and constantly pumping money into this thing. From our standpoint, we’re more comfortable playing in the B-class arena where it’s still affordable and desirable. We do like the properties where there’s a good mixture of that cashflow and that appreciation potential.

I like that strategy and that thinking. It’s in line with a lot of people’s thinking. How are you still able to find deals that meet that criteria?

I don’t think anybody’s finding deals nowadays. What you’ve got to do is you got to go out there and create an opportunity. I had a mastermind class and we talked a lot about this. You have to figure out what your principles are, what you’re looking for to deal with and figure out how do you create an opportunity. If you take your spreadsheet, you analyze whatever it is you’re using. You throw the numbers from the broker in there and you expect it to spit out a great number to buy it. You go offer that to the broker and you’re going to get under contract. You’re going to be sadly mistaken.

You’re going to spend a lot of time turning the wheels. Sam, I don’t know how many deals you analyze but I can’t tell you the last time I analyzed the deal and the numbers spit out and it was a good number. The first time I underwrote it and I made that offer and got the deal. I haven’t had that happen in years. What you have to do is you’ve got to be creative. You have to figure out what problems you’re solving.

One of the things we always talk about is understanding that this is a relationship business. You hear people say that all the time but they don’t necessarily explain what that means. Let me give you some context. There is an owner on the other side of this negotiation. That owner is looking to get something beyond the money, capital and the return on their money. What else are they looking to get?

If you can understand that, build the relationship and help them understand how you can provide that for them, if you can prove yourself out, if you can build that credibility, if you can position yourself as the right buyer because you’re going to close, that carries a lot of weight both with the broker and the owner.

Part of that is understanding the deal structure, your offer and how do you create a deal that’s very enticing to an owner, as opposed to simply throwing out LOIs with random numbers on there. The key in this market is to understand what a seller is looking for, being able to solve that problem, also being able to stand out and be a bit creative in how you structure your offer.

What are some creative things that come to mind that you guys have done when you’re reaching out to those sellers or positioning yourself in front of those sellers?

Part of it is also understanding the terms, the purchase prices, the big thing everyone always focuses on. It certainly is the most important thing but there are other things that are just as important. You want to understand the terms. How long do you need to close? Are you using hard money? Are you using agency debt? Are you using an all-cash offer? The cash that you’re using or the money you’re using is an important thing.

What contingencies do you have at play? Are you willing to waive those contingencies? Are you willing to shorten the timeframe for those contingencies to be applied? Will you go hard? Hard money works well. It’s very enticing for someone. It’s not that hard money is very enticing. You have to break down the psychology of it. What you’re saying is I’m committed to buying this property and I’m committed to buying this property. I’m willing to give some of my money upfront to demonstrate that commitment.

Real Estate Investing: You always have to have deals coming in. You always have to have that deal flow. You also have to always be nurturing your investor relationships.

Hard money is one way to demonstrate a commitment to close. There may be other things that you can do to demonstrate that same commitment to close. You have to be creative and think through how do you convey to a broker or to an owner that you’re committed to buying that property. You’re committed to closing on this property. That’s what they’re looking for. The hard money is one thing but what I want is I want a commitment that you are serious, that you’re going to do everything in your power to buy this property. That’s what’s going to make you stand out from the person who made whatever offer that’s out there.

Those are some good points and the risk that’s associated with going hard. If there are other ways to get around that and yet convey the same amount of commitment, why not take those creative approaches. How often do you guys get to talk directly to the seller?

This is going to vary based on the size deals you’re doing. If you’re doing a mom-and-pop, which is going to be more of that 10 to 15, maybe 10 to 75-unit range, it might be easier to get in front of that owner and talk to them. If there’s a broker involved, you’ll typically go through the broker but you may have some conversations there.

If you’re doing larger apartment buildings, 75 units and up, 100 plus units and up, typically there are a couple of calls that are structured where there’s almost like a buyer interview conversation, where they want to know your experience, learn more about you and things like that. There are typically not a whole lot of opportunities to get right in front of the ownership group.

What I would say is on the deals we’ve done, they’ve all been pretty interesting. One is a deal where the broker is the owner’s son. In dealing with that, it’s fairly easy. You’ve got the father-son dynamic there. If we say something and it gets lost in translation or whatever the case may be, it’s easier for us to get on the phone together with the owner. We’ve talked to that person a lot. We’ve had a lot of conversations with that owner.

On the other deal, the 81-unit deal, we probably had two face-to-face meetings but we’ve had the email address, phone numbers. We probably talked to them once a month to find out certain things, “Are you handling this?” They had a staff member who had been working with them for probably ten years. They wanted to know what was going to happen to him when we bought the properties.

We talked about his salary and his total compensation package. We worked out some things there. It depends on the situation. At that point, we had locked in on the terms of the acquisition. It was more talking about what happens with our transition and what’s the impact going to be for some of their staff and their personnel.

Talk to us about these deals. We talked briefly about some things you guys have learned in deal stacking and things like that. Can you shed some light on that?

We had two deals and we tried to pace them out a little bit. One would be completely wrapped up before we started the second one. The timing didn’t work out that way. One deal got delayed. The other we got pulled up a little bit. They ended up coinciding a little bit more than I would’ve liked. Part of the lesson for us is understanding like, “When you’ve got multiple deals, how do you differentiate the two? How do you make sure you’re not putting two out there and making people pick between which one they like?”

What you don’t want to have is people who are committed to the first deal see the second deal and say, “Never mind, I want to do that deal instead.” That was my fear that we were losing investors for the first deal for the second deal. Here I am trying to get the first one across the finish line. A couple of lessons for us is to continue to build up the pipeline. That’s the important thing with the business but the more prospects you have, the more people you can help, the easier it’s going to be to go out there, raise capital, find deals and do business.

You got to go out there and create an opportunity.

It’s like a machine. You have to always have deals coming in. You always have to have that deal flow. You also have to always be nurturing your investor relationships. Talking to people, letting them know the deals that you’re working on, understanding what they’re looking for in an investment opportunity and providing those opportunities when they present themselves.

For us, it was more of a reminder that, “There’s a reason we do all these things.” You have to let people know what you’ve got in the pipeline. You’ve got to be transparent and talk to people about, “We’ve got this deal. This one’s good fit based on what you’ve told me. This other deal will be out for X amount of time,” or whatever the case may be. Make sure that you understand how you can help people.

I also think a big lesson is understanding how deals can differ. The two deals, one was a townhome deal where it’s 80-townhomes. There’s a big opportunity to push rents. The other deal was a newer construction property where there’s an opportunity to push rents but it’s not going to be through renovation. It’s going to be through operations and the market. That deal required a little bit more understanding of our analysis of what the market could take and where the market was headed versus the previous deal.

We didn’t have a whole lot of data points. It was pretty transparent to see like, “There’s no way in the world these rents should be this low to give you a data point.” Forty percent of the residents at that property had lived there for at least five years. I had never seen anything like that. You’re talking about people who haven’t had their rents increased in five years. I want to say something like 70% of the residents have been there at least two years, 70% or 80%.

The point is rents were low. All the residents knew the rents were low. They were not pushing them on lease renewals. We knew there was plenty of upside potential. These are townhomes. We peep they’re desirable, the three-bedroom, two and a half bath townhomes, people want to stay there. They don’t want to move. You’re not going to find a property like this that you can rent. The alternative is to go buy a house.

We know that in that B-class area especially if you’re in the middle B, credit is still an issue for a lot of folks. It’s hard to qualify for a house. This is the best alternative. That business plan, we were extremely confident with, most investors picked it up right away. With the newer property because this is also a transition for us into buying newer properties. It was a little hard for people to quickly see, like, “Are you going to be able to generate those returns? Are we trying to be a bit optimistic here?”

For us, it’s great to see the spectrum and understanding the risk tolerance people have. I will say that we are growing more risk-averse. I’m looking at the labor shortage and the cost of materials going up. I’m less enthusiastic about deals where I got to spend $7,000, $8,000 a unit to increase the value. I’d much rather find a deal where it’s a light to medium value-add play as opposed to a heavy lift type deal.

Material and labor shortages, you get into a heavy lift and you could be waiting a long time. I know we’re placing a large order on some construction materials here, which we budgeted in. We knew this was coming but it’s like, “This is a long way out.” From what I’m hearing, deal A, the 80-some odd units, clearly the upside and the business plan were understandable by your investors. Deal B, maybe not as much. Were you guys buying more of an in-place cashflow on that deal to where it still makes money from day one but the value-add component was missing?

It’s still a value add. It’s the light value add. It’s more of an operation play. The thing I like about these B-class properties is when you look at debt to income ratios, you understand what people are making in a market. Let’s say the median income is $50,000 or $60,000. We can reverse engineer how much we believe is affordable for rent. Typically, you don’t want the rent to exceed three times their monthly income. Meaning, if rent’s $1,000, they need to be making at least $3,000 a month in income.

If you’re looking at that and you’re trying to stay underneath that bar, that’s for the rent. If you have a nice gap, maybe it’s four times. If their income is $4,000, it’s more than that affordable space where they can maybe indulge in other things, other features, they want to pay for in-unit washer and dryers or they want to pay for other features.

Real Estate Investing: If you can build the relationship and credibility, help them understand how you can provide for them, and position yourself as the right buyer, then you’re going to close deals.

There are other ways to increase your income and increase your bottom line without making it a flat expense across all people. Those are things that make it a unique opportunity. By buying a newer property B-class, B-plus type property, these people have the means to cherry-pick the solutions that are best for them. That’s the thing we like is making it more tailored to the community as opposed to having to drive up red spot $50 because that’s the only way we’re going to deliver on these returns.

How do you make a good estimation on what percentage of the people in those facilities will take advantage of the additional services you guys are providing for them? How do you build that into your model?

It’s important to have great teams. We talked about this being a team sport. If you’re going to be a real estate investor, you have to rely on your teams and the knowledge that they have. In this case, we want to understand your property managers. If they have a large number of units that they manage, it’s great to lean into them. “If you’ve got a 5,000-unit portfolio, what are you seeing across other properties that offer these amenities? What’s the adoption rate? Is it 20%, 30%, 40%? What’s the range?”

You can at least go in there and make some good, educated guesses. You certainly don’t want to be aggressive in your estimations. You want to be conservative. Let’s say pet fees if on average 25% of the residents will take a pet and pay pet fees. Maybe you only underwrite to 20%. That’s what you do. You give yourself a little bit of buffer there and say, “If we get 20% by the end of the stabilization period then we’ll be in a good place.” That’s how we play it.

It’s much less about the operator and how we underwrite. Certainly, you want to understand those things. It comes down to the investor. You have to understand what your risk tolerance is. What are you looking to do? Where are you at in your life? What are you hoping to get out of this investment? If this is meant to be a home-run investment some of these deals are probably going to be too conservative for you. If you’re looking to triple your money on a deal, this stuff is way too conservative. You probably want to ground-up construction or something as completely distressed that you can go in and gut-rehab so you can make that huge return.

Where we see the market being a bit in flux, not knowing when a recession may truly kick in, looking at interest rates potentially going up, our play is more defense that leads to offense. We want to buy properties where they don’t need a ton of work. We want to be able to create value still. We don’t want to buy something to hold it but we don’t want to spend $10,000 a unit creating that value.

Hard money is one way to demonstrate a commitment to close.

For us, this is an opportunity for the investor who’s looking to park capital, make a solid return, still take advantage of all the amazing perks that real estate and particularly commercial real estate have to offer but not necessarily take on the additional risk of the renovation. There’s a contractor and labor shortage in general. We talked about materials. Supply chains have been completely disrupted.

When you look at all those different aspects, we said, “This still is for that investor.” That doesn’t mean that you can’t do a deal that’s ground up or anything like that. That means it’s for different types of investors. The investor who’s at a different stage, maybe you’ve got a portfolio and you balance it. It’s like if you invest in stocks. You have maybe your emerging portfolio stuff. You’ve got your value stuff. It’s a similar mentality. This property was still cashflow in a day and still has that value-add potential. It doesn’t have as much upside as maybe some other deals where there’s more renovation going on. It has a higher floor than a lot of those other projects too.

Risk and rewards certainly go hand in hand there as well. I love your thought process behind that. I love what you guys are doing, John. Thanks for giving the recap. You’re thinking behind the end of 2020 and what you guys have done here in 2021 and sharing the lessons that you guys have learned. Certainly, I have enjoyed it. Having you on the show last and final question for you. If our audience wants to get in touch with you, learn more about you and the Casmon Capital Group, what is the best way to do that?

We got a sample deal on our website. You can check that out. That’s the easiest thing for you to get into our email database, get some information about the way we think about deals and learn more, whether it be a deal we’re doing or someone else. Learn what to look for. When you’re looking at these opportunities, try to get a sense of the conversation we had.

How do you break down the thought process of what’s going on, how this deal has been underwritten and what should you be paying attention to? You could check out that sample deal at CasmonCapital.com/sampledeal. We’re going to get you on our show as well, Sam. You can check out our podcast, Target Market Insights: Multifamily and Marketing show. Either 1 of those 2 things is a great way to get in touch with us.

John, thanks. I do appreciate it.

Thanks, Sam.

Important Links:

• Casmon Capital Group
• episode number two – past episode
• CasmonCapital.com/sampledeal

About John Casmon

John Casmon launched Casmon Capital Group to help busy professionals invest in real estate without taking on a second job. We’ve helped families invest in close to $90M in multifamily apartments to create passive income, reduce their tax obligation, and foster generational wealth. John hosts the Target Market Insights: Multifamily + Marketing podcast. In addition, he is the co-founder of the Midwest Real Estate Networking Summit. As a former marketing executive, John oversaw marketing campaigns for General Motors, PepsiCo, and MillerCoors.