Any business venture has its challenge but today, we’re going to dive deep into the real estate industry. What are the risks of having a real estate business? Kenneth Gee is the Founder and President of the KRI group of companies. He has more than 23 years of significant real estate, banking, private equity, and multi-family investing experience. In this episode, he explains how he handles risks and how to take and put everything in place. Figuring out your way in the real estate industry is a challenge, but it’s going to be worth it!

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Understanding The Risks And Challenges In Real Estate With Kenneth Gee

Ken Gee is a former Public Accountant. He is also a prior owner of three Cessna Pilot Centers and a prior pilot. He, at one point in his life, operated a Zamboni machine and has also been a commercial lender but all of these things naturally lead themselves all the way to being a multifamily syndicator and owner-operator.

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Ken, welcome to the show.

Thanks so much for having me.

You guys have been now in multifamily for many years. There are three questions I ask every guest who comes on the show. Can you very quickly tell us, maybe 90 seconds or less, where did you start, where are you now, and how did you get there?

I started out in 1997. The first property I bought was a 28-unit apartment building in a small little part of Cleveland called Shaker Square. I met a wonderful lady who taught me the concept of value-add. We have a blind pool fund that we have closed for $13 million. We are deploying the capital now. We are about to get ready to raise our second fund. We have syndicated multiple deals. How do we get there? My background is pretty diverse, so everything has contributed to running your own decentralized business as we do. We have been slowly pecking away and growing to where we are now.

Ken, you have done so many things. One of the things you said was running a decentralized multifamily business. What does that mean?

When you think about running a decentralized business in itself, it has its own challenges. Where I learned the most about how to do that was when we owned the three Cessna Pilot Centers. We were in three separate airports and we taught people to fly. We rented airplanes. We had a Part 141 pilot training program that we prepared pilots all the way through to the Delta connection. We got them hooked up with Delta, but that process of learning how to operate a business that is under the scrutiny of the FAA. They inspected us regularly and there is no room for error in the aviation world.

Learning how to do that in separate locations prepared me for what we do now. We manage and own apartment buildings and they are strewn over a large geographical area. I became the checklist-crazy person. Everybody in our company makes fun of me because I always liked checklists, a review process and redundancies. All of that comes from aviation because as you’re growing a company, you need all of those things in order to do it successfully. Although we’re not dealing anymore with people that fly that can kill themselves in airplanes, we’re dealing with people’s homes. It is equally as important. That’s why I think it’s effective in helping us do what we do now.

Let’s talk a little bit about the Cessna Pilot Centers and for those of you who are not aviators reading this, can you tell us what they are quickly? I know you said that they teach people to fly and give lessons. You get people all the way through to maybe even a job at Delta, but what is it, just so they understand that.

It is a program that Cessna developed so that people would have a good, solid way to learn to fly. If you think about it, they are here to sell airplanes and starting with single engines all the way up to Citation jets. They know once people get started, they get hooked, and they are going to keep moving up. What they knew was that there needed to be a good way to teach people how to get into this and how to learn to fly. They partnered with a school out in California that provided all the materials, but now, they gave us a well-structured, well-thought-out video-based learning system that we could then go sell to the market.

While we were doing that, we used brand new Cessna airplanes to teach people to fly in. When people had a choice, which flight school do we choose? The one flying the airplanes that are from 1950 in shag carpet or the one from brand new, glass cockpit, wonderful experience, GPS and hard to get lost in. You can see how people would choose because the price wasn’t that much different.

Talk to us about the risk side of that business, why you ultimately exited that, and compare that to what you guys do in multifamily.

The risk side of the aviation business is the challenge. Even though we were super careful about all of our processes and everything else, one of the things that made me change my mind about that business was, I think it was Christmas Eve or the day after Christmas, one year. We had a 1,700-hour military pilot, who is a flight instructor. He is extremely qualified. He has flown in all sorts of military operations but he almost killed himself landing a Cessna 172 at a small airport in Akron-Canton. He was flying it for maintenance. There was nothing wrong with the airplane but when he did that, I realized, “There is nothing that I could have done here that could have changed that outcome.”

He didn’t kill himself. He crashed and the plane was fine after about $50,000 in repairs. He was not hurt but after that experience, I thought, “I don’t know that I can manage this risk. I can’t.” Now, draw that parallel to our business. What we do now is we are managing people’s homes. What it does is keep me hyper-focused on life safety issues and make sure that we have processes in place. It is because most of the risks in running an apartment building are preventable and manageable if you have systems and processes in place to identify and mitigate them. That is the comparison. In the aviation world, I sold the company because I couldn’t get comfortable managing that risk. In our world, I can get comfortable managing the risk.

You should have systems and processes in place to identify risks and mitigate them.

What are some of the risks that you see that you mitigate with proper procedures and checklists that maybe you see some other operators not accounting for?

There are a lot of things. The most important risks that people have in the apartment world is that tenants will fall asleep and leave something on the stove and there are kitchen fires. That is a more common experience than I care to admit, but there are products out there that will automatically detect that fire and automatically put it out before anybody even knows what’s going on. We have smoke detectors but can I be assured that every resident isn’t going to somehow disable that smoke detector? I can’t, but some of these products that are available now can mitigate that risk.

The other thing we do is we put a fire extinguisher in every kitchen because the number one thing people do when they do have a kitchen fire is panic. If the fire extinguisher is literally right behind them, they put out the fire, and life goes on. We look at every little risk like that, figure out what it is going to take to mitigate it, and we put it in place.

For our readers who are going, “We own a couple of thousand units and we don’t have that in our kitchens.” What is the product that you use?

It is a fire suppression system that you can get from Chadwell Supply or HD Supply. I don’t remember the exact name of it but it’s a fire suppression system, and it’s not ridiculously expensive.

I wonder, even on the insurance side, if you can present that to your insurer and say, “All of our kitchens are equipped with this product.”

We do tell them. I’m not the one negotiating directly with the underwriter. Our agent is. I don’t know how much benefit they give us but you are right. It is something to consider doing.

How long have you been raising money from private investors?

I think our first raise was in 2004. It was a small property in Cleveland, Ohio.

I’m sure you have learned some lessons along the way. Let’s talk about this from two perspectives. First, from the passive investor side. What are some things that you feel like passive investors should know before they give you or anyone else money?

That is a loaded question because I spend a lot. I have very strong feelings about this and that is the number one thing I want passive investors to do. It is to vet their sponsors and make sure they have experienced this. I can’t underestimate this. I know it seems obvious but you would be shocked. There are people out there raising money and millions of dollars who have never bought and sold an apartment complex and made money. I don’t want to see passive investors take that risk. Somebody has to start somewhere but do that with your friend, your buddy, your family or something like that. Let them cut their teeth on their family.

Passive investors need to make sure that their sponsors have experienced because look at the pandemic that we thought we were coming out of. We’re still in. Look at the recession of ‘07, ‘08, ’09, and 2010. These are real big events that if you don’t have an experienced sponsor with a good management team that understands how to react to whatever it is. We don’t know what is coming around the corner.

These are live businesses that we have to run. The only way we can do that is with experience. We want to make good decisions, and because of that, we have always come out of these problems or challenges well. We have no problems with that at all. Again, if we don’t have that experience and we don’t know what to do, we are going to start going down the rabbit holes that we should not go down as investors and as sponsors.

 

I see that a lot in sponsorship teams that are an amalgamation of people that I know either are new to the business and you see 8 to 10 general partners on it. It is a quilt work of people raising money and doing various parts of the process to get the deal done. That gives me great concern when I look at that. I go, “I might know some of you but I’m not investing. I personally won’t invest with you. I can’t.”

Not because I don’t like the deal, but I don’t like the team makeup, if you will. How do you feel about when someone goes out and brings on a third-party mentor or someone in the space? They say, “This is somebody I’m working closely alongside. I have paid them a lot of money. I have their cell phone number. We connect and they are joining this deal with me.” Do you think that adds any credence to the deal or is it still that buyer beware?

It does add credence to the deal. I prefer that whoever that coach or that person that you are working with has a little bit of their own money in your deal because now I know they are going to be more interested than if they have none. Anything that you can do to get experience on your side is a good idea. I completely agree with that 100%.

I like that statement there. Does your coach or your mentor have money in the deal? That flies directly in the face of what I call the guru but no to a person, and I am opposed to that. I will say it here on the show flat out. If you are coaching but not doing, I probably don’t have any interest in what you are doing. Does your coach have money in the deal? I think that is another great talking point.

If you are reading this and you are scaling to take that home or you have a mentor, are they investing in your deals as you guys go live? Not only maybe signing on loan but also putting hard cash of their own in the deal. Talk to us when it comes to steps that we must follow. You guys have your checklist and you love your checklist. One of those things is when you are renovating a property. You have developed some steps and checklists for that process and things we must know. What are those?

Again, that is a loaded question because I feel pretty strongly about this. I would say three things that have nothing to do with renovations. The first thing I want you to do is do a true in-depth market study. Not at the back of the napkin. Don’t only look at the broker’s OM. Get in your car, drive around and figure out what the neighboring properties are. You want to do a good rent study. I start with Google driving the market. That’s what I call it. I will get in my car and do it before I buy the property. You are putting properties into three buckets, which are top tier, middle tier, lower tier. Where is your property at now? When you are going to renovate, where is that property going to compete when you are done, and how does it look in both of those scenarios?

Make sure that it makes sense. Imagine you are a renter trying to figure out where to live and you are projecting a certain rent amount. Will you feel it is appropriate given the competition that is out there after you are done renovating? That’s step one. People don’t like to do that. They like to delegate it to their management company. Your management company is not the one that is talking to your investors. You are, so make sure you do it yourself. That’s important to me.

The second thing is to figure out your budget and don’t be afraid to modify that budget. I see a lot of new people in this business. They tell their investors upfront they are going to do A, B, C, X, Y, Z, and when they get into the deal, they stick to that plan no matter what. Here is what I will tell you. We ran it and we changed our plan repeatedly through the process.

I have one plan when I first tour it, an LOI. I have another plan after DD. I have another plan after close and this leads me to my next point. I want you to wait 30, 60, 90 days or some amount of time. I want you to sit on your hands and resist the urge to go spend all your renovation money on day one. Don’t do it because I want you to know your property because you need another iteration on your renovation plan. Do you think that sellers tell you absolutely everything there is to know about their property before you buy it? Probably not.

There are probably even things that the seller didn’t know about the property that you are going to learn. What you don’t want to do is spend your renovation budget, then figure out, “I learned something about this property that I now have to deal with and I don’t have any money left. Now, I’m going to go back to my investors and ask for more money.” That is not a good situation.

Those are the first three things I want you to do, and then I want you to renovate from the outside-in. This is not hard, curb appeal, Jerry Maguire, You Had Me at Hello. Think about how a renter approaches your property, signage, curb appeal, then they go to the clubhouse and the leasing office. Your amenity package makes that dynamite. Wow them before you even have to get them to the apartment.

Go into the apartment and don’t let them down in the apartment. Many times, I see people do the other way around. People live in their apartments. “That’s where I’m going to spend my money.” People don’t care about the pool. Yes, they do. If I can’t get them from the curb behind that back door where all your money is hidden, then it serves no purpose. Outside-in seems obvious but I see a lot of people making that mistake.

The last thing I will talk about, and I have talked about this before, is don’t be afraid to reassess your plan. That is an experience issue. I have clients that do this. “No, I told my investors on day one, I was doing X, Y and Z, and I’m going to do it. Come hell or high water.” I said, “The situation has changed. Don’t you think you should change?” “I don’t want my investors to think they don’t know what I’m doing,” is their typical response.

No, your investors understand that you are in a dynamic environment and you should change. We prepare our investors like, “This is what we think we are going to do. For the most part, we do it but we are tweaking it here and there.” It’s because it is our job to make the best decision every single time we make a decision and use their capital as wisely as we can.

Don’t stick with something if it isn’t working out. Change your plan repeatedly through the process.

Framing it from that perspective to your investors helps that conversation go a lot more easily. Have there been some times where you learned this lesson the hard way?

I can’t remember the deal but a long time ago, I had a deal where I did exactly what I talked about. I didn’t sit on my hands. I was excited to go in there and get it done and do it, then I realized, “I learned something about the property. I’ve got to fix this.” It was harder to do that because the money was gone. I had already spent it all.

Some of these lessons that I talk about are our personal experience lessons, which is why I go back to my advice to passive investors to make sure your sponsor has experience. He or she is going to make mistakes. They will make mistakes in the future. We are not going to be perfect. Nobody is but you want the big ones out of the way before your money gets into the deal. That is how I look at it.

You have got 24 years in the business. You have seen a lot of things change here in the multifamily industry. Where do you feel like we are now and where does multifamily go in the future?

I am extremely bullish on multifamily. Generally, we were in the growth markets. Now, I could have a different conversation that we were in a non-growth market. There are so many reasons why we buy in Central and Northern Florida, in the Southeast, and soon, probably in the Southwest, like Texas and places like that, but it is demand and supply in order for this multifamily world to think about this. Everybody needs a place to live. Can you find a case scenario where office space might not be in this high demand? How about retail? How about self-storage?

You can name any asset class and find some way to erode the demand for that product, but it’s hard to figure out how that is going to happen in multifamily unless we all figure out how to not need a place to live. I don’t think that is going to happen. That is the safest asset that I can find in the real estate world. Now, I go to markets where people want to live. People are moving to states like Florida, the Carolinas, and Texas.

We have a demand picture that I don’t see changing any time soon. I don’t see it happening unless something, for example, in Florida. Suddenly, they enact a big statewide income tax. That will throw everyone for a loop and it might reverse the train, but I don’t see that happening. Plus, there are all sorts of other reasons people want to live in Florida and it’s not only a retirement community anymore. It’s not at all.

Now, that is the demand side. On the supply side, think about this. We do B and C-Class assets. We don’t buy the brand-new stuff. When you have an increase in demand and a B and C-Class asset that they can’t build now because they can’t afford to and they have never been able to afford B and C-Class assets, you have a demand-supply situation that is very much in your favor for increased rents. You have got to show me how one of those two things is going to break down before I change my mind about multifamily real estate.

Ken, thanks for pulling back the curtains on that and giving us your thought process behind multifamily and where it is headed. You have given us lots of things to think about here and I certainly appreciate your time in coming on the show. Let’s jump here into the final four questions. The first one is this. What is one digital tool or resource you find you cannot live without?

It’s some of the market technologies out there like Yardi and CoStar. I use that constantly. Not as the end-all in my rent survey but as a way to learn as much information about a particular area, properties, sub-market, or neighborhood as I can.

If you can help the audience to avoid one mistake in real estate, what would it be and how would you avoid it?

An owner-operator or a passive investor?

Either one, you pick.

Passive investors, stick with experience. Owner operator, do your homework. Don’t delegate any of it. Make sure you understand the deal, roll up your sleeves, get your hands dirty, and figure out what’s going on in the market.

 

 

Question number three, when it comes to investing in the world, what is one thing you are doing now to make the world a better place?

We were generating nice places for ordinary people to live. I’m proud that we do that and I think we do a good job of that.

Ken, if our audience wants to get in touch with you or learn more about you and your company, what is the best way to do that?

KRIPartners.com/ebook is my eBook. I wrote it myself. Multifamily Real Estate is a Total Game Changer addresses two questions. The first question everybody faces before they get in this business and is they know everybody is making a ton of money in real estate. Do they only have to figure out how does that fit into their life? How does it work for them? I will take you through that process.

Most people should probably become passive investors. As I said, I was big on this topic. How to vet sponsors is the second part of this book because I think it’s important that you get with the right sponsors because if you do, you will make a lot of money. If you don’t, you are going to have a bad experience with it, and I don’t want you to do that. It’s a free download. It doesn’t cost you anything except your email address, and then you get to hear from me every now and then.

Ken, thank you for your time. I do appreciate it.

You bet. Thanks for having me.

Important Links:

• Ken Gee
• Yardi
• CoStar
• KriPartners.com/ebook
• https://www.YouTube.com/channel/UCRWZfJ0hmHxVdf3DNA7RHlQ/videos
• https://www.LinkedIn.com/company/kri-partners
• @KRIPartners – Twitter

About Kenneth Gee

Mr. Gee is the founder and managing partner of KRI Partners and the KRI group of companies. He has more than 24 years of significant real estate, banking, private equity transaction and principal investing experience. Throughout his career, he has been involved in transactions valued in excess of $2.0 billion, much of which has included the acquisition, management and financing of various multi-family real estate projects as well as playing a significant role as a member of due diligence and transaction structure planning teams for several private equity firms specializing in the small and middle markets.