#166: Urban Multifamily Real Estate Strategies
LISTEN AND SUBSCRIBE
Apple Podcasts | Google Play | Stitcher | Spotify
Welcome back to another episode of The Richer Geek Podcast. Today we have Drew Breneman. He launched his first business at 14 and a successful internet venture in high school. By 19, he bought his first rental properties with online earnings, earning him a spot on HGTV as an emerging real estate star. He earned a BBA in Real Estate & Urban Land Economics from the University of Wisconsin-Madison.
Founder of Breneman Capital, co-founder of The Blackhawk Investment Group, LLC, and creator of Dwelle, Drew's diverse real estate experience spans from working with national development firms. As host of the Breneman Blueprint Podcast, Drew simplifies complex financial topics, making him a go-to speaker on multifamily real estate, risk assessment, and market insights.
In this episode, we’re discussing…
Building a Real Estate Mindset: Drew discusses the importance of developing a long-term vision and avoiding the get-rich-quick mentality prevalent in real estate.
Market Selection & Specialization: Discover Drew's strategy for identifying top MSAs and high-growth locations within them, ensuring strong tenant demand and appreciation potential.
Beyond the Fix & Flip: Learn why Drew prioritizes value-add deals with renovation opportunities and stable cash flow over quick flips.
The Power of Location: Explore how Drew leverages location data to pinpoint properties with the most significant upside potential.
The Current Market Shift: Gain insights into Drew's perspective on the rising interest rates and how they impact cap rates and investment strategies.
The Chicago Deal: Dive deep into Drew's current investment opportunity in Chicago, offering a projected 6% cash-on-cash return and long-term appreciation potential.
Resources from Drew:
LinkedIn | Breneman Blueprint Podcast | Breneman Capital | The Blackhawk Investment Group
Resources from Mike and Nichole
Gateway Private Equity Group | REI Words | Nic's guide
+ Read the transcript
Mike Stohler
Hey everybody. Welcome back to another episode of The Richer Geek Podcast. Today, we have Drew Breneman. Drew's a natural born entrepreneur he started his first business actually at the age of 14 years old. Then he launched an internet business while he was in high school. I think the guy could not do a 9-5 job if he had to, what do you think? The guy's an entrepreneur out and out in 2005? He founded Breneman Capital, formerly Rise Invest, and co-founder of The Black Hawk Investment Group, LLC in 2008. Along with Dwelle, he's a Chicago focus based real estate investment property manager group. And we're going to talk about what sets him aside in the multifamily world and what he's doing now. How are you doing, Drew?
Drew Breneman
Great. Yeah. Thanks for having me. Happy to be here.
Mike Stohler
Yeah, absolutely. So you just couldn't do the newspaper route boy and the ice cream. You started your own stuff, at the age of 14. What was that mindset? Why did you decide, "Hey, I'm gonna start something at the age of 14."
Drew Breneman
I just wanted to make money. I just always was wired like that. When I was a kid. I remember I did a little concert for my parents, just in the basement playing a guitar or something that my sister wanted to charge him admission to the show and make some money from it. I'll try to do the same thing with my son now and see you if he wants to. I can get him to invest his money. And he's interested in that. He told my dad the other day, I'm investing my money like my daddy in apartments. So proud of that.
Mike Stohler
Yeah, it's so good to have like a couple generations instead of, you know, it's like my parents. Dollar. No, you need to get a degree, go work for someone for 35 years, get a pension. And I'm like, "Oh my God, that's the most boring thing". So your son, he's got a mate. He has that influence.
Drew Breneman
I've been trying to do that slowly. And then he was listening to sleep stories to fall asleep. No one's ever heard of that, like with the calm app, or where they read like a story about a bear slowly. And he is ready for the worst endorsement ever. But I have a podcast as well. And he listens to that now to fall asleep. Not because it's so bad or boring. Check out Breneman Blueprint. It's about real estate investing, but it's more I think, soothing for him hearing your dad talk or be interviewed. At some point he'll hear this as a story to go to bed, I'm sure, but he's actually learned quite a bit about real estate listening to this. It was very funny when he said something. He asked me a question the other day about why I bought a property, a certain one. And he knew about it. One in Phoenix. It was interesting. He asked me what I was like, and had a question about it. Yeah. And we lived in one of the rentals we had in Chicago for a couple years. And he's getting exposed to the business. He's seeing people doing the deals. But yeah, so it didn't just kind of start out young and wanted to figure out what to invest my money in. Both my parents were teachers. So it was kind of like what you were hearing, but they were not. They weren't saying you got to go work somewhere for 35 years, but they were definitely saying you got to finish school. And that stuff sounds risky for us. So we won't be putting our money in these real estate deals or businesses or anything, but if you want to do it, that's fine. I mean, stay in school, get good grades, but they weren't at least giving me I would say that's like almost bad advice. But you're hearing from your parents about where you got to do this or that where they never really push you on what you got to do. Thankfully, yeah, so then I developed I think, a pretty good mindset or realistic, they weren't hyping me up like I could do anything and we didn't come out unrealistic or never failed at anything like that. So I think I worked out and then wanted to see what I could do to invest my money and I bought my first property Yeah, back in 2005. And when I was going to college at UW-Madison and did four deals there but 2 million in property and then moved up to Minnesota to go work. I did work at two jobs full time as a real estate and investment analyst and in doing deals underwriting deals and pulls out the first place I met what will be my first investor, it was the father of one of my interns there and we met and that kind of explained what I had been doing and we decided to partner up in 2009 2019 we had bought a bought about $100 million property together didn't start out you know with a big you know, with millions of dollars right away but we did for me was a big deal, two and a half million dollar one to start and just kind of worked our way up, did good deals. So far on deals we've sold, my average return is a 24% IRR. And not unlike little one, two year hold periods. This was the average hold period on those same properties as 5.8 years. And then so your multiples like solidly into the mid to high twos. And then a lot of the stuff that we've owned a lot longer like we've bought deals in 2009 1011 13 A lot of the most all those we still own. So you know I think that's one thing that we're we've been a little different than most folks. And that's that was easy to do. Starting out in a way having one investor and seeing that we were both aligned on longer term deals. And then eventually as I started expanding the investor base and we doubled our let's say assets that will you know what properties in terms of just total dollar value for we had about 100 million in 2019. Now we're at about 220 million today. expanded the investor base and then really because I've had people that wanted to invest in our deals over that time period. But we really actually weren't set up at all to take on outside investors, we were to start all set up just one guy, we know what he wants to invest, we were focused on these deals where we would buy them, we'd raise the rents, then we do a cash out refinance, pull out all the equity and just buy another one. So we didn't, didn't feel like at the time, we needed a lot of investors with that, that business plan, but also we were doing smaller deals. And eventually we're like, why don't we just do some bigger ones. And then we realized we need to develop an edge. And so we realized what we should specialize in where we specialize in just really only the top MSA in the country for multifamily. And I can get into how we determine that. And then also focusing on the best locations within those top MSA so that we're getting better performance and does your average return there, because we're focusing on the areas that are either the most high income well established neighborhoods, parts of the MSA, or the ones that are growing the fastest. That's sort of the other area where we've done really well is buying like on the where it's already turned and just getting a lot better quicker.
Mike Stohler
What class are you focusing on now?
Drew Breneman
Let's say the Class B to like a class, the class A but not brand new, and that the brand new Class A it still feels like Class A to me, but like a lot of the deals in Chicago we bought it would be like a three year old building we're buying from the developer. But it's not like a tower where they're charging $5,000 a month for a two bed, it's like they're charging 2800, which for their in on that property might be low, and it should be 3400. So then that for Chicago, where you might have a couple earning 100 grand each and there that's actually a reasonable rant. Obviously, that's a lot of money. I think I might have skipped the geographies. But yeah, started out in Wisconsin, then moved up to Minnesota. That's where he started doing all his early deals. And then I moved to Chicago for my second job. Because I did all this at the same time, too. I was buying my own deals, running those working full time and doing the deals where I was raising was partnering up. And so I did all that simultaneously for three years as until it got to the point where the job was I felt like we're probably my cost and money. If I kept it, like I'll be costing me deals. So then I was in Chicago, so then I stayed there. And then the next 10 years, for the most part, all the deals were in Chicago. And then in 2021, that's when we really looked at the whole country of where the best markets to go. And then we bought in Phoenix and only in certain parts of the Phoenix market. And I moved to Austin, Texas, and we're getting going in Austin as well as DFW. And then from there, I think plants that go up through Nashville and the Carolinas, eventually not anything near term.
Mike Stohler
Yes, one of the things that's a little bit different that I'm hearing is you're concentrating on those large embassy markets, where a lot of people that I talked to it's Well, I don't want to be inside that major metro. Because that's where the costs are high. What made you decide to stick into that urban area instead of maybe just outside Chicago or just outside of Austin in the smaller up and coming different types of the smaller cities that are maybe suburbs of those?
Drew Breneman
I think you have a lot less demand in those places. I mean, that's not where your average renter wants to be a lot of people they think about what's the liquidity like in this investment, what's the next buyer gonna put in if you're a deal, and Scott, they'll be a lot easier to sell than one in let's say, Casa Grande or something to make it or the Phoenix locals, but there's a lot more liquidity and then also have a lot more demand from the renter. So I think you get the strongest growth in those really established areas. So let's say if you're in Phoenix, like the Scottsdale so the world or where it's growing fast in Midtown Phoenix, where it's turning and getting nicer. That's what we've tried to focus on. And yeah, I think people that do well on the fringe of the MSA actually think that's just a game for the developers, if you can build out there properly, and then sell it like that makes sense. You can buy the next farm or ranch at the end of the highway and build on it. But that hasn't been our business. We're more acquire, run it well or do a renovation and hold on to it. type of play.
Mike Stohler
Yeah, that makes sense. And that's what's great everybody, you have all these differences. You have the buying sales, you have the fix and flips, you have the people that develop themselves. So there's not just one avenue in the multifamily market and everybody, again Drew Breneman and it's brennaman.com, br e n e m a n.com. So let's talk about how you evaluate what you are looking for when you go into Chicago, you go to Austin. What's your criteria?
Drew Breneman
Well, with our market model, what we looked at was we figured out what was correlated with the price appreciation. So we pulled in demographic and job and income, population information, apartment fundamentals, single family home fundamentals. Then we looked at what was correlated with prices going up over the last since 1990. And then we looked at what, how to wait for those things to go forward. So our motto matches what happened or mirror as best we could, and then run it out forward, we've settled on what markets to buy in. And some of them are not a surprise, some may be on which ones you've skipped. But I think, really what has set us apart is that we're really looking within those MSHS, we only would want to buy in certain parts. And so you already talked about the establish of the fast growing areas, we would look that up first, we have an internal location score that we use to put it in our sort of vernacular where we want it to be. And when we look at all this stuff, we were scoring the locations with where it would be a positive score, that's a half standard deviation, or more above the average, you will see these B and C type properties that were built in the 60s and 70s that need a renovation, they're often in bad locations, too. And that's so so it's a bad property in a bad location with rough tenants, those deals, we just skip right away. So if that comes through, we just go; this isn't an area we would buy. And it's probably not a property condition we'll buy anyways, because we're trying to buy 1980s and newer deals between five and 35 million, we've bought some older ones, 1970s deals, they're in the right spot. And then in Chicago, you can buy a deal. It's built in the 1800s even but it's pad a full gut rehab everything but the bricks basically, it was new and so that people really more think of his like, when was it fully got it as like the build date they'll build it is actually nice to own because there's the bricks are three deep and you don't even need insulation if you have that much bricks. So we look at the location first. And then from there, we were for a value add deal. So buying it and doing a renovation and re-releasing it. We're underwriting a 15% Gross IRR is typically like our move forward signal. And that's been impossible to do the last 15 months for us, we've looked at 400 deals, and none of them have met that criteria. We also look at a couple of deals that people call Core Plus when like the institutional investors, they throw around the term. So there's core real estate Core Plus value, add opportunistic. And then Core Plus this is like one step up, maybe up or down the risk spectrum, I guess whichever way you're looking where it's a safer deal than like a value add one that's going to be a newer, nicer property, better location. But it's not like a core deal is not downtown, necessarily high rise Class A type deal, but it's still newer, nicer. And then some element where there's some hair on it or value add but not as much as big renovations, a lot of those deals where we were buying and then increasing the rents and doing the cash out refinances. Those were properties that were three or four years old, you're buying from the developer, they never really maximize the rents, you pick it up at a fair price based on what it makes now and then you just raise the rents as simple as that in terms of until you get to an attractive attractive cap rate attractive on trended yield on cost doing that compared to just buying a fully stabilized deal, but you're not taking nearly the risk, or you aren't a value add deal. And then we've also done a lot of loan assumption deals back when that was what we're doing now as well. But also that back when that was a negative right now it's positive. But that was a problem, because their rate was higher than market and you're picking it up at a discount, and the debts are temporary and price is permanent. And so we'd like those deals for that. So that's really what and then on the Core Plus like we're solving tools, slightly lower return than that maybe a 13% gross and we have a deal in Chicago that we have under contract and we opened up to our investor list and the underwritten targeted returns ended up being higher than that. But it was really just a function of there's a lot of loss of lease on the property. And we are in a market we know really well. I own 16 buildings in Chicago and the best comp for this building we bought from the same seller and 2020. We just realized the loss to lease opportunity and we will be able to stabilize that at a seven cap on a tax adjusted basis. So for multifamily, a really high cap rate, which then translates to strong cash flow because we can borrow fixed rate in the low six is five years interest only 65% LTV so then that you have strong cash flow, it's talking about long term holds. That's something we'd want whether it's a newer, nicer building or our business plans a 10 year hold on that. That's how I've seen like the other people in Chicago in these big cities really make a lot of money. It wasn't just fix and flips like one guy bought a property from his dad. He bought like 50 duplexes in the Lincoln Park neighborhood. Well, I'm one of the nicest neighborhoods there back in the 1970s for on average 50,000 a duplex and conservatively now someone said What's your average duplex worth there? I'd say 900 Grand i mean lot value is basically 800,000 or more in those neighborhoods. So I don't know what his IRR is, and he probably doesn't either, but that's you know, that's how a lot of people made a lot of money. What's hard to get your hands on these good deals so I'm really more of a longer term holder and I like if I can to have some liquidity along the way through a cash out refi but I mean but not over leveraged where then there's no cash flow or you're at risk of a problem but that's how we did a lot of the Chicago deals we bought them raise the rents right away then we did a cash out refinance in the second year at some point returned on average all the capital we did this on 13 deals where we did 100 person On slightly over 100%, on average cash out refinance in the we kept the property. From there, we just had our profits left in it. That's ideally the business plan with this, we're doing a five year fixed rate loan so that refi would not come in year, two would come in year five at the end, but we then from there, we would have grown the NOI a lot. And ideally, interest rates are down somewhat, and that will help with the refi. But even if there isn't, there'll still be a good cash out opportunity.
Mike Stohler
That's amazing that you're finding because I only know the Phoenix area here and we're at three and a half cap rates seems like four caps on a lot of these that's moved,
Drew Breneman
It's five and a half now. Yeah. In the market, ya know, your average run of the mill multifamily cap rate, it would be a five and a half in Phoenix five and in DFW and then a high fours in Austin, and then Chicago, a plus or minus 6%. And then the reason we can get it to a seven is because the under market rents developer rented it at one number Chicago has had really a lot of rent growth the last two years, it's actually the last three quarters, the number one market for rent growth in the whole country. And our buildings that we have, last year, depending on the building, increased our rents five to 9%. And then this year, it was similar to five to 9%. So back to back huge years. And then this owner did not keep pace with that. Yeah, so that's the opportunity. And then that's to do those kinds of deals, you just really need to have know what's going on in the local market. And if we didn't already own a lot in Chicago, in a very similar building, a lot of the people who are probably trying to maybe make a run at buying this building as well might not have realized a loss, at least that was there. But one thing was specialized in multifamily and only some markets are, the more specialized you are the better you're going to be at it. And that's what we realized that would be our edge where if you were just going to do apartments, sure you specialize. But then if you're gonna do it across the whole country, you're never going to know as much about Chicago is like, I lived there for the last 10 years, I recently moved to Austin, you never ever going to it's going to be really hard to catch up on what we know being there and invest in their specialized in product type, but only a few markets. So we've found the best people getting the best results and then started developing a really good team and technology and sort of everything around that.
Mike Stohler
What do you see in the future? And that surprised me? I don't understand the interest rates, the high rents and why the cap rates would be reversing. Why do you see that trend? Why is it going up? Especially in some of these hot markets? Why are they going up to 555 and a half, six,
Drew Breneman
the growth slowed or stopped depending on the market or rents dropped even I mean, dip in the Sunbelt, let's say the areas where the cap rates were in these threes and fours like you're you're mentioning people to pay those kinds of numbers they're anticipating the following year, or they can mark the rents to market meaning the current owners renting, let's say, the two beds, two bedroom, two baths out for 1200 bucks. But the market now is 1400 with how much the markets move. So I just need to move these rents to 1400. And now my three cap turns into a four and a half cap and then I'm in this market that is growing fast. And pretty soon, it'll be 1500 and up. But what happened is on those deals that people bought, while you're in the middle of raising the rents to 1400, your interest rate, everyone was doing floating rate debt. Because if you wanted to go into a higher leverage 70-75% loan to value, you had to go at a floating rate because those were the only lenders that would lend at that high loan to value were the debt funds or banks if you want to do full recourse. And they were sizing to your stabilized NOI in year three NOI your net operating income. So what the property would make in year three. Now what it's making today, so then you explain we get the rents to 1400, we'll grow them two more years now we'll be here and they will give you a loan based on where it's going to be here in year three. But now what happened is interest rates went up. So you got a lot of people that are going to need to add money to their deals in order to pay those loans down. And then right size and based on the higher interest rates and also the growth not being there. So I guess I started talking about that and didn't exactly answer your question. But the answer why cap rates went up is twofold, the growth stopped and then interest rates went up. So people were only paying three caps because interest rates were in the threes and the growth was tremendous. So now if you go whoa, could I pay if interest rates are in the sixes, and there's not as much growth? I mean, honestly, a five and a half cap is still pretty aggressive, you have negative leverage when or when is that gonna be turned positive? And that's why I like the Chicago deal we have now is because we don't need anything to change. We're stabilized into a seven cap, we're doing fixed rate debt for five years. We don't have a business plan where we're saying we're gonna sell it in a year or two, because I don't know where the market is going to be in a year or two. It could be up, could be down. But we'll have you locked in with fixed rate debt in a market that's very stable. You know, it would be better if at times Chicago would be more up and down during the ops, but it's very stable. It's number one for least new supply and all in the top 20 largest markets so there's not like a tidal wave of supply coming in like some of these cities. That'll be another headwind. And still the nice neighborhoods in Chicago. They're still growing. I know the national headlines on Chicago and Illinois, it's losing people and all that. But it's not. The population is definitely shifting within Illinois and the nicer neighborhoods in Chicago are gaining people. Like the West Loop is the neighborhood this deals in and they're still building new office buildings even though there's so much demand. So McDonald's moved their global headquarters from Oak Brook to the west loop. Google's got a big office there. There's a ton of employers and new new buildings popping up. So it's, it's different than maybe what you would think of with Illinois. What I like about it, though, is that nothing needs to change. You know, the rents just need to stay where they are in the market and we can raise our rents to market. We'll have a fixed rate loan, we don't need anything to change. We're what's kind of still scares me even though some of these Sunbelt deals are five and a half caps, you still need to do something to get them to positive leverage. You need to renovate them, you need to get your rents up even more. I mean, who knows? In a year or two? How many deals are going to be on the market when they sell these floating rate loans expire?
Mike Stohler
So your opportunity in Chicago? Let's get to that real quick. And everybody again, it's breneman.com. And I'm sure there's a tab where you can check out the investments. Is it a syndication?
Drew Breneman
Yeah. 506(c) verified accredited. It's how we do it.
Mike Stohler
Okay. minimum investment?
Drew Breneman
Yeah. 50,000.
Mike Stohler
Yeah. And you're looking at if I heard you, right, this is gonna be more of a patient longer term. And that's what you need to do now. It's 10 year.
Drew Breneman
Correct. Yeah. And it's projected to start out 6% cash on cash, and then go up from there. But what I've liked about it, and the kind of the response has been like for this market, high cash flow for multifamily. And also your share of the upside on the price increase. The appreciation now will be realized over the next 10 years, but then we have the refinance opportunity at the end of year five, he has been really a good reception on the deal. And I think what a lot of people have liked is they just added something different the last few years, it's a lot of Sunbelt renovation stuff. And we were doing those deals too. There's a time and a place for those and renovating apartments in Phoenix right now, there's still a time and a place for those. But thankfully, all but one of those Phoenix deals we did five year fixed rate loans at three and a half percent interest or one was a seven year at four and a quarter. So those deals are all fine. But I think the less moving pieces you can have in your deal right now the better. The main thing that people have been liking is this is just simple, kind of basic real estate. There's not a lot going on, you're buying a newer, nicer property, starting out with relatively high cash flow and just growing it from there. And then the price we're picking up at 15% below the lowest comp in that sub market, which was a deal we bought in 2020. So at that point, we thought we were picking up something at the bottom in the middle of the pandemic but with higher interest rates. There's even a better opportunity now I guess.
Mike Stohler
I guess so. Well, Drew, I appreciate you coming on everybody. Again, Drew Brennaman, breneman.com. If you're interested in diversifying your portfolio getting into not a C or C minus but a nicer Chicago area West Loop apartment complex. Check it out. breneman.com. Drew, thank you so much for coming on The Richer Geek Podcast.
Drew Breneman
Thanks for having me. Appreciate it.
ABOUT DREW BRENEMAN
Drew Breneman, a natural-born entrepreneur, launched his first business at 14 and a successful internet venture in high school. By 19, he bought his first rental properties with online earnings, earning him a spot on HGTV as an emerging real estate star. He earned a BBA in Real Estate & Urban Land Economics from the University of Wisconsin-Madison.
Founder of Breneman Capital, co-founder of The Blackhawk Investment Group, and creator of Dwelle, Drew's diverse real estate experience spans from working with national development firms.
As host of the Breneman Blueprint Podcast, Drew simplifies complex financial topics, making him a go-to speaker on multifamily real estate, risk assessment, and market insights.