Vertical Integration and Scaling in Real Estate
JUL 18, 2022
Description Community
About

In this episode, Kim Radaker Bays explains how to effectively manage massive business growth and expansion. Founder and Managing Principal of Exponential Property Group, Kim lead the firm to capitalize on over $1 billion of Multifamily Investments with an average IRR and equity multiple of over 30% and 2.0x, respectively. She is responsible for the strategic vision of Exponential Property Group, Exponential Property Management, and the Martha’s Ranch Foundation.

 

Listen in if you’re looking for expert insights on scaling and thriving in the current market!

 

[00:01 - 07:09] The Market Then and Now

  • Kim  on how she got into multifamily
  • From 77 units to 9,500 units
  • Her take on the current lending environment
  • How they are underwriting amid the uncertainty
  • Looking at the best and worst-case scenarios
  • Is there a softening in the market?

 

[07:10 - 16:15] Strategies for a Successful Scale

  • Creating solutions for supply and logistics
    • In-house services and domestic partnerships
  • Why it’s important to document processes
  • Staying competitive by sticking to the numbers
  • There is value in taking things more gradually
  • What Kim is looking to improve in her business

 

[16:16 - 17:36] Closing Segment

  • Reach out to Kim! 
    • Links Below
  • Final Words



Tweetable Quotes

 

“Make sure that you're underwriting it with best and worst case scenarios in mind. You are never going to be able to make any deal work in underwriting if you assume the worst of the worst or the worst of the worst of the worst.” - Kim Radaker Bays

 

“I think it's going to be a bumpy ride. And I think that really making sure that you're paying attention to the details of operating your assets is going to be hugely important in the short term.” - Kim Radaker Bays

 

“ It's better to walk away from a deal than to get in a bad one.” - Kim Radaker Bays

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Connect with Kim! For investing opportunities, email invet@exppg.com, and for the supply and logistics side of the business, go to the Exist Multifamily website.

 

Resources Mentioned



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Want to read the full show notes of the episode? Check it out below:

 

[00:00:00] Kim Radaker Bays: You are never going to be able to make any deal work in underwriting if you assume the worst of the worst or the worst of the worst of the worst. So you're not going to hit your goals and your targets and your, you know, expected returns, if everything goes wrong, but you need to know that you're at least going to be able to float by if everything goes wrong.

[00:00:17] Kim Radaker Bays: And what happens if half of the things go right and half of the things go wrong kind of a thing. So, you know, it's hard to underwrite it completely with everything going wrong, 'cause there, it just won't be competitive.

[00:00:38] Sam Wilson: Kim Radaker Bays has completed 20 transactions with over a 2x equity multiple in the last three years. She currently leads 10 properties, totaling over 3,200 units across DFW and Houston. Kim, welcome to the show. 

[00:00:52] Kim Radaker Bays: Thanks so much for having me on.

[00:00:53] Sam Wilson: Pleasure's mine. There are three questions I ask every guest who comes in the show: in 90 seconds or less, can you tell me where did you start? Where are you now? And how did you get there? 

[00:01:01] Kim Radaker Bays: Started with a finance degree, spent some time in the retirement plan industry working in 401ks and define benefit plans then got into some single family. And then for the past, almost 11 years now have been in multifamily. So started with the 77-unit property. And over time now between things we bought and sold about 9,500 units. 

[00:01:18] Sam Wilson: Wow. That's a lot. That's a lot. 77 units now to 9,500 units in 11 years, you've seen a lot of things change. I mean, we've gone from everything was basically on sale and you could buy anything you want to now you can't hardly buy anything at all without a dog fight getting, you know, to get the deal done. Tell me about that. Tell me that story and how you guys are positioning yourself now. 

[00:01:38] Kim Radaker Bays: Well, gosh, it sure was easy when everything was like $30,000 a door. Right. You know, now, now even the horrible, horrible stuff is a hundred thousand dollars a door. So it's a very different, very different marketplace.

[00:01:50] Kim Radaker Bays: I suppose when I first started out, I was able to get one of, kind of the first loans that came back after the 2008, 2009 stuff. So it was in 2011. It was just when lenders were starting to actually lend on distressed properties kind of before that for a while, there was kind of no option to get loans on value add.

[00:02:07] Kim Radaker Bays: So we, we were wondering if we were going to have to buy the first property actually for cash. And then today, fast forward, many, many years, many, many units, the lending environment has gotten a little crazy again. You know, for a very long time, it was a very close-packed groups of lenders. You know, the spreads were the same.

[00:02:25] Kim Radaker Bays: The base rate was the same, you know, whether you wanted fixed or floating, there were, there were options for both. Now, I would say the fixed rates kind of have built in all of the potential yield curve and then some. So, you know, kind of have to almost go with floating rate at this point in time, but also the floating rate, you know, it used to be that basically everything was going to be in a narrow band, it's SOFR plus whatever, and you're going to have eight or nine loan quotes that are all going to be in that same band. And right now we've got some stuff and it varies somewhat based on leverage, but also just based on investor, on lender appetite right now. Some things are SOFR plus 250. Other things are SOFR plus 450. And so it just seems to be a little more all over the board in terms of lending terms and, and what's possible. 

[00:03:09] Sam Wilson: Wow. I mean, is that just because lenders don't, they don't know, they, they don't think the market's found its footing, or what is it?

[00:03:17] Kim Radaker Bays: I would guess it's a lot of that. I think they just kind of don't know exactly what it's going to happen, exactly where it's going to go. You know, definitely expected SOFR to increase, but for the spreads to have gone so wild over, so, I think, was a little unexpected. It's been very interesting and sort of, there's just a whole lot of uncertainty in the market right now. 

[00:03:36] Sam Wilson: What have you guys done, I guess, to make it where, I mean, 'cause you got to underwrite to a certain, you know.

[00:03:41] Kim Radaker Bays: Yeah. 

[00:03:41] Sam Wilson: You got to plug a number in your underwriting spreadsheet. What are you guys doing on that front to kind of even be able to synthesize decent numbers, you know, when you're, when you're doing your underwriting? 

[00:03:50] Kim Radaker Bays: You know, we're really kind of stress testing the whole gamut of things. What if we can get the loan for SOFR plus 300? What if it's so plus 350? What if it's SOFR four? You know, let's look at the yield curve that's going forward. How far into that can we underwrite a hundred percent of it, you know, only 50% of it? What does that look like? Make sure that kind of you're covered on the worst-case scenario, but understand sort of what that whole spectrum looks like. So you, you kind of have to rerun the numbers over and over again. Plan with it and kind of make a note of what the results are and seeing where that goes. 

[00:04:23] Sam Wilson: You said that right now you almost have to go with a floating rate. What risk do you see in that? 

[00:04:32] Kim Radaker Bays: I mean, most of the time you're going to have to buy some sort of an interest rate cap anyway. And really, I think the big thing is make sure that you're underwriting it with best and worst-case scenarios in mind. So make sure that you're underwriting it and all of those things, you are never going to be able to make any deal work in underwriting if you assume the worst of the worst or the worst of the worst of the worst. 

[00:04:49] Sam Wilson: Right.

[00:04:50] Kim Radaker Bays: So you're not going to hit your goals and your targets and your, you know, expected returns if everything goes wrong. But you need to know that you're at least going to be able to float by if everything goes wrong. And what happens if half the things go right, and half the things go wrong, kind of a thing. So, it's hard to underwrite it completely with everything going wrong 'cause there, it just won't be competitive.

[00:05:12] Kim Radaker Bays: Although the big thing I'm seeing in today's market is that there are a lot of deals falling out. There are a lot of times that we are investing final on a project and suddenly somebody comes in and offers you. 2 million more, 3 million, more, 5 million more 'cause these are some large properties and, like, can't make the numbers work at that.

[00:05:30] Kim Radaker Bays: It's that's too far out there. It's too risky. But a lot of times then I'm, like, don't go award it somewhere else. And so they do, but then sometimes people are getting a little bit more real as they're actually really getting lender quotes in, really seeing what's going on. And so sometimes they're walking away from deals now.

[00:05:46] Kim Radaker Bays: And then the big thing that I'm seeing is that the brokers are coming back. They've already gone through a whole marketing process. They don't want to start from square one. Again, the sellers don't really want to start from square one again. Sometimes they've got a certain number that if we don't exceed this, we're just going to hold it. Other times they are just actually sellers.

[00:06:02] Kim Radaker Bays: And so they're oftentimes bringing it back to just two or three groups that have toured that at least have underwritten it that are familiar with it. But that they have experience with, that they have transactional experience with that they know will close. And so there's been a lot of times that we've had at least second looks on things and sometimes, you know, sometimes it doesn't work out anyway. Sometimes it's still too expensive. The, yeah, expectations still aren't quite right. But at least really having those relationships gives you an opportunity at that last look. 

[00:06:30] Sam Wilson: And that's a softening, I think, in the marketplace that we maybe weren't seeing 12 to 18 months ago. 

[00:06:36] Kim Radaker Bays: Oh, for sure. That softening wasn't even there probably three to four months ago, but definitely has hit a bit now. I think the NOI growth from rent increases from inflationary pressures, particularly in a market like we're in Texas, I think will mitigate that over a longer term. I think the true uncertainty is probably a little bit shorter term, but I think there's going to, it's going to be a bumpy ride. And I think that really making sure that you're paying attention to the details of operating your assets is going to be hugely important in the short term.

[00:07:09] Sam Wilson: Tell me about that. I mean, you guys have taken a unique angle on supplies and logistics. I mean, it's something that you told me about this off air. And I want to hear more about how you guys have solved a lot of the supply chain constraints around logistics around construction. Talk to me about that side of your business and how you have, you know, solved a problem that many people haven't. 

[00:07:29] Kim Radaker Bays: Sure. we started out self-managing from the very beginning and still do. And so we also have a construction team that is in-house that does all of the interior renovations. We've found some fantastic GCs to work with as far as exterior, but it is just a very labor intensive piece to do the actual interiors of the units.

[00:07:45] Kim Radaker Bays: And so we brought that in-house a long time ago. I think there's some newer players to that space that are doing things pretty well if you do want to outsource it. Haven't tried them myself personally yet, but the things that I tried years and years ago just didn't work out that well. So really bringing those things in-house.

[00:08:01] Kim Radaker Bays: And then, we were fortunate on the second property we were buying, we knew we were going to need 200,000 square feet of flooring. So actually had a partner that was a Chinese national, went over to China with us, found sourcing for that. Over time, really built out that entire piece of the business, bringing in a lot of the renovation materials that we were going to need.

[00:08:21] Kim Radaker Bays: And so obviously when tariffs hit, we had to realign the whole thing again and find other vendors in different areas. So we've done a lot of that. Also built a lot of domestic partnerships, distributorships for Frigidaire and GE and those kind of pieces. So it's not that we weren't without refrigerators for a little. But it was a much shorter lift thing than most people were experiencing for sure.

[00:08:42] Sam Wilson: Right, right. Yeah. I think that's a business all in itself. And to build those out takes a lot of team and a lot of, I guess, planning ahead of time. I was at Reeding yesterday, there was something. But it was just talking about just entrepreneurship in general. And they said the main thing that, most entrepreneurs struggle with is documenting their processes early on 'cause they can just do it themselves faster. And then, you know, all of a sudden they're at scale mode and they go, oh my gosh, no one knows how to do what I know how to do. So how have you overcome that and scaled, I mean, you guys have a massive operation. How have you done that? 

[00:09:14] Kim Radaker Bays: We do have a large operation. So we use EOS, which is Entrepreneurial Operating Systems based on the book Traction or Get a Grip if you like the storytelling portion of it better. So I think that's been hugely impactful. It's a good way to get information to where it needs to go to make the best decisions to really impact the business. They're obviously huge in documenting processes. I'm very, very fortunate. I've got a couple of members of my team, particularly one that is outstanding at documenting processes. So it is just sort of, even if it's totally not, her department, has nothing to do with the things that she normally touches. I'm always like, okay, teach it to Allie, get her to write it all down. She will put it with the screenshots, with the stuff and really kind of put that together and that, and that's been huge obviously as, as you grow it is hard to pull yourself out more and more. 

[00:10:00] Sam Wilson: Absolutely. Absolutely. I love hearing, especially when, you know, you've gotten to a point where you guys are where you have not just built a multifamily business, but you've built a construction business. You built a logistics company. You've built a lot of different operations and they're all, you know, uniquely different. So it's one thing to build one company, but when you're building four or five, then I think it's certainly an interesting story and something we can always learn something from. Tell us, what are you guys doing right now to remain competitive? I mean, there is, like you said, we're seeing a softening in the market, but it's still a competitive marketplace out there. What are you guys doing? 

[00:10:32] Kim Radaker Bays: I mean, I think the big thing is really sticking to our numbers. Not every deal is going to be a good deal, particularly not in the current environment. There's a lot of things that just got prices went up so fast so quickly that kind of everybody thinks everything is worth a fortune right now. So I think really paying attention to those things, digging into what it is, obviously with having our internal supply chain, with having some of the construction pieces in-house. There's a lot of savings that we're able to get from that in terms of just the general logistics, the supplies, the other pieces of that.

[00:11:05] Kim Radaker Bays: So there's a lot of cost savings that can come just from that vertical integration piece, but also it's hugely important to just really watch the numbers, make sure that you've stress-tested your stuff. It's better to walk away from a deal than to get in a bad one. You know, it is hard to be competitive, but don't, don't get so enthralled in the thrill of the chase that you go after something you shouldn't.

[00:11:26] Sam Wilson: Right, right. That is a personal flaw I'm trying to overcome as a deal junkie. It's like, oh man, it's so fun. But then you're like, no, no, no, this doesn't make any sense at all. So that's absolutely awesome. Tell me this. What's a mistake, maybe that, and I'll rewind the last 11 years, I think you said you started in 2011, is that right? 

[00:11:44] Kim Radaker Bays: Yeah.

[00:11:44] Sam Wilson: What's a mistake you've made. That you think other people could avoid making? 

[00:11:50] Kim Radaker Bays: Well, I think one of the things is especially early on because we've been very capital gain focused and very kind of net worth building, not just for ourselves, but for our investor group is very focused on the general capital gain, much more so than cash flow.

[00:12:02] Kim Radaker Bays: And so, we're always trying to sort of accelerate the process of get the renovation done as quickly as you can, get the rents increased. So, you know, we had one property where I probably pushed a little too fast and a little too hard. We were getting the rents for sure when we were leasing up, but kind of dropped occupancy a little more than I expected and stayed there for a little while.

[00:12:22] Kim Radaker Bays: And we were fortunate. We were still cash flowing, even at a lower occupancy rate than I would've liked. But I think especially as the market has tightened and gone up so much, the big thing that I learned is to take it a little more gradually, even if it takes three or four years, you know, or a little bit longer to get through the project instead of, you know, two years and one month.

[00:12:42] Kim Radaker Bays: Taking that time, you know, like I said, back then, it wasn't so much, I mean, it was, there were a few sleepless nights over it, but it was never actually a problem. But right now with where mortgage rates are and where property taxes have gone and where insurance has gone and all of those other pieces, there just isn't as much net to fall into anymore as there used to be.

[00:13:04] Kim Radaker Bays: And so I think that's one of the things is I've taken it just a little more gradually, make sure that you kind of test it, work in steps, work in phases. Oftentimes the properties that you're able to find that are a good deal are the owners that haven't paid attention to the market at all and have cared only about as long as I'm 99% occupied that's all I care about. And so oftentimes they are three or $400 below market on some properties. And so, but you have to take that kind of in steps to make sure you don't clear everybody out all at once and end up with an occupancy issue. 

[00:13:33] Sam Wilson: Right, right. Yeah. 'Cause if, if everybody's there is used to 400 bucks under market rent and suddenly you raise it, it could become a real issue. So that's really, really good advice. You know, I think a lot of people, when they look at where you are in your business, they say, gosh, I could never get there, right? 'Cause they think, man, now you got it, now Kim's got this figured out. They got this massive company, you know, they're kicking butt and taking names.

[00:13:55] Sam Wilson: We can't get there. But I know that every business still has its own needs and its own things that you probably see from the inside looking out where you say, man, you know, we could improve X, Y, or Z. What are those things, if you don't mind sharing? 

[00:14:06] Kim Radaker Bays: Some of the things I, we have been working on some software development, that's been a more challenging piece of it because neither of us are actually coders. We've hired some talent now obviously to get that done, but have tried to work through some offshore pieces and that's been a little harder it's, you know, with everything else, we are able to be like, just, just move out of the way out, install the light, picture myself, kind of a thing, or, you know, just give me the spreadsheet. It's fine. 

[00:14:28] Kim Radaker Bays: And obviously anytime that you start expanding your business into areas, that can be hugely impactful and effective, but the skill sets that you personally have and you can't say, just get out of my way, hand it over to me, I'll fix it. That's definitely a piece. So that's we've been working really hard on trying to make sure that we find some top outside talent on the pieces that we don't know as well.

[00:14:49] Sam Wilson: Gotcha. What are needs when you say software development? I'm really curious 'cause I'm, I can't think of anything off the top of my head. What's a software development need that you find that's not already in the marketplace? 

[00:14:59] Kim Radaker Bays: A lot of it's just automating a lot of our processes in terms of the renovation piece. Some other pieces, some of the great skills that our accounting team has. There's a lot of things that we can just automate. Hey, go check and make sure all four water bills are in. Rather than having an actual person have to go look in the GL, click, and make sure all four water bills are in that number. You know, just, a lot of smaller things to just really speed up and. The more boring aspects of some of the business that are involved in really doing it right. 

[00:15:31] Sam Wilson: Right, right. And those are huge things 'cause you know, suddenly you're two months later and the water company is, you know, calling you or shutting off your water and you're like, how did we miss this?

[00:15:39] Kim Radaker Bays: Or your financials just look really screwy two months later 'cause suddenly there's one meter that didn't get put in. And so now, now you've got your books closed first, prior month and why'd you have this jump in water consumption? Well, I didn't, it's just something didn't get put in before the period got closed.

[00:15:53] Kim Radaker Bays: It's always 

[00:15:54] Sam Wilson: something it's always something. And I think, in its own right, is comforting to know that the problems never go away. They just change. 

[00:16:01] Kim Radaker Bays: They do. 

[00:16:01] Sam Wilson: You know, and obviously take on a different tone as you grow. It becomes less of like, how are we going to grow, but now how are we going to manage the growth that we have, which is a, I think a more fun place to be perhaps, but the problems never do actually go away. They just, like I said, they just changed. Kim, this has been a blast. Thank you for taking the time to come on the day, share about your business. You guys are doing awesome stuff there. If our listeners want to get in touch with you or learn more about you, what is the best way to do that? 

[00:16:25] Kim Radaker Bays: Sure. So we have two sides to our business, supply and logistics side of the business is Exist Multifamily. So you can go to existmultifamily.com and see, 'cause we service not only our own properties but about 250 to 300 other properties in terms of those supplies and logistics, getting everything in a single kick box for your upgrades so that your guys are not spending the whole day running back and forth to the shop or running back and forth to Home Depot, even worse.

[00:16:47] Kim Radaker Bays: And then also on the investment side, invest@exppg.com. Tell us a little bit more about our general side and even emailing invest@exppg.com, whether it's for investment purposes or other pieces. That team is fantastic at finding the right person to direct you to inside the organization. 

[00:17:03] Sam Wilson: Awesome. We'll make sure we put all of that in the show notes. Kim, thank you again for coming on today. I certainly appreciate it. This was a blast.

[00:17:09] Kim Radaker Bays: Thanks, Sam. Had a great time. 

 

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