319: Janet LePage on the State of the Real Estate Market

Buck: Welcome back to the show, everyone. Today, my guest on Wealth Formula Podcast is Janet LePage. Now, many of you know who Janet is already. She is the founder and CEO of Western Wealth Capital. She’s one of my partners on this great endeavor in the multifamily space. Janet has got a tremendous background. That all started out as a computer scientist, and now she is a certified real estate mogul. Janet, welcome back to Wealth Formula Podcast.

Janet: Thank you for having me back.

Buck: I want to back up a little bit because you have spoken at our events. People know you as this mastermind behind Western Wealth Capital. People don’t know your background. A lot of them, though, which I find really fascinating and I think very relevant to the way Western Wealth Capital operates. You are a computer scientist, correct?

Janet: I am.

Buck: Now, ultimately, you founded and are now the CEO, one of the largest privately held real estate firms in the country, in the world, for that matter. So tell us how that happened.

Janet: All right. I’m going to make this really short.

Buck: You flipped houses, and then the next thing you do, you flip multi billion dollar buildings

Janet: I don’t share this very often, but my first role out of University as computer scientists was to come into a company. It was a telecom company, the second largest in Canada. And basically they said you need to save a million dollars a year. Well, as a new graduate out, how do you do that? They had mainframe systems and different systems. It was using computer programming to find out ways to reduce costs. And I truly believe that was a foundational moment in my learning was what can I do to save expenses or increase revenue? And what is that value? And if I look back to everything we do at Western Wealth Capital, when we buy a unit and improve the property, look at $25. But when you multiply it by X number of units, that small, $25 in increased revenue really is an astronomical value creation. And that came when I was 23, 27. I thought I would be the largest mobile home park owner in the US, is what I told my father. I don’t own a mobile home park, but I bought my first home after traveling many parts of the US, areas I never knew of, only to realize I couldn’t quite afford mobile home park. And I found myself in Phoenix, where we are the second largest owner now multifamily. And I bought my first two homes and then went on to flip 58 homes in the next 24 months. Bought my first multifamily in 2011, all while still having a corporate career and having two small children at the same time. It was when my second was one or one and my oldest was two. And I knew that my passion was in real estate. And that was the birth of Western Wealth Capital eight years ago. We just are about to turn on our 5 billion in transactions, 130 properties purchased, and that’s where we found ourselves today.

Buck: So Western Wealth Capital has really got the best track record for investors that I’ve ever seen. With over 30 divestments, an average annualized return of over 30%, essentially nearly doubling investor money every three years on average. What’s different about Western Wealth Capital? How does Western Wealth Capital do this? Whereas other competent operators, very good operators, are not getting anywhere near these numbers. And I should point out, these numbers are not including things that are coming up. I know of because those things have the additional benefit of tremendous inflation. These outcomes were really not in these crazy markets. So how is it done?

Janet: Take it back to the computer science, black and white. We have simply a formula. You go in, give an asset that’s underperforming or can be improved. For every dollar you invest, you make $200. It’s black and white ones and zeros. So when we did our first purchase of a property, we can go in, we can renovate the unit, we can put in washers and dryers. That cost is about $10,000 and makes us about $45,000. When you multiply that across a property, that is what we did. We started in Phoenix. We basically perfected our model. I honestly can walk onto a property and in about three minutes say whether or not we can perform. And obviously we have to do our financial analysis after that. But that’s how consistent what we do every single time. It is a very simple formula that says if we do A, B, and C, we can actually double our investors investment in five years. We then went on to expand that city after city that had the same economic underlying more jobs than there are housing, and people need a place to sleep in. So you have over demand for housing and you can improve those units to what people want to pay for them. And you have your perfect formula. It is literally a systemized approach. I remember about four or five years ago, I said to my team, I don’t care where you go in the world, McDonald’s fries are McDonald’s fries. We have a formula and we replicate it. And what that actually means. There’s a lot of ways to make money in real estate, but we reduce the risk by doing the same thing over and over again. Repeatability allows scalability. Repeatability also reduces risk. And so that became our competitive advantage. And we chose to stick with that in the cities that we are in is actually they go, gosh, doesn’t this look like the last place? And I go, exactly, because the formula works. It’s like when my mom bakes her cookies, they taste better than any other chocolate chip cookie because she doesn’t mess with the formula. It’s perfect.

Buck: The other thing that I think what I noticed and you can comment on this, is that somewhere down the line, the idea of doing this, the formula and doing it twice as fast as most people are doing it became a real focus. And it seems to me that when you’re looking at what annualized returns or a return over a period of time, that is something that tends to be not focused on as much by most operators.

Janet: So I couldn’t agree with you more. When you are walking lawn to an apartment community and the paint job is old, but you have new signage, there’s no playground, but the interior of the office looks good. Every single piece that you improve makes it a little bit better. But it’s not until you have the entire package together that it’s like, wow, this is different. It’s like being handed a gift and you go, oh, the gift is nice. Oh, wow. Now it’s in a nice wrapped package. Oh, now there’s a bow. It’s not until you get to the bow. The present on the inside is actually exactly the same, but the experience is completely different. And once you have that bow experience, being able to increase the rent to compete with that next level of asset is very easy to explain to the new resident. This is a new rental price. Well, you can do that in nine months, twelve months, two years, or you can do it starting day one. And the only way that you are going to actually achieve those projected rents is to get to the boat faster. And so when we started really seeing that, we had a ten point checklist that had to be done on the day we purchased our assets. It is now an 84 point checklist. I think it went from ten. I know there was a number of 52 for a while and I think it was 26, if I remember, because of those numbers and we thought we were doing great, other operators will come in and go, okay, should we change the name of this? Yeah. Which paint color? We only have four paint colors. You can only pick from four platters because we know this color of wrapping papers with this bow and this card make it look perfect. And so that has allowed for us. We have two sayings inside the organization, need for speed and McDonald’s effect repeat and need for speed. It is not until that bow is on and now you are up and increasing those rents. And that is what de risks our investors investment because we are covering it by that increased value almost immediately.

Buck: So this model has worked and it’s done very well. And now we are in a slightly different environment. We’ve got rising interest rates. They’ve created some uneasiness amongst investors. We know the multifamily markets have slowed a little bit in terms of trading. So what’s going on with the markets right now and how does Western Wealth Capital plan to navigate it?

Janet: So in times when there is movement and some uncertainty, I always say let’s go back to what we know. So what do we know? We know that there is 5 million home shortage in the US. That’s not changing. We know that there’s a shortage in supply and construction is behind on any plan that they have. We know that actually in an inflationary environment, in an interest rate increase environment, construction can slow as well because it’s a pause as they refigure that out. That is only going to add to pressure in housing. We know that sitting on cash in an inflationary environment also erodes the value of the cash. We know that hard assets are the place to have money during inflation. Those are things we know. We also know that if you’re in a market that has in migration and an average Occupancy of at least 94%, you have nothing but at least four plus percent in growth. We know that across the ten or real estate categories to invest in multifamily is number one because of the short term leases and the ability to increase rents to capture the erosion of inflation or follow it at the very minimum. And that doesn’t talk about the 4% minimum. I’m explaining there that’s what we know what’s happening right now in the market and what I’ve instructed even our own organization to is to watch. Is there’s a mix between the increase in interest rates and really the availability of debt that is out there at the moment the larger lenders are also figuring out they have mandates to deploy cash. If they sit on it, it’s eroding due to inflation, but they’re figuring out what spread and which rate would they be deploying it at. So everyone is in a little bit of a who’s going to go first here what that means is and what I’ve instructed Western Wealth Capital to do is to be diligent when Covid hit. You stop and you watch and you ensure just like we have every single time that we know that this is absolutely the right investment because there is more folks watching doing the same thing that we are. It means that there are opportunistic opportunities out there. This is actually an excellent time to be able to be really selective when everybody’s out there trying to buy and place equity. It’s a race for it. This is actually times where we have had historically some of our best investments when there’s not others out to compete with us.

Buck: Right. So you’ve got basically some of these big groups that normally you might have 40 or 50 competitors on a given opportunity and all of a sudden 30 of them are gone because they’re waiting for the spreads and so forth to come down or trying to figure out where things land.

Janet: And spreads are all an indication of the availability of supply of debt in the market. Fannie and Freddie still have to deploy before the end of the year. They don’t have a choice, so they will. And what that means is as they have to deploy, their spreads will come down. And so really the larger players are also waiting because they know that that deployment will have to happen. And so they’re waiting on that spread to take advantage of we all are. So this will level out very quickly. It will have to. And that also includes if you talk about pension funds or institutions or any part they too need to deploy money. Otherwise they’re sitting on cash, which is a negative growth. And so it’s just been a lot of one of the ways to curb inflation isn’t just interest rates, it’s native media. One of the easiest ways is just make people feel uncertain. So they sit on their wallet actually without having to change anything. And if anyone’s asking these questions, they are actually doing exactly what they need to do to slow down a little bit of that inflationary growth without changing interest rates at all. What helps us and makes us different in this moment is that we have a system and we have do the exact same thing. We’re not in four different asset types where we have to figure out what to do here. We’re in cities. We are in the top ten immigration cities on average in the cities that we invest in for every renter that moves out, 3.1 come in, but there’s already not enough housing and there’s already jobs that still can’t be filled. The demand is unbelievable. Put everything else aside. They believe the consumer index is believing over 11% rent growth across the nation. Well, that’s across the nation. Last year it was 6.6% belief and that is at a time where you could still buy a home. So we are in actually what you’re going to see is some still continue to be some of the highest rent growth that will erode any interest rate increases and really make them a moot point, at least in the cities that we are in. What it will do in the short term is as we balance out, there’ll be some shorter term cash flow distribution but not wealth impacts that I can foresee at all because of our ability to turn those leases much quicker than any other asset class.

Buck: If there are less buyers, then obviously there are less sellers. And how is that affecting any plans for dispositions? Does that mean that there are properties that you might have thought, hey, it’s a good time to sell that we’re holding off on as well?

Janet: We plan out throughout the year. What are we going to refinance, what are we going to sell and when we are slowing that for the same reason because of where the spreads are at and the lack of supply of debt for this very short term, which is going to come at the end of the year, we’re not going to need to go and sell something that impacts the wealth and any means of our investment partners. We are very prudent. I laugh going back to my computer science background and I will honestly tell you our CIO and our analysts are far more sophisticated than I am going through this. But we don’t need to be selling short or doing something to impact the wealth. That’s not what our investors invest in us. They invest in us because they trusted us to make those decisions knowing that supply is coming later in the year. As that happens, we will do it. Right now we have incredible debt on most of our assets because of the lower interest rate that we were at in the time to go and change that to return funds that really only allow you to have funds back would impact the overall wealth. That doesn’t make the right sense for the overall investment. And so we are being very diligent to ensure that we’re looking at the holistic investment.

Buck: So the sellers who are out there right now, Janet, in some cases, if they’re selling right now, there’s a reason they need to sell right now too. So is that part of what makes it a buying opportunity?

Janet: Absolutely. Selling out of necessity is never a place that you want to be in selling. So there are sellers out there that are selling out of necessity. And so that is an opportunity and we’re absolutely looking at those that are available.

Buck: So basically when there’s not a lot of inventory. There’s a lot of tire kicking and that kind of thing. Where do you think that this how does that affect? Obviously, Western Wealth Capital has been prolific in terms of an acquisition of it’s probably been an average of one major asset a month for the last several months. Does this change that projection in terms of the sheer volume of opportunities that your investors can expect?

Janet: It could. I have zero interest in buying something just to keep pace when we didn’t do that. What’s interesting is the first two assets that we did buy, we were ahead of a lot of the group because get out of the media. Get out of this world that’s going on. Go back to what do you know. There’s a shortage in housing. Put your money in hard assets. It’s the number R1 estate category to be in. Like, you have to talk yourself off the media ledge. We came out the first two assets that we did purchase, the growth, I think it was 100% within a year, 100% over that. I’m actually downplaying the numbers because I had so much fear and swirl. And you take it away, you just go, what is your facts and data here? And that is happening and will continue in these moments. And all of a sudden, others perk up. I encourage everyone. What do you know? Not the swirl. The swirl is actually what they want to bring it down.

Buck: Yeah. You know what’s interesting to me, just looking back to Covet, and obviously it’s not it’s not like that. But looking back to that, in many cases, if we had potentially avoided what you’re calling the swirl, I mean, the assets spot right around Covet exploded. I know. And so it goes back to the whole Warren Buffett saying about investors should be greedy when others are scared and scared when others are greedy. And in some ways, I feel like that’s kind of a little bit of the position we’re in right now. It’s not that simple, but it’s the time to be looking for opportunities because so many people are tuned out. And in the meantime, as you mentioned, I was talking to another colleague of mine, real estate investor in DFW who’s got a portfolio. And nothing has changed on the ground in terms of driving up rents. Nothing has changed in terms of the number of people coming into the leasing office, looking for a better place to live and willing to pay more. Nothing has changed. And that is I think it goes back to your whole point about looking at the fundamentals. And if you can avoid the swirl, there may be a great opportunity there.

Janet: And the other opportunity is, I always say, protect the house. Right. So even though I feel like we have some of the best operations in the nation, one of our partners is an institution. And they have ten others across the nation very, very large. And it’s a hands down the best operators we have. And so I’m very confident. But there’s always room for improvement. Sure. So part of that slowdown due diligence means take the capacity of normally the deal you’re talking about and deep dive because we all operate well, there’s always room to find something else. And that’s what got us from the ten point checklist to the 26 to the 52 to the 84. It is an opportunity to tighten down everything. There is a great opportunity coming. And one of the things is important that we’re transparent. We over communicate because we don’t need to buy the next asset. We need to make sure we stay with our system. So when we do share with our investment partners, it’s good. It’s good.

Buck: So, Janet, you are…just turned 40, maybe not even?

Janet: 41 last week.

Buck: Okay. Last week. Happy birthday. Happy birthday. So you did most of this in your thirties. So you’re like sort of the Doogy Houser of multifamily.

Janet: You know what I’ll take it? When I was young, I had a crush on him. So that works.

Buck: I’ve had some people ask who are curious about this, too. We’re active investors. How long does this go? What’s next for Western Wealth Capital?

Janet: You know, it’s funny. We’re talking about raising interest rates. We’re talking about a rate level that was 2018, early 2019. That was a great economy. We’re not talking about some major recession. We’re talking about some leveling out.

Buck: I’m not talking about a catastrophic event.

Janet: We’re not talking about a catastrophic event. What we’re talking about right now is there’s an imbalance and availability of attractive debt to where the rate has gone. That’s all actually, we’re talking about.

Buck: Oh, no. And I get that. I’m mostly talking about like, where do we go here, Janet, from 40 to 50. What’s the plan? I’ll get to 50 before you. What’s the plan?

Janet: If you want the honest truth. So one of the things I saw a long time ago was Western Wealth Capital. The industry of real estate is old and it’s about making money. But there’s an ad in there. And that’s something that I saw five or six years ago as we were going on. It’s an industry that’s known not to treat their team members and their employees with respect and a place to be pride, to call and come to work every day. It’s a place where residents don’t have lights in the parking lot so they don’t feel safe coming out of their car. It’s a place where there isn’t a shade sale over the playground and a new place for a mother to sit so that she can watch her child play. It is a place where there’s not pride of living. Western Wealth Capital wouldn’t have a drive to grow in size if it wasn’t about changing how this industry operates. It’s an end. You can have both. Our track record, I promise you, is because of the fact that we recognize our maintenance supervisors who worked on properties for 25 years and have never had an owner say, wow, I really appreciate here. Here’s a gift card and take your family up for dinner. What you did today, the fact that that pipe burst and you stayed 24 hours, that mattered. That mattered to our asset, that mattered to the people that were living and impacting because they have no other place to go, it mattered. So where are we going to be in ten years? A lot larger. And we’re going to leave the industry and use that platform to show that you can have an end and you can help and support the people that choose to work and live on your properties and create wealth for our residents. And so if you ask whether or not I’m passionate about it, I think it’s pretty obvious.

Buck: You’re tearing up here.

Janet: But it’s an end, so that’s where we will be.

Buck: Fantastic. Janet, thank you so much for being a Wealth Formula podcast. Again, it’s always a pleasure to not only have you on the show, but to work with you and keep up all the good work.

Janet: Thank you. You as well. Buck. We appreciate your partnership.

Buck: We’ll be right back.