How Multifamily Investors Turn High Vacancy Into Massive Value-Add Opportunities | Michael Tempel

Michael Tempel (00:00)
Yeah, as long as there’s not like a really bad reason for it, that’s a great sign. I’d prefer that ’cause I typically what we like to do by background, we go into a building and we just renovate the units as quickly as possible. If they’re occupied, that’s very tricky to do. If you have to wait for leases to end, the rents are gonna be usually much lower than your new rate’s gonna be even if you do the renovation with the occupied units. So

Yeah, the best buildings we had were almost a hundred percent vacant. So we’d go in there and, immediately add, sometimes two hundred and fifty to three hundred dollars a month in rent value, which almost doubled the value just at times.

Dylan Silver (02:07)
Hey folks, welcome back to the show. Today we’re joined by Michael Tempel, a multifamily investor and founder of ROI Multifamily. Michael, thanks for joining us here today.

Michael Tempel (02:17)
Absolutely. Thanks for having me.

Dylan Silver (02:18)
What types of deals are coming across your desk these days?

Michael Tempel (02:22)
Yeah, I mean we well, you’ve always focused on multifamily. So that’s something I constantly look at. Basically finding distressed Class C buildings that you can go in and do some value-add and really add value quickly. So that’s something we’re always looking for. Prefer things out in the suburbs versus in the city at this point, but we are still running across those. And then there’s just a lot of distressed

real estate in general, Minnesota right now with everything going on. So commercial, if you want to go into the downtown areas, there’s a lot of stuff for sale right now that’s selling at a discount.

Dylan Silver (02:58)
When we talk about distress, people sometimes have their buy box and what they are willing to cope with, if you will, for scale of work and scope of work. What types of distress are you looking for? And maybe what might be too much distress?

Michael Tempel (03:12)
Yeah, I mean for me, I’ve—I’ve always focused on Class C properties. That’s what we’ve done value-add on. So it doesn’t scare me away. The trick is the area, of course. You don’t wanna buy a property next to a bunch of properties you can’t control ’cause then you’re just—it’s just a losing battle. So you could find a one-off that’s in a lot of—that’s in pretty rough shape. You can do quite a bit with that because you’re gonna get the return once you do

all the work and finish everything. You’re not gonna have to compete with a building that’s gonna hold you back. So that’s probably the biggest thing right there.

Dylan Silver (03:44)
When we talk about finding deals, acquisitions, right? People have so many different ways to find a deal: direct-to-seller, through brokerage, through referrals, right? Do you have one preferred acquisition strategy?

Michael Tempel (03:57)
Not really. I mean, honestly, it’s just getting out there and shaking hands and meeting as many people as you can, taking long walks in different areas like where you’re looking to buy, just networking like crazy, things like this. I’m on CoStar and I’ve got all the kind of tools where I can pull things up. But ultimately, I’m more likely will find a deal having coffee with someone than going through hours on CoStar, and pulling data up.

It’s just really kinda being in the right place at the right time with the right people, in the right room.

Dylan Silver (04:26)
You also have a background in property management. Property management, of course, can be tricky, especially in multifamily. In many cases, folks are looking for the right property manager, they’ll try to figure out how to do it themselves, but there is a lot of doors and and a lot of potential communication when you are managing that size and that scale. For folks who are looking at multifamily acquisitions and trying to decide what the best

strategy is for management, should they manage it themselves? Should they find a property manager? Should they partner with a property manager? What should be their expectation set? What’s your feedback?

Michael Tempel (05:53)
Yeah, that’s—that’s a loaded question because, so when I was fully into it, which was for almost twenty years, I had fifteen different ownership groups, everything from mom-and-pop to Class A new construction development groups for local. It can go on and on. And the biggest lesson I learned is that it’s easy—it’s easier to take on more than you can handle.

And so, like, with ownership, what I would suggest is finding either a way to do it yourself if you have a team in place, but if you don’t have the team in place, be really careful in who you partner with as a management company. Really look at what they have in their portfolio, how spread out they are, just meet the staff, see how professional they are, and then from there, essentially, you can kinda gauge where things are at. And, of course, obviously, look at reviews, things like that. But

I’m kinda going the different direction where, like, if I went back into property management, I’d probably focus on one or two key clients and I wouldn’t take on as many again. It was—it was fun to be big, but it was hard to be big. So, yeah, less is more sometimes.

Dylan Silver (06:55)
I’ve heard this from a lot of operators, that just property management itself as a business can be challenging because you have to do so much volume, right? And then the—the margins aren’t the same as owning, so it—it can be challenging. Is that—is that a fair description?

Michael Tempel (07:10)
Absolutely. Yeah, the biggest thing I ran into is I always felt like I needed probably double the payroll for what the ownership expected. So, yeah, it’s real easy—you’re absolutely right on the margins. And I think some of the property management companies—I’m not currently acting in that area right now, but what I’ve seen is they have raised their rates to kind of mitigate this, so they’re—they’re doing more, but they’re also getting paid more. I think it

just with the necessity that happened, because, yeah, for a while, it’s just the margins are so thin that and especially when you’re working in multiple cities, multiple ordinances, and everything else at the same time, the cost can really skyrocket quickly if you’re not careful.

Dylan Silver (07:49)
When you are looking at acquisitions, pivoting back to that, does vacancy or—or high vacancy, is that a—a negative sign? Is that a—a value-add opportunity? What—what do you look at when you see vacancies?

Michael Tempel (08:05)
Yeah, as long as there’s not like a really bad reason for it, that’s a great sign. I’d prefer that ’cause, typically, what we like to do by background, we go into a building and we just renovate the units as quickly as possible. If they’re occupied, that’s very tricky to do. If you have to wait for leases to end, the rents are gonna be usually much lower than your new rate’s gonna be even if you do the renovation with the occupied units. So

Yeah, the best buildings we had were almost a hundred percent vacant. So we’d go in there and, immediately add, sometimes two hundred and fifty to three hundred dollars a month in rent value, which almost doubled the value at times.

Dylan Silver (08:40)
I wanna ask you about raising rents, right? There’s in many cases times where the previous owners haven’t kept the rents on par with the market, and so therefore a simple value-add opportunity might not be overhaul of the individual units, but it might be some common areas and then keeping the rents competitive with the rest of the market. Do you come across these opportunities, and—and

is this something that investors can bank on as a strategy, is finding properties where the—the owners haven’t raised rents?

Michael Tempel (09:14)
Absolutely. I think that’s one of the best opportunities. It’s actually exactly what I look for, is if I could find lower rents in a good area, then, yeah, you don’t need to go in there and put granite, stainless steel, and everything, like you might on a value-add. You can just, like you said, just kind of redo the common areas. Curb appeal’s huge, just make sure everything looks great. And then, yeah, we’ve done that with buildings where we literally see ten to fifteen percent increases kind of right off the bat.

Dylan Silver (09:38)
There’s a whole back-end portion of this multifamily game, which is the capital portion and financing, right? I wanna dive in there. A lot of our podcast alumni have stated that that’s the bottleneck for them, is raising capital and being able to finance the next deal. How have you approached raising capital over the years?

Michael Tempel (09:58)
Yeah, I typically, of the deals that I did, I wasn’t the main sponsor on them, so that made it easier. But what I have found is, when if you find a good deal, the money will find you. I mean, you can go out there—I had one in TenantCloud, unfortunately, it ended up going through, but I had a raise, I think it was around two million, and that happened almost, unfortunately in a way, in two days. So

it’s gonna happen a little faster than I’m explaining that. But, yeah, so literally, if you have a good deal, the money is gonna find you. But, yeah, finding the strategic partner that has the ability to be bankable, I think, is definitely a key point.

Dylan Silver (10:37)
Once you’ve raised the capital and you’ve acquired the deal, you—you’ve closed on it, now you’ve got to manage a rehab. Of course, this can be a pain point for investors with contractor expectations and timelines and delays as a value-add multifamily investor. How do you manage those moving pieces and—and set those expectations?

Michael Tempel (10:56)
Yeah, I mean, that’s literally—I learned from one of the best, I’d say, in your market, Jim Soderberg with Soderberg Apartment Specialists. He was kinda one of the first ones to go through and actually start doing the granite, stainless steel, and luxury vinyl plank properties. So for a while, that was a lot of fun because, literally, the appraisals from the banks would come in and they’d never seen this before. Now you see it all the time, so it’s not a big deal. But back then, it was the new thing. But, yeah, so we’ve—I think I’ve done

around a thousand units worth of renovations, and that’s kind of why I moved away from the management side and now, like with ROI Multifamily, essentially, we manage that whole process.

Dylan Silver (11:33)
Now, when folks are coming to you with a deal or a problem set and they’re asking for feedback, is there any common question or—or set of questions that you find people regularly asking?

Michael Tempel (11:47)
A lot of what you’ve already asked: the vacancy, the area—you get that constantly. I’m trying to think on that a little bit more. I mean, all the questions you already have been asking is typically what I hear. And then the biggest thing is always, “What can we raise rent to?” I think that’s the next question, now that I think about it a little bit more, is how far do we have to go to get to that rent rate. So going back to what you’re saying, if you

have a building with lower rents already, then maybe you don’t have to go in and do all the huge changes to get the a hundred-dollar rent increase, whereas if you’re not there yet and you want to kind of get ahead of the market, then you definitely would have to do that.

Dylan Silver (12:23)
Now, in—in the Midwest, are—are there any markets where there is a surplus of—of multifamily?

Michael Tempel (12:29)
There’s a—I mean, just in general, I mean, I’m at near Minneapolis. I mean, there’s tons of multifamily in our area. It’s been a little difficult to navigate, I would say, for four years, just for, regulations and just different reasons outside of our control. But, yeah, the supply is absolutely massive in in Minnesota.

Dylan Silver (12:48)
This creates a challenging dynamic. I’m a Texas Realtor, and we have Austin, where there’s this massive surplus of of multifamily housing and lots of potentially distressed syndicators who who have these deals that are now, the the the debt’s becoming due. When we look at surplus and the cities where there is a surplus,

does this mean steer clear of these cities? Does this mean like steer clear of the Austin, Texases of the world? Or—or does this mean like, hey, if you’re looking in those areas, you—you have to be aware of the surplus and you have to buy right?

Michael Tempel (13:22)
Yeah, I would say, I feel like there’s an opportunity in really any area provided you can handle the operation side. Like, obviously, a building in a very difficult area probably isn’t worth your time, even if you’re gonna get a really good return on it. But I feel like even in places with surpluses and everything, it’s—it’s really a matter of buying at the right price and understanding that you’re not gonna be able to probably crank rents as much as you could if there wasn’t that surplus.

But so if you buy at the right price, if you’re still gonna be just fine.

Dylan Silver (13:52)
You mentioned earlier rehabbing can be challenging if there is occupancy and then you’re waiting for leases to end, right? Typically speaking, how—how long might it take for a property to get stabilized? I know it’s different property to property, but is there—is there a—a goal in mind when you acquire a deal?

Michael Tempel (14:10)
Yeah, I mean, like when we first did it, started doing it, it was almost like immediate. We just kinda went through and we—we literally did occupied units. I had one building where we were doing four kitchen rehabs a day. Like literally ripping the cabinets out, putting the new kitchens in, the whole thing. And I think that was—that’s like, say, around seventy units. So we basically—about four units a day is what we handled on that project, and then

really from there, just looking at when the leases turn. But, yeah, that—that one went really well. That was one of my favorite ones. It had—it had a lot of vacancies, the rents were extremely low, the renovation went very well, and we were able to add probably about two hundred fifty dollars per unit within the first six months, minus ones that were obviously on lease still.

Dylan Silver (14:54)
I wanna ask you about a different side of this game here: managing tenants and and evictions. And you’re familiar, of course, with Minnesota, and I’ve heard mixed things about Minnesota, right? Typically, do you tend to steer clear of areas where evictions may be more challenging, or or do you just have to underwrite for that?

Michael Tempel (15:14)
Well, definitely underwrite for it, ’cause again, I think there’s an opportunity if you’re willing to take on the pain. For me, ’cause I came from an environment where there weren’t all the restrictions and ordinances and you name it, and it was great managing. Then, I would say the last five years, like Saint Paul and Minneapolis especially have made it extremely hard for landlords. That’s

one of the big reasons I kinda got out of the game is ’cause I—I had a lot of stuff in near the uptown area, a lot of stuff in Saint Paul, and it just, yeah, to evict someone was—it—it got—it got so ridiculous where you’d have to almost wait a month just to file the eviction. And then once you file the eviction, you can get to court, which takes, another twenty days, and then legally come in and essentially work out a deal and extend it another month or two. So it’s

unfortunate that everything kinda went that direction. But I would say that’s probably the biggest challenge in our market right now.

Dylan Silver (16:09)
Yeah, I mean, it can be definitely a pain point, and that’s where you see investors themselves becoming distressed, right? Because now they’re handling property management and evictions, and they’re saying this is just too much. I wanna pivot a bit here and ask you about hold times. When syndicators and and multifamily operators are looking at deals, I’ve seen hold times increase. It felt like there was a time period where people were looking at like five-year exits, but they could do it in three.

And I think people now may be looking at maybe longer hold times. What is your outlook on how long you hold these properties?

Michael Tempel (16:42)
Yeah, and that’s—I think it’s everyone’s preference. But, yeah, I—I heard the same—that’s how it was, too. It was almost every deal that I was part of was a five-year deal, and then it kind of became a voting, point, that fifth year, like, “Do we hang on to it? Do we sell it? Do we refinance it?” But back then, most of the time we hung on to—usually when I’ve seen properties trade, it’s what life events, the stage, or, something happens where they need to sell. But then, like a—like a friend of mine, there’s

a family-owned portfolio, they—they literally are not allowed to sell the buildings as part of their covenant. So it’s like, I’ve seen a—I’ve seen a little bit of both. That’s a little goofy deal. But—but for me, it’s—I’ve always been around like, if the property is doing great and it makes sense, might as well hang on to it. And then a lot of times, what will cause that will be depreciation and, frees up all your depreciation, like if you do cost segregation or—

Dylan Silver (17:33)
Yeah.

Michael Tempel (17:33)
—you know what I mean? That’s gonna change the game a little bit. So there’s just—I’ve seen probably about four or five different strategies from different ownership groups I’ve worked with on that.

Dylan Silver (17:41)
Yeah, you mentioned cost segregation, and of course, this has been more and more common as people are becoming more aware of it, and then it’s effectively more powerful now with the the current laws in place and and tax tax laws. When we look at cost seg specifically, you mentioned that there’s strategies tied directly to that. Maybe without giving away all the gold, can we unpack that a little bit here? What might that look like if if cost seg is a primary driver in your strategy?

Michael Tempel (18:08)
Yeah, and keep in mind on the come. So this is just kinda my my opinion and what I’ve seen. Essentially, the the buildings I—I’ve been a part of where cost segregation happened, it’s pretty much the plan right—right out of the gate, especially if you’re doing like a two million dollar renovation. ‘Cause you’re gonna just—it’s—it’s obviously it’s gonna be great for the investors, it’s gonna—you’re gonna get a lot of the depreciation upfront. And

that’s—I mean, I feel like almost every deal we’ve done, that’s kinda what’s happened. Go into the renovation, do the cost seg, and, kinda go from there and assess how long going into it.

Dylan Silver (18:43)
I remember the first time a guest had said cost seg to me here on the show, and I was a little bit of a fish out of water. Now I’ve heard this term so many times, and I—I feel like everyone’s doing cost seg, even on, single-family homes. When we look at the another side of the business, you had mentioned in the green room brokerage. Have you been active on the brokerage side?

Michael Tempel (19:01)
Not—not—not especially. Like, I more had my broker’s license for the property management business—it just was a necessity. But, yeah, I just—I really—I really enjoy the side of acquiring, finding, and and and bringing the group together versus the management, I think. So maybe it’s because I’m just getting older, but that’s—that’s really much more appealing to me. And then I had a—I had a kind of a weird deal when I was in my management

business: I had a lot of out-of-state owners. And what happened—I—I had a couple of them, and not to pick on—pick on them, I won’t name them, but they’d have me look at tons and tons of buildings. And at the time, it was frustrating ’cause I feel like kicking tires, ’cause they weren’t putting good offers in, but I got to know every broker in my market like a good friend. So it’s like—so now, it’s—it’s been fantastic because I feel,

you know, it—it’s—it’s like the point of school with everyone, you know. It’s—it’s—it’s just a nice opportunity. And that’s kind of what got me into the idea of doing more brokerage. And I know from the management side of what to look for, you know, what renovations are needed, everything we talked about earlier: vacancies, when to raise rents when the rents are low, and how far can you go? And so it’s—it’s just kind of changed the game for me a little bit. And I did have the—

I work very closely with a roofing company. I used to own a roofing company for a little bit, so I’ve got a strong side on the construction side as well, as far as exterior/interior stuff. So it just—just kinda fits and it’s kinda fun. That’s—that’s what I’m doing.

Dylan Silver (20:26)
You know, when managing these deals remotely, when the property isn’t in your—in your backyard, do you see investors struggle with this, or—or are most people aware that, hey, if they’re not buying in a place that’s within driving distance, they really have to have boots on the ground and people that can be their eyes and ears?

Michael Tempel (20:42)
I’ve seen both. I’ve seen some that are extremely successful. I just looked at a building—a building the other day that’s—it looked, everything’s perfect. Like, I was like, this is one of the best things I’ve seen, and that—that had an out-of-state owner. But I’ve seen other out-of-state owners where, they’re falling down, and, it a lot of it’s not putting the right team in place. And and I think there’s some really big, big management companies in our market, and from what I can tell, they

do a really good job. I—I have been shocked sometimes at how thin they are spread, too, even with the doing Class A-type, level work. But—but, yeah, I’ve seen kinda a little bit of both is kind of the quick answer.

Dylan Silver (21:19)
There’s a lot of people who tend to get what we’ll call scope creep when they’re looking at different asset classes and identifying their next deal and, what type of scope of work should they be doing. Have you ever looked at other asset classes, or has it always been multifamily for you? Walk me through kind of the decision matrix of how you ended up focusing on the multifamily space.

Michael Tempel (21:42)
Yeah. Well, actually, it’s funny you say that, ’cause like with my management company, like I—like I said, if I could go back in time, I would have fewer clients and I would take on fewer asset classes. I was very, very good and I felt very comfortable in the multifamily, a I wouldn’t even say A, I’d say B, C class where you’re doing, renovations. I—I got kind of carried away, so then I started doing office. Then I started doing single-family thinking, if I—I wanna be

similar, you—I want to do the same thing like industrial/warehouse. Like, they—you—they obviously scaled and made some money there. So the next thing I had, teams managing, mixed-use, obviously apartments, single-families, and it—it just—to answer your question again quickly, I would stick to just multifamily, one asset class, and just really master that.

Dylan Silver (22:26)
There’s been a lot of folks on our show recently, for for whatever reason, who are multifamily operators then looking at another asset class, whether that’s small bay industrial, strip malls—I talked to another Midwest investor yesterday who’s investing in in strip malls. Do you see multifamily investors, especially over the last couple of years, maybe struggle with some level of fatigue, maybe thinking it’s it’s gotten more challenging and they’re looking elsewhere?

Or do you see people maybe sitting on the sidelines and saying, “Hey, if I can’t find the right deal for me, I’m not just gonna buy anything, but I will wait for that opportunity to come”?

Michael Tempel (23:00)
I’ve seen a little of both. Like I’ve talked to a ton of syndicators, and, yeah, there’s a lot of sitting on the sidelines the last couple of years, especially at interest rates. But then I’ve also seen a couple operators—and I didn’t mind—everything from car washes to you name it. And I—I—and it works. I, again, I think slow and steady kind of wins the race in the long run, but I—I have seen a lot of that where I think

a lot of people thought that multi-pandemic was kind of tapped out and, “Let’s look at something else,” kind of pivot. And I’ve seen it work both ways. The—my favorite operators are the ones that are holding up, though. They—they’re good at what they do, and like they know time’s gonna eventually work in their favor.

Dylan Silver (23:38)
You mentioned car washes. One of the things that I find interesting is there seems to be more car washes popping up everywhere. And now that I’m, talking to to real estate investors all the time, one of the things I think about is maybe these are, real estate investors who got bored, right? They need to put their money somewhere. So these might not be folks who have owned car washes forever, but this might be a new thing for them, even if this looks like, “This is this big brand, the franchise owner might be a multifamily syndicator”.

When you see folks venturing out into, car washes and different asset classes, do they have to then treat it like a different kind of business, or can they still wear, their real estate management hat and have things run seamlessly?

Michael Tempel (24:19)
A good question. I’ve never done it, so it’s like I can barely answer that. But from what I’ve seen, what I would do is I would have a really good operator that specializes in the property that I’m looking at and really lean on that and treat it more as like a balance sheet item versus something I’m personally managing. And then, yeah, just kind of evaluate the return on investment. If it makes sense and you’re making money and someone else is running it for you, that’s probably the best of both worlds for me.

Dylan Silver (24:45)
Find the operator. I want to pivot back to something you mentioned earlier, which is out-of-state operators. When you’re talking with and working with out-of-state operators who are looking at at deals in in Minneapolis or in the Midwest at large, do they have a rose-colored lens? Are they like bullish and trying to get into the next deal, maybe even overpaying for for certain things? Or are are they aware that

because this is a different type of of market, that they really need to align themselves with the the right operator in order to understand the underwriting?

Michael Tempel (25:19)
Yeah, I think—I think aligning with the right operator is key in general. I’ve seen both. And, again, I’m not gonna name any names, but I’ve seen some significant portfolio growths that, they literally are losing the buildings now, where they overpaid thinking they had to. And and then, the operator I mentioned earlier. I mean, you—you would look at this—I think he was looking at one building, I won’t name it specifically, and I think he had it in, say, about eighty thousand, yeah.

And then they ended up paying about a hundred and thirty thousand for it. So obviously, you lost the deal. But I mean, I don’t know how that wouldn’t be overpaying a little bit when someone else already kinda had it tied up at eighty per door.

Dylan Silver (25:55)
Yeah, that can be a pain point. One of the things that that is particularly challenging is expansion. And when you go from success for for many, many years to then looking at, well, how do I take this to the next level? That leverage can sometimes burn people. We saw this at at large throughout the country, pretty much every market or or most markets during COVID and then after COVID in the years that that followed. But before that happened, you had like 2012 till 2020,

where it really felt like, for for many folks, you couldn’t buy a deal wrong. And during those years, people made money without really having the the best processes, team, and strategy. Having seen that firsthand, do you think that that maybe spurred a lot of people to thinking syndication is is easier than it is?

Michael Tempel (26:44)
Without a question, it did, yeah. ‘Cause like when I first got in the business in Minnesota, there’s probably six, maybe seven people that were actively buying—no groups that were buying. Now it’s almost infinite, It’s like, and, yeah, I mean, I was—I was managing for syndicators that were in their early twenties, It just—it was—it was pretty impressive. And I think—I think a lot of the ones I worked with are still doing well now, but

like you said, it was a point where you could literally buy a building and almost flip it, months later, literally a year later. Now that’s not the case. You have to hold it steady and really operate it efficiently.

Dylan Silver (27:18)
These days, because things are a little bit trickier, if there’s a new multifamily syndicator or or value-add multifamily investor listening and you have to say, the the one thing that they should really be focusing on, what immediately comes to mind?

Michael Tempel (27:35)
Yeah, well, I always say measure twice, cut once. Really take the time to make sure you’ve got everything figured out. Like when we did our renovations, we literally got our materials ready to go day of closing, Everything mapped out, the whole plan, the whole execution of how we’re gonna do it. Where I’ve—and as a management company, I loved those scenarios. But I also worked for another group where they buy a building and then try to finance a renovation with no capital upfront,

just through cash flow. And it was just an absolute nightmare. So just having a plan and holding to that plan, I think, is key.

Dylan Silver (28:07)
We are coming up on time here, Michael. Any new projects or activities that that you’re working on? Also, anything you’d like to mention directly to our audience?

Michael Tempel (28:57)
Yeah, nothing—nothing too crazy right now. We’re working on a couple of renovation projects for somebody—multifamily—that’s coming on board. We’re just kinda waiting for the closing dates to happen. And, yeah, essentially, the biggest thing for me, it’s just doing the renovations through ROI Multifamily, doing the—just running the whole thing.

Dylan Silver (29:14)
Michael, thank you so much for your time today. Thanks for joining us here.