Why Multifamily Investors Should Back the Operator, Not Just the Deal

Feras Disrupt Equity (00:00)
what I’m telling them is slow down, right? Like, don’t feel rushed into a deal. And you want to invest with people that you like, and trust and spend the time to get to know the operator. Because in this business, know, as much as because everybody in and it’s almost interesting because we see this like we’ve done deals where we tried to do deals like where we didn’t know the deal we’re investing in. We just told investors, hey, we’re investing in 90s product in Houston.

Cody Crabb (01:55)
Welcome to the Real Estate Pros podcast. I’m Cody Crabb with Investor Fuel. Today I’m joined by Feras Moussa managing partner of Disrupt Equity, a Houston-based multifamily firm that’s acquired over 7,000 units and operates with full vertical integration across management, construction, and insurance. We’re going to talk about all kinds of stuff today. Thanks so much for joining me, Feras. This is going to be good.

Feras Disrupt Equity (02:17)
Thanks for having me, Cody. Excited to be here.

Cody Crabb (02:19)
Yeah, so give us a little background before we dive in. How did you get into this world of real estate? It’s typically not one you see on the kindergarten jobs when you grow up bored.

Feras Disrupt Equity (02:30)
It’s funny

you mentioned that because I kid you not, I’m doing a career day in two weeks for my daughters, one of which is in kindergarten, one of which is in third grade. I just yesterday was asking my assistant, I’m like, do we have any cool swag or something to kind of, know, that I give the kids? I don’t have a fire truck, I don’t have anything interesting, but what is something I can give? also try to think about like, how do I explain what I do to them? I’m all the…

Cody Crabb (02:47)
Yeah.

I’m just picturing you in front of a ⁓

class of kindergarteners like, we add a tremendous amount of value to the properties.

Feras Disrupt Equity (02:57)
Yeah, I was thinking I was gonna I think my

story and not to go sidetrack is gonna be hey, you know people let give me their money so then we can go buy something bigger together and then that turns into a return and so anyways, I gotta still put pitch put my pitch together, but it’s definitely something that I am thinking about so

Cody Crabb (03:13)
No, yeah, yeah, it

sounds, it’s coming together, it’s coming together.

Feras Disrupt Equity (03:18)
Yeah, but to answer your question, mean, in a nutshell, my background is software, right? Like you said, I not expect to get into real estate. I grew up kind of at Microsoft. I had a software company after that. And really, as I kind of just grew as an individual, I started investing myself, right? I started, bought a bunch of houses, realized I didn’t scale up on apartments. And kind of between the software and the real estate, I just realized that, there’s just kind of a missing link.

link in real estate where a lot of this stuff is just dated, right? None of it was modernized, not as much tools and systems.

Feras Disrupt Equity (03:50)
And like you said, real estate is not something most people grow up with. And me, my background is software. So I grew up in software. I worked at Microsoft and then had a software company and came up that software pedigree. And as part of that, I started, had extra disposable income and I started investing. Started buying a bunch of houses, realized it didn’t scale and started getting to apartments.

Between that and what I was doing with software, started to just realize that, this business is really dated, right? There’s not a lot of modernizing. There’s not a lot of tooling. And I thought we could build a better mousetrap. And so that’s really where Disrupt Equity was born, right? The name is kind of tailored more towards the tech spin. And the whole thesis from the beginning is about, how do we really go in, use more tooling, more systems, and have better data than a lot of our competitors to allow us to buy better assets and then

On top of that, right, we have our management company which does the day-to-day operations and how do we better manage those assets? And it’s been a wild ride, a long nine years, but thankfully it’s gone very well. We’ve been successful in pushing things forward.

Cody Crabb (04:49)
Great. I think something I am always interested in when someone has kind of a dual background like this is like, how do you think it benefited you to have kind of a software and tech background while getting into real estate and investing?

Feras Disrupt Equity (05:51)
it’s been extremely valuable, right? And for lot of reasons. mean, first and foremost, most tech people have an analytical approach to things, right? Being included. So being very comfortable with numbers, being very comfortable with the spreadsheet, being able to look ahead and understand, if these things happen to the capital stack, how that will impact the deal, right? It’s not really, I don’t input numbers into a spreadsheet to see the final result. I already have an idea of what’s going to happen. I input the numbers to see the exact result, if that makes sense. And so.

versus some people have no clue. Like if you tell them like, well, if I reduce my interest rate, but then I also increase my leverage, like what happens to the deal? They can’t tell you, it cost you more to help you? Right. And so really analytics is one side of it. And the other side of it is just in tech, there’s a lot of things that I like to say are more like defaults, right? Everybody is used to a CRM. Everybody’s used to, you know, emails and mobile friendly emails and, you know, dashboards, all of those things, KPIs, all of that is

default for anybody in tech, like every company, doesn’t matter what part of the company you’re in, you’re typically driven that way versus in real estate. That’s not the case, right? We’re starting to see a lot more companies get modernized, but very few of them at the time really had kind of some of that. And so just brought a lot of the things that I was just already used to in the tech world and applied it to our company.

Cody Crabb (07:08)
So, I mean, that’s pretty interesting. think I’m kind of fascinated by the idea that someone has like tons of knowledge in one space and just kind of transfers it into, because real estate is one of those things where pretty much any expertise could come in handy at some point. It’s just what you happen to know. So right now kind of in this market, where are you seeing operators kind of make assumptions that are maybe not

best like you said like maybe some of that analytical mind is not coming into play as much.

Feras Disrupt Equity (07:39)
Yeah, I mean the one thing that everybody was guilty of including us, right? I mean, 21, 22, right? We thought there would be more rent growth and interest rates went up really high and a lot of supply came online. And so it’s been, know, really the projections of rent growth just haven’t been there, right? And you know, some markets more than others. I mean, we’re based here in Houston, Texas. The bulk of our portfolios in Houston, Houston’s done very well, but we have some stuff in Austin. In Austin,

complete other side of the spectrum. mean, rents have gone backwards 30%. It’s very challenging for a lot of different reasons. And so I think that’s one of the biggest mistakes a lot of people had, which was really not understanding the amount of supply in the pipeline and the real impact it was going to have. I mean, interest rates, nobody could predict those, but supply and demand, we had a better sense of it. there’s just a lot, kind of that post-COVID world was just kind of wild. I remember

Values went down and then they shot up and then they crashed back down with interest rates. So it’s been a little bit of everything. I think a lot of people are, I mean, a of things, a lot of people are in pain, right? So the one thing I tell the team is like, hey, we’re sitting in a much better spot than most of our peers. And for those that aren’t in that much pain, everybody’s on the sideline. There’s a lot of wait and see. And that’s kind of the opportunity that we see today that presents itself, which is people know that we close deals, right? We can get things done.

sellers that need to make a transaction. We’re very close on a deal right now that we’re getting heavily discounted and it’s because they have to sell it by August. And who better than us to actually make sure we get it across the finish line.

Cody Crabb (09:13)
So something I heard you say, which kind of caught my eye was that your edge is kind of like systems and data kind of compiled into operations. So where does that kind of show up the most in the day to day?

Feras Disrupt Equity (09:27)
I mean, it shows up. And not to be kind of say generic saying, but it really is in our DNA, right? I mean, just kind of the expectations of people that, you know, the problem I have with property management specifically is that it’s a very old industry and there’s a lot of just, you know, you can almost say the same answer to any question, right? There’s a lot of just generic stuff versus the expectation is like, let’s drill down and prove to me the thing you’re saying. we’re getting, you know, ⁓ people don’t want to rent because our units are ugly. Is that really the case?

prove it to me like or you know is it that you’re not getting traffic or is it that you’re not really selling it is it that we’re mispriced right I mean there’s a lot of other things and so it’s been really kind of a big focus on. You know having the data to kind of support what you’re saying and then the other side of it too is having enough data to try to get ahead of the problems before they really manifest because that’s the other challenge that we have in multifamily which is. It takes sixty days for some of these problems to really fully surface on a financials and then it takes you another sixty days to.

try to salvage it. And so now you’re 120 days into a problem, versus if you could see it sooner, you could solve it sooner.

Cody Crabb (11:08)
or avoid it altogether, So zooming out, I’d be curious to know like what is the next 12 to 24 months look like for you? mean, things are changing so fast with tech especially and in the industry. I mean, first of all, I would love to get your kind of take on that, but I wanna hear kind of what is it that you’re kind of looking at changing and doing and developing in the next little while?

Feras Disrupt Equity (11:17)
It’s.

Yeah, I mean for us, you know, we’re really looking right now for distress situations that we can pick up deals at a heavy discount. That’s going to be the focus, right? You know, we’re we’re kind of almost vintage agnostic, meaning we’ll do the older stuff, which everybody is scared of that right now, which is, that’s where we’ve made the most money, but we got to buy it right. But we’ll also do the newer stuff. I can get it heavily discounted. So hyper focused on basis plays and being comfortable to distress. That’s why we have the management company, right? You know, we are uniquely positioned

to A, we’re in a market, Houston, which is growing, doing well. B, there’s still distressed deals in Houston and we’re headquartered here and because we have our own management company, we’re comfortable doing some of the hard deals. A lot of people can’t do the hard deals because they don’t, who’s gonna manage those, right? Versus us, we can manage our own deals. And so we’re really kind of trying to play to some of our strengths. And again, we have super deep relationships with the brokers and getting first look at a lot of these deals to find the one that, or two or three deals that make sense.

We’re hoping to get at least four more deals done by between now and the end of the year. So we’ll see.

Cody Crabb (12:33)
You mentioned distress properties. What are the first couple of… I mean, don’t know how much day-to-day you have on the hands-on looking at deals. You know what’s funny is that’s the answer I always hear from a CEO that’s built something that comes up from just him and then it expands and expands. For some reason, they just can’t let go of that part.

Feras Disrupt Equity (12:40)
More than I want.

Cody Crabb (12:56)
That’s the one thing. Well, anyway, so the reason I ask that is, you know, what are the couple of first things that you look at on these, on some of these distressed properties to know if it’s like a money pit or if it’s actually fixable and can be profitable.

Feras Disrupt Equity (13:08)
Yeah, I mean, there’s a lot of pieces. mean, first and foremost, like, I mean, you have to understand your markets, right? You know, is the market growing? Is it population growth? Is it job growth? Is it rent growth? And then from that, understand the sub markets. And that’s where it gets tricky, right? In Houston, there are some deals in areas that are great and some deals that are for someone outside of Houston, they think it looks like it’s reasonable location, but it’s really not. And so we quickly say Howard knows certain deals.

based on the value that the price are charging. Now, I’ll do a hard deal in a hard area if I get it cheap enough, right? But I think to me, it’s kind of that matchmaking of location, market, and the price point. And if those three things align, great. And so that’s where price point really matters. I mean, we track all our deals in all of our submarkets. And we try to see, in this submarket, we’re seeing deals come in 20 % below guidance, or hey, we see them 10 % below guidance, just to really understand, are we getting a pretty discounted deal relative to what’s been transacting?

And then from that, mean, you got to get out there, see the properties and dig into what’s going on more fundamentally, right? Specifically around, are they getting the occupancy and why, why not? And how is bad debt actually looking? Because bad debt becomes a lingering problem that really takes a while to clean out if you did not tenant the property well. And that’s fine. We can retain it properties. We’ve done that. We’re doing that now. But again, it’s got to make sense as part of the business plan.

And then, mean, there’s just a lot of other questions that we go into due diligence for a whole two podcasts to dig into, but it’s just try to understand the distress that they are in and why. So for example, they may play it off like they’re not distressed. And then you ask, well, can I see your AP report? And then you see that they owe a million dollars out to vendors. That’s distress. There’s a reason why you’re not going to pay your vendors. so then what does that mean? Well, does that mean that they’re not collecting enough money to even service their debt because they’re basically stealing, robbing computer to pay Paul?

you know, what are the ramifications of that? And that’s where usually that means they start, you know, cutting edges on deferred maintenance, right? Units aren’t being taken care of, ACs aren’t being fixed. And so you have to plan for that. so, you know, whenever we’re going into heavily distressed deals, we just budget anything and everything. And if it all comes in better than great, but we just plan for the worst, you know, hope for the best.

Cody Crabb (16:04)
That’s a really good way to look for it. always, yeah, plan for the worst, hope for the best. ⁓ Because you never know what you’re going to get into. mean, I’ve heard so many stories of people that, ⁓ you know, they’re doing a flip and it’s their margins are raised or thin already. And then they run into like, and now you have termites that you got to take care of. So that’s really good to planning on the worst case scenario. It’s only going to, it’s going to be either the worst case scenario that you’ve planned for or a great scenario that is not the same one as you planned for. So. ⁓

Feras Disrupt Equity (16:25)
Yeah.

Cody Crabb (16:33)
So that trucking the sub markets and all these things, mean, where are you getting a lot of this data? Because it sounds like you’ve got so much data that you’re working with.

Feras Disrupt Equity (16:44)
It’s just a lot of conversation with brokers. mean, we have brokers that will call us and ask us for data points. And so, I we talked to all the different brokers because we are kind of agnostic. I don’t work for a CBRE or for a Cushman Wakefield or a New Market. We talked to all the brokers. And so we see across brokerships of what’s going on. What are they seeing? What are they VOVing? Is it from lenders? Is it from sellers? Is sellers? It’s buyers.

Are they aligning or are they still disjointed, right? And really digging into all that. But having the calls is easy. It’s having the discipline to go in and put it and then make decisions off of it later is the more impactful and harder part to do.

Cody Crabb (17:24)
data is data. This just, it’s nonsense if you don’t. Yeah. Yeah, true. well, this is, all this has been really interesting. so I’d love to kind of get your, let’s say we’re in a, in a big theater. We’ve got a bunch of real estate investors that are kind of new to the new to the business, not new, new, but they’re like, they need some help. Maybe they’re solving a problem. and you have a chance to say, to give some them some advice to move the needle.

Feras Disrupt Equity (17:27)
It’s good to get it out.

Cody Crabb (17:50)
in the best, for the most of them that you possibly can. What advice are you going to give them? I’m handing you the mic. What are you going to say to this crowd?

Feras Disrupt Equity (18:00)
Yeah, I mean,

what I’m telling them is slow down, right? Like, don’t feel rushed into a deal. And you want to invest with people that you like, and trust and spend the time to get to know the operator. Because in this business, know, as much as because everybody in and it’s almost interesting because we see this like we’ve done deals where we tried to do deals like where we didn’t know the deal we’re investing in. We just told investors, hey, we’re investing in 90s product in Houston.

Right. And we don’t see as much interest in that.

But then if I told them, I’m investing in this property, it’s whatever Oak’s Apartments located at blank address at this 1990 construction, people are a lot more apt to it. And I think that’s the fallacy. want to feel like they see and they feel the deal and they know the market versus you really 90 % of success just boils back to the operator. And so you are backing the jockey, not the horse. And so really spend time. I told them.

our investors come out to meet the team, come out to our office, let’s go towards some of our deals, let’s go do some hands-on stuff, right? And that has an operator, as an investor, sorry, it’s all about the operator. And I think my big advice is go get to know them. I mean, you’re making a big investment. $100,000 investment is a big investment for most people, right? Sometimes it’s one of the biggest investments they’ve done, right? Outside of buying their house and maybe a down payment on the house. And so really spend the time and treat that with respect.

And you want to go invest in an operator that also treats it with respect. I respect our investors’ equity, but it’s not something to scoff at.

Cody Crabb (19:29)
Well, this I think you’ve given us a lot of kind of different perspectives to think about, especially the I love the the prepare for the worst plan for the best plan for prepare. Is it prepare for the worst plan for the best or plan for the best prepare for the worst? Yeah, that same thing. Cool. Well, I love that. And for the worst hopeful hopes for this. Yeah, there you go. There you go. Yeah, I love that. That’s that’s a super good takeaway here. So if people want to kind of work with you, find out more about what you do.

Feras Disrupt Equity (19:42)
Yeah, yes.

No, it’s just plan for the worst, hope for the best. That’s what’s confusing. It’s plan versus fail.

Cody Crabb (19:58)
Who should they be, first of all, and where can they find you online?

Feras Disrupt Equity (20:02)
Yeah, mean, go, you know, want to, you should be an accredited investor, right? That’s a kind of ultimate the people that we invest with and check out our website, disruptequity.com, or you can email me directly, FERAS [email protected]. We’re happy to kind of get on a call, show, you know, show what we do, right? Our team will happily walk you through deals, walk you through them. And if you’re out here in Houston, please come by, come visit us, come say hi.

Cody Crabb (20:25)
Well, thanks again so much for your time, Feras and thank you listeners as well for joining us. If you liked what you heard today, go ahead and give us a like, subscribe, comment, follow, review, do all the things so that you don’t miss another awesome conversation like this one. Feras, once again, it’s been a real pleasure. We’ll see you next time.

Feras Disrupt Equity (20:41)
You too. Thank you, Cody. Appreciate it.