From Single-Family Homes to Multifamily Ventures With Special Guest Arn Cenedella

In this episode, we welcome Arn Cenedella from Spark Investment Group, who shares his extensive experience transitioning from single-family homes to multifamily syndications and provides invaluable insights for aspiring real estate investors.

All right. What is up and welcome back to how to invest in commercial real estate. We have a super exciting show today because we have a guest on the show. We always love guests, find out new stuff. Um But before that, we just closed on our Amarillo shopping center. Super excited about that. Um Martindale is the name of that. So that one filled up pretty quick. Um We should pay out a third quarter distribution on that. Um We should have almost a full quarter there. So cash on cash projection and I think it's like 1213, 14 cents that's decent. And then we've got another Houston uh shopping center coming up. Yeah, we are closing on that in 40 days. So we should have rough legal documents back. Um mid next week. I would imagine we're launching this out to the investor list here in a few days. Um Yeah, closing on that, I think late August and um it is a um grocery anchored center in Houston. Um Yeah, we, we, we love that deal. Super excited. All right.

Well, without further ado, we are going to get right into our show today. We have a guest, ARN um, Cinna from Spark Investment Group and he is going to give us a little background on multifamily syndication. I know everybody loves multifamily investing or, or residential housing, residential housing investment. Um So without further ado, ARN uh give us a little background on yourself and, and kinda how you got into this and, and I guess where you are now in, in the space. Um, we'd love to hear it. Yeah. Great. Aaron, uh appreciate you having me on the show. Look forward to having a good chat. Hope hoping to help your listeners uh further their investing a journey. So uh appreciate the invite. Look forward to chatting with you guys. So how'd you get started in commercial real estate? Tell us. Yeah. Yeah. Well, that, that, that's the whole story. So, uh I'm 69 years old, so I actually got in the real estate business way back in 1978 and um it was kind of a fluke was in grad school, studying Chemistry of all things and uh at the University of Michigan go Blue.

But um uh decided academics weren't gonna be my lifelong passion. Uh And so I wanted to do something else grew up in the San Francisco Bay area basically on the peninsula. Uh uh What people now know better is Silicon Valley called my dad up and said, hey dad, I think I'm done with school and he said, uh well, come on out I get your real estate license and I'll put you to work. So he had a residential brokerage business in Menlo Park, California, which is basically next to Palo Alto kind of venture capital of the world Sand Hill Road. If, if folks are familiar with that, that area of the country. Um So I started a residential brokerage business and uh started buying single family homes as a rental, did that for about 35 years. Uh did well, was blessed to sell real estate and probably the greatest residential market in the world.

And then about 10 years ago, moved to Greenville, South Carolina. Uh I was ready just for something different. And about five years ago, moved my personal portfolio of single family homes and kind of my residential brokerage business in the multifamily. And now I've done probably seven or eight either syndications or joint ventures, multifamily here in Greenville, South Carolina where I live. And uh I've enjoyed the transition, uh a lot of opportunity in commercial real estate and one of the great things I they like about it, it's a kind of team sport. So you can partner with people who have skills that maybe you don't have and allow you to kind of accentuate your personal strains and together form a team that's really, you know, an effective investment tool and help other people invest in real estate. So that's, that's 45 years condensed as quick as I can.

That's good. It'll, it'll uh cause for some questions. So uh you did, you did uh residential brokerage and uh single family home investments for 35 years, you said you transitioned the single-family portfolio into multifamily. Talk to us about that. How many uh single family homes did you have? And then what did that transition look like? What, what did the transition from residential to commercial look like for you? Yeah. So uh at one point, I probably ended up with 3540 single family homes and that could have been in the San Francisco Bay area as well as Austin, Texas. I kind of have a knows to find kind of ascending markets got into the Austin market back in 4001. And of course, I think most of us know what's happened to Texas in general, Austin in particular, of course, there are a lot of other great markets in Texas. Um interesting because a lot of residential real estate brokers don't really invest in real estate and it, it kind of doesn't make any sense to me, right?

I mean, you guys know as an investor, your competitive advantage is knowing the market, right? And whether you're in retail multifamily, industrial single family homes, knowing your market, knowing your submarkets is really your competitive advantage. And my father who was a single family investor and interestingly enough, never went to multifamily, he went from single family to multi-tenant office. That was his kind of transition. And what he told me when I came to work for him was use the brokerage to create income, use the income to create capital. But if you really want to be financially free and wealthy, you can't do that off brokerage, you can't do it transaction or you need to use that capital invested in real estate long term that creates wealth as well as income. So I just kind of followed in his footsteps.

Um And then when I moved to Greenville, I continue kind of the single family rental. But I made friends with a young guy who had gotten into syndications. Uh And right about the time COVID hit March 2020 I can remember the phone call to this day. He called me up and goes, hey, ARN what do you think is gonna happen with rent collection? So this was about March of 2020 when I think most people finally understood COVID was actually a real deal and something we had to deal with. And I told Mario, I go, hey, I don't know, I got my March rent call me April 5th. And I'll let you know how the rent collection went in April. And at the end of the call, he turned me on to a podcast about multifamily. And essentially, I kind of started consuming those podcasts and kind of a light bulb went off in my mind. And that started the transition of multifamily a little over four years ago.

The other part of it was with the single family. I generally did a lot of self managing, at least for the properties that were in the location I, I lived in and, uh, I got less enamored to that. So I had to find a partner who loved the multifamily or sorry, loved managing property. Uh, I like, I love kind of hunting deals, networking with people. So that's what I do. I'm the deal finder. I'm the, I'm the hunter, but I need somebody to kind of operate the day to day thing. And when I found him, that's when I kind of moved to multifamily. And from there, I started selling single families, transitioning the cash, uh the multifamily. So that's kind of what I did. Your multifamily is uh existing properties. Is that right? Or are you developing? Uh, we have not done any ground up development, but what we've been on to recently is buying new construction at co from builders.

Uh So as you know, multifamily volume has dropped quite a bit. And if you think about a property that somebody's owned for four years, maybe they got 4.5% debt on it and it produces a certain, no, I, well, if I'm to buy that property, I gotta pay 6.5 now. It's the same. No, I, but I gotta pay 6.5 percent debt. So the property is actually worth more to the existing owner than it is to me as a new buyer. And that's why multifamily sales volume has gone way down. And so I started to think, well, who are the multi, you know, who are the motivated sellers in this market? And I would say it's builders, right? Builders build to sell, they take their profit, they go on to the next deal. So our last couple deals have been small build to rent duplex communities where basically we sign a forward purchase contract and buy them at completion.

And we've now completed maybe three of them. And we're happy with that. We still look at existing product, but there's still kind of that price differential, at least in the multifamily space that makes it hard to buy existing assets. Uh The other thing is I probably don't have the Gonads to do ground up development. I'm an old guy, old school and uh I'll leave that to people who know development a little bit better than I do. Interestingly enough, you mentioned that the existing owners may have a lower interest rate. So the value is different uh for them than it is for a purchaser. But with new construction, they're gonna have a construction loan that's gonna be at 7.5 8.5%. So, uh that matches up well with today's rates. Uh So you don't have a big drop off in value there, correct? And you know, most builders developers they're not really long term buy and hold investors. It's not what, what they enjoy doing. It's not what rocks their boat.

It's not how they make their wealth. And so I think it's a good fit because I'm very much kind of a long term buy and hold investor. Uh uh you know, flipping apartment buildings was kind of all the rage back 2019 2021. I think that was a historic Anno anomaly period where I think now the investing is gonna go back back more to kind of this long term approach, which is what I've always been taught and kind of what I've done. And in my mind with real estate, if you buy it properly, you operate it properly, you set the debt structure up properly, have ample cash reserves, you just hold that property till it's a good time to sell and then you take your profit. Uh The only people who ever get hurt in real estate are those who kind of get over leveraged, can't afford the property and then maybe forced to sell in a down market.

So if you don't allow yourself to get in that situation, 57, 10 year period, you're almost bound to win and that's kind of how I do it. So talk to us about uh your syndication setup. Um Did you have investors or did your partner have the investors? How did you go about finding them? And then, then after that question is answered, talk to us about the structure of your syndication. So our listeners can understand, you know, how other people are syndicating deals. Great question. So I have a long career in real estate. I have a good database of people in the San Francisco Bay area, fairly wealthy area. Uh Most people understand real estate is a good thing to own and either they don't have the time or the knowledge or the expertise to run. It seems like a lot of work and it is a lot of work and you need to know what you're doing. So a lot of our investors come from the Bay area, kind of my past residential clients, many of them who also own a handful of rental properties, you know, in the area or whatever.

Um My partner Brian is a property manager who maybe manages about 500 single family units in Greenville. And so he has a built in database of investors who know he does a good job with their rentals. And so then the transition and go, hey, we're doing this syndication. Buying multifamily is good. Um I'm very active on social media. We're locked into the Greenville real estate scene and uh a lot of our investors are local. They see what's going on here. They want a piece of it. And uh that's where our investor come from. We're trying to increase our capital raise capability and we're gonna start kind of more formal linkedin campaigns and so forth. But most of it has been kind of pre-existing relationships and reaching out to the local community. Sounds great. Yeah, we're, we're similar. Um We're always trying to increase our capitalizing ability.

So talk to us about your structure. What kind of returns are you shooting for? Uh What kind of ownership do the LP S get uh that kind of stuff? So, um our approach to investing isn't probably for everybody. Uh I'll say I'm not a cash flow as king investor, I'm more looking at kind of total return over time. And I'd say I'm also a little conservative. So I'd say I'm more kind of um core, core plus type investor as opposed to a heavy value add. And, and of course, my approach resonates with a certain subset of investors and doesn't work for other investors. And I think as you develop business and look for investors, you have to understand your approach isn't going to appeal to anybody, find the people that like the way you're going about doing it and really double down and work with them.

So um we generally use low leverage fixed rate debt. So we don't have any problem putting 40% down, 45% down. Uh And most of our multifamily deals, we're probably projecting an average cash on cash return 5 to 6% over a five year hold and LP irrs maybe 13 to 15. And I can say on every deal we've done, we've exceeded projections. So, you know, 6% cash on cash. 14 irr doesn't sound too sexy. But I ask investors, well, would you rather be promised 10 and 18 and get pause distributions? Uh Then they kind of see maybe slow and steady is the way to go. Uh The analogy I make is our approach is kind of line drive base hits as opposed to swinging for the fences and the home run in the grand slam again, not for everybody, but for our investor da database, it works.

So that's kind of the deals. We do 5 to 6% cash on cash, 13 to 15, irr we're ahead of projections on everyone. Um And then typically we'll offer a 7% pref and maybe a 7525 LP GP split. So fairly standard. The other thing I would say is we tend to do smaller deals. Our sweet spot is kind of maybe 4 to $8 million. So we like that, we actually like the sub 100 unit multifamily uh because it's easier to get in and get control of that asset and turn it around, the bigger the asset, the longer it kind of takes to turn around the asset, we kind of like to get in, turn around an asset, get that running smoothly and then move on to the next deal and do the same thing. No, I I like it. Yeah, we have a different, a different model.

It's a little bit more aggressive, a little bit higher returns, but there's nothing wrong with delivering returns to investors. And if you're delivering a 14% irr consistently, then, then that's great. How long, how long are you thinking you're gonna hold some of these properties? Uh So, um that's a great question and I would say it kind of depends on the market. Uh You know, right now, most of our deals, we have fixed rate debt, either high threes or low 4%. Uh In general, we probably got another 3 to 5 years on that debt to run. So, not a great time to sell. Not a great time to refinance. We're just gonna ride the boat, keep increasing income and rents and keep increasing cash flow. And then I think hopefully there'll be a period here. Ah Who knows? I don't have my crystal ball, but maybe 1824 months from now, rates will be a little bit lower cap.

Rates will come back down a little bit accordingly. And there might be an opportunity to either sell or refinance at that time. And our deals are small enough. You know, our average investor maybe writes a check for $50,000 per deal. We have a few bigger investors, but most of them are around 50,000. Uh And typically we maybe have 30 40 50 investors in each deal. I think when the opportunity arises to either refinance or sell, we'll try to get a reading from our investor base to see what they kind of like to do. And maybe those who want out, we take them out when we refinance they can cash out, they get their profit, they move on and then others might want to go. Hey, let's refi into 57 year agency debt and ride the wave another five or seven years. I suspect the majority of our investors will opt to stay in and keep riding the wave.

And that's what we'd actually like to do too. Um So that's kind of the plan, but it, it all depends on the market. Your philosophy is not too much different than ours, your current thinking and that it's not a great time to sell right now. Our, our uh multi-tenant retail uh not a good time to refinance. So we're, we're kind of holding on to those assets as well. And the beauty is if they're cash flowing and performing and you're sending distributions to the investors, sit back a little bit and enjoy the wave. I mean, uh unlike some people in the multifamily space who are pausing distributions and, or asking for more capital, that's a nightmare as an LP. But as an LP in one of your deals, if I'm getting my distribution, everything's going good. I'm a happy camper. So you said when you look to recapitalize one of these assets or, or some of these assets you may look to kind of take a pulse from the LP S and see if some of them may want out if I was an LP in that deal and said, hey, you know, I, I ran the first five years.

I'm happy with this return. How would you negotiate that? Buy out with the LP? If, if, if most of them or a lot of them are staying in? Yeah, that's a great question. So uh we'd have to somehow fairly accurately determine the value of the asset at the time that happens, right? Uh And that could be lender appraisal could be broker, opinion of value. Uh We haven't really quite figured that portion out. Uh But the, the way we think about our investors is there are partners and to some degree, we're honored to have the awesome responsibility of handling their money. And so they deserve a a and they're giving us the opportunity to participate in larger commission deals, larger commercial deals.

And if we perform for our investors, we're going to be compensated and that compensation is going to be earned. No problem there. People understand that. Uh But I think if you always keep in the back of your mind, what's best for the investor? You create that loyal database of investors who are gonna invest in future deals. So, maintaining good relations with the investors is really key. Uh you know how hard it is to bring in a new investor And so if you have an investor who's uh invested in two or three deals with you, uh he or she's likely to invest with you again. So we'll figure out some equitable way to determine that value and, and distribute accordingly. I mean, if you guys have any thoughts, if you've done it, I'm happy to listen. I mean, I would say that um you know, when you sell a property, you eliminate all the risk and so you can give the investors the full value of their shares.

But if an investor wants out prior to a sale, uh they're gonna have some discount to that value because um as the owner and the other investors, we're retaining the risk of something going wrong in the future or not getting a certain purchase price in the market. And so, you know, we would come to a reasonable solution. Uh But let, let's say that they invested 100,000 and, and today's value of the property at full market value might be 200,000 at a buy out. I would, I would assume there would be some discount given and maybe they get 100 and 75,000 or 100 and 60,000 today to take their money and they eliminate their risk while we all retain some, some amount of risk holding the assets, something like that. But like you say, being a fiduciary for their investors is always important. And uh you know, treating them with fairness, reasonableness um allows them to keep investing with you because they trust that when things happen, you're gonna, you're gonna do the right thing uh with regards to their equity. So, yeah, I, I, I like that app. I, I like that approach.

You can give the investor an option and you wanna buy out X or do you wanna stay in the deal? Because legitimately as an LP, they're in for the duration of the deal at the direction of the GP, right? So if, if we decide to refine and want to hold another 57 years, we're certainly within our rights to do that. So by then offering them an option, uh uh that gives them a decision and they may say, hey, no, I wanna stay in or hey, I'm happy with the return. I got, I'll take my cash and go. So I like that approach. Yeah, I think the other thing you have to consider is whether or not you're buying it as a sponsor or personally or whether or not you have to get the rest of the investors on board to buy them out as a company, right? And then, and then you have to go back to them again. Hey, not only do you want to stay in, but now are you ok with buying out half of the equity at, at this price and injecting more possibly. Um That could be an interesting conversation anyway, it it's always difficult, I think to recapitalize.

Um And, and also 1031 exchange. Right? I think that's a big question. I don't know if you all um look at doing that at a sale. Obviously, it can get very complicated. Um as the general partner, you may even have to do, you know, tenants in common um on, on the next deal. Um I don't, I don't know how you feel about that. So that's another great question. So I'm in L, I'm an LP and probably seven or eight deals. And about two days ago, I got an email from a GP and ad I and an LP and then they go, hey, we're selling the property, it's gonna close in August. And do you wanna stay in and as a 1031 investor in the next deal or do you wanna be cashed out? So they kind of presented the option to me. Uh I did invest as an LP in another deal where the sponsor was rolling a 1031 into the new deal.

I came in as a cash LP into the new deal and he rolled in about 80% of his existing clients in the prior deal into the new one. So, um you know, as an individual investor, 1031 is a great tool uh to uh defer Uncle Sam's tax bite out of your equity, allow you to kind of multiply and, and grow your portfolio. So 1031 is a great tool as an individual investor. Uh And so I think it does have some value to syndication investments. But as you indicate, it is a much more complex dynamic to put it all together. There's more moving parts. I do see more sponsors kind of going to that. Uh So it'll be interesting to see what happens over the next couple of years and how, how preponderant that that approach becomes.

Well, uh man, super interesting to, to hear about your success and about the history you've had in commercial real estate. If our investors and listeners want to get involved with some of the stuff you're doing or at least even want to find you on the internet. Do you have some website company name that we can send them to? Yes. Uh Appreciate the the question and the opportunity. So it's Spark Investment Group. Uh I'm very active on Facebook or linkedin, either other under armed CIN Aella or Spark Investment Group website is simple, invest with spark.com and so people can find me and we pretty much stick to Greenville, South Carolina where I live behind me is a bridge in down town where there's a river and waterfall. So we have a narrow geographic focus. But within that geography, we'll buy seventies product to new products. So it's more about the geography and our local knowledge than we buy assets that make sense to us.

Yeah, I love that. I love that. I think that's a super intelligent move and I, I see a lot of people around here specifically in Tulsa that, that only buy in Tulsa, right? Tons, tons of people. Um But anyway, ARN thank you so much for coming on the show. I, I think the listeners will get a ton of value out of today's conversation and everyone else we will catch you next week on how to invest in commercial real estate.