Apr 26, 2023
Today’s guest is Kunal Dewan
Kunal discovered his passion for real estate in 2010 when he acquired his first rental property in Southern California, while still working full-time as a civil-structural engineer. Over the next decade, he utilized his engineering and management skills in construction and value-add projects to invest consistently in rental real estate, building a strong cash-flow portfolio.
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[0:00] Intro
[0:42] The 3 questions
[1:28] Multifamily
[6:00] The 3 myths of passive investing
[12:15] Too much value-add?
[20:00] Types of debt
[23:42] Closing
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Connect with Kunal:
Linkedin: https://www.linkedin.com/in/kunaldewan/
Facebook: https://www.facebook.com/dewan.kunal
Connect with Sam:
I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
Facebook: https://www.facebook.com/HowtoscaleCRE/
LinkedIn: https://www.linkedin.com/in/samwilsonhowtoscalecre/
Email me → sam@brickeninvestmentgroup.com
SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson
Apple Podcasts: https://podcasts.apple.com/us/podcast/how-to-scale-commercial-real-estate/id1539979234
Spotify: https://open.spotify.com/show/4m0NWYzSvznEIjRBFtCgEL?si=e10d8e039b99475f
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Want to read the full show notes of the episode? Check it out below:
00;00;00;02 - 00;00;20;20
Kunal Dewan
So the number one myth the president has to go through, they look at the property, they look at the market, the business plan, but they don't look at the property manager. You're the actual person who's going to make your dream a reality. They don't look at the leasing agent. They don't look at the regional.
00;00;20;20 - 00;00;23;29
Intro
Welcome to the How To Scale Commercial Real Estate Show. Whether you are an.
Active or passive investor, we'll teach you how. To scale your real estate investing business into something big.
Sam Wilson
Kunal Diwan is an engineer by education, an entrepreneur by choice, and a real estate investor by passion. Gardner Welcome to the show.
00;00;41;11 - 00;00;42;29
Kunal Dewan
Thank you. Excited to be here.
00;00;42;29 - 00;00;53;03
Sam Wilson
Sam Absolutely. The pleasure is mine. Kunal There are three questions I ask every guest who comes on the show in 90 seconds or less. Can you tell me where did you start? Where are you now and how did you get there?
00;00;54;29 - 00;01;28;04
Kunal Dewan
I started in Southern California almost 20 years ago when I put a condo with a small condo. And the journey since then in the last two decades with my engineering background, construction background, slowly scaling up to duplex a triplex two for like two small multifamily, two syndications. And here right now in my journey, I am going towards a vertically integrated firm so that we can take down larger assets and create passive income cash flow for our investors.
00;01;28;18 - 00;01;36;29
Sam Wilson
Wow. Oh, that's really, really cool. So let's let's hear what what type of assets are you buying right now, then?
00;01;38;11 - 00;02;02;24
Kunal Dewan
Multifamily. I only do multifamily, Sam. I've been doing multifamily. I understand multifamily. I'm confident multifamily. About 13 years of my life. I must I used to be a structured engineer in my previous life. So used to build design and build tall building skyscrapers, you know, residential, and then went to hospitals and then to mixed use and then to multifamily.
00;02;03;01 - 00;02;09;04
Kunal Dewan
And then that's when I say, you know what? This is what I want to do for the rest of my life. So I only focus on multifamily.
00;02;09;13 - 00;02;18;01
Sam Wilson
I love it. I love I love the focus. Have you ever dabbled in any other asset classes or is it always just strictly been multifamily?
00;02;18;27 - 00;02;46;05
Kunal Dewan
You know, I started looking into self-storage for a little bit and, you know, and I'm glad I did. As I looked into self-storage in my extended friends circle, I have friends and extended family who invest in hotels. And so I looked into that and there are car washes in their extended family. But I'm so glad I learned about all this so that I know I don't want to do that.
00;02;46;23 - 00;02;55;29
Kunal Dewan
So it kind of just helped me further go deep in what I do already. So that's why I only do multifamily because I don't want to do any of those.
00;02;56;14 - 00;03;05;06
Sam Wilson
It sounds like you have found the power of focus to be part of your success strategy. Can you can you speak to that?
00;03;06;22 - 00;03;32;01
Kunal Dewan
Indeed. You know, I. I don't do multitasking. I hate multitasking. I'm a strong believer of one thing and just one thing at a time and just do really, really good. So it applies to be time with the family, be it business, be it anything else. Now I'm guilty. That's not how I used to be, because I started with a W-2 job.
00;03;32;06 - 00;03;59;12
Kunal Dewan
I'm a first generation immigrant, right? I mean, I started with $400, 20 years ago. I had to build something while I was doing my job. So that was my engineering. And I did my residential real estate eight years ago. And then after that, I built my first business, you know, and I started out with 20 $500 to that to multiple seven figures, multiple unit while I was doing my job.
00;03;59;24 - 00;04;21;16
Kunal Dewan
So that was the time where when I was realizing, you know, in my early twenties, I can do I can rule the world, I can do everything only to realize, no, you got to go deep if you want to build up. So going back to engineering, the foundation has to be wide, it has to be deep so that the structure above can be as high as you want it to be.
00;04;21;25 - 00;04;45;28
Kunal Dewan
So when I quit my W-2, I went all in on my business, my first business, then I went all in on my residential portfolio and started making as a passive investment. So my business is fully passive. Great team. I have a team of 20 plus people, they manage it. My residential portfolio, I have great people, handymen, managers manage that and now I'm going all in in my real estate syndications.
00;04;45;28 - 00;05;11;19
Kunal Dewan
You know, I have done for syndications in the last 12 months and there are two in the pipeline right now as we speak. So and this is all I do right now. So the power of focus is so valuable. If you want to go long and far and truly create impact, I can talk about the same in my personal life, but I think you get the point one thing and just one thing at a time.
00;05;11;25 - 00;05;34;29
Sam Wilson
And just one thing, man. And I wish I had met you about five years ago, and you could have given me that speech then, because that's that has been the theme of, you know, somebody asked me this in December, and it's like I look back at everything we've done to this point and I'm like, you know, it's all going very well, but is it as great as it could be if we focused and just stated one thing?
00;05;34;29 - 00;06;00;03
Sam Wilson
And so we said, Hey, what do you do in 2023 to make it more meaningful? And I said, it's going to be focus and team like we are just focusing. So I love that. I love the way you've said that one thing and one thing alone in that that can be hard to do to turn off, especially with the, you know, for the for the entrepreneurs in our in our midst like you, I can imagine that the temptation to look elsewhere because there's always good opportunities coming our way.
00;06;00;03 - 00;06;12;08
Sam Wilson
That's tough to say. No, but I love I love where you say in there on focus. Let's talk about the three myths of passive investing. I know we mention this here off air, but we'd love to get your insights on what that means.
00;06;13;21 - 00;06;38;14
Kunal Dewan
Yeah. So, you know, when I started into real estate syndications, where now I'm going outside my own personal equity in creating equity for other investors around me friends, family, neighbors, coworkers, and then their circle, they don't have the real estate. I call it burn out that I went through. They don't have the scars and the wounds that I went through as a landlord.
00;06;39;00 - 00;07;02;01
Kunal Dewan
And Ruth's syndications have gained popularity in the last few years. I'm less than a decade, right? So and now we live in I live in Southern California, and the entry level is the bar is pretty high. And plus there's regulation and lots of red tape. So we start looking to outside California to invest and the questions coming up, you know, okay, yeah.
00;07;02;01 - 00;07;30;05
Kunal Dewan
You know, 80,000 a door, $100 in the door. Great business plan. Fantastic. All good stuff. And that's what that's all. They stopped the passive investor to stop that at that level. So the number one myth that passive has to go through, they look at the property, they look at the market, the business plan, but they don't look at the property manager, the actual person who's going to make your dream a reality.
00;07;30;25 - 00;07;57;25
Kunal Dewan
They don't look at the leasing agent. They don't look at the regional, you know. So that was the reason that I am going into a vertically integrated firm because now in our company, in our partnership, we know the leasing agent, right? We know the handymen and the cousin who are doing the job. There's a relationship. So the gap between the business plan and the execution, the risk gap is very small because we have the control.
00;07;58;00 - 00;08;21;18
Kunal Dewan
So I encourage all passive investors. There's nothing wrong in getting a third party property manager, but look at the track record of the property manager. Look at the challenges of that property management business right now in that market. Look at the the failures and success. Right? So that's that's my number one. Number two is we talk about data a lot.
00;08;21;27 - 00;08;45;24
Kunal Dewan
You know, look at the data. Look at the data. That's great. And we look at the gateway markets, you know, like L.A., Southern California, great market invest. It has some lots of troubles. But so you had the market, you have the data, I call it the selective data, the data that kind of feeds your by box. So but they don't look at the big picture.
00;08;46;13 - 00;09;09;09
Kunal Dewan
And in this picture, where does the sponsor fit in? Right. So, I mean, you are you are a sponsor. You know, your market back of your hands and. Right. And you had the data for that market. I would encourage I was your passive investor. I will ask you, hey, in your market, what are the bad points? Give me the data for the bad points.
00;09;09;09 - 00;09;40;12
Kunal Dewan
So people think if I invest in get me markets, my investment is secure. Nothing can be further from the truth because who who is more important than what and where? Yeah, that that's the number two myth. And the third one, my favorite. And a lot of people cannot get their head wrapped around this. And this is coming from my, my construction background in my, my value project when I did buy for myself is I call it the too much value add.
00;09;42;06 - 00;10;04;22
Kunal Dewan
Every neighborhood has a cap depending on the income, depending on demographics, depending on so many different factors, you know, job and employers, there's a cap there's a cap on the rent. This cap on the even the house price that people are buying right. So people think, okay, I'm going to give I'm going to remove the the plywood. I'm going to remove the countertops and put some granite.
00;10;04;27 - 00;10;24;11
Kunal Dewan
There you go. That's 80 bucks. I'm going to remove the carpet, put some laminate flooring or tile flooring. That's another 80 bucks and rent. And they keep on tacking on this and they keep on calculating the extra revenue that product will generate. Right. Well, if you look at the graph from a mathematical perspective, the amount spent and the return received, right.
00;10;24;25 - 00;10;57;01
Kunal Dewan
That graph, that's a there's a 200 of your rent gap between a great product and a product that you are buying. That graph has a really high growth in the beginning of the renovation, the first 5000 are you will spend you will get instant $80, $100. And if a dollars rent bar which is great sure but the last 5000 you will spend whatever that is, you know, build an extra countertop or a wire, five, package, security pad, whatever that is.
00;10;57;01 - 00;11;19;05
Kunal Dewan
The return on that last is not the same as the first, so people tend to average it out. Okay, there you go. That's my average increase in rent by the money spent in CapEx. But that's not the way to do this because the last bottom 20%, 40%, that value add is not necessary. It's not because you're past the market.
00;11;19;11 - 00;11;40;19
Kunal Dewan
So look at the value add plan. Look at the market, look at the comps, the true comps. I am a passive investor myself where I invest with other people. You know what I do, Sam, was that I called the market. I called the market myself before I spend my another 100 or 250 K as a passive investor, I ask you what are the amenities?
00;11;40;24 - 00;12;07;28
Kunal Dewan
And they're this like a trash valet, and then there is a pad fee. I get all of that. Now I know this is my spectrum, this is the bare minimum rent and these are all the extra things happening based on certain amenities and the finishes. Then I come back to my plot where I'm at, and then I do my math myself and then I come up with the, the sufficient value add and I look at the too much value add and then I make the decision.
00;12;08;03 - 00;12;15;01
Kunal Dewan
So that's my number three myth that every passive investor should consider before sending that money to the sponsor.
00;12;15;01 - 00;12;41;09
Sam Wilson
Love it. I love it. That's a great that's a great very simple to understand, but great points you made there on, you know, the three myths that of passive investing. But let's let's talk about this too much value add maybe a little bit more in detail. When you say that, is this is this subjective? As in you say, okay, you know, each property is going to have its own version of too much value add?
00;12;41;24 - 00;13;04;17
Sam Wilson
Or are there things that you see kind of across the board that sponsors are doing, such as the I don't know, the things you mentioned there, you know, wi fi packages, security cameras, etc., that just aren't getting that same return on investment that other things like flooring and countertops might. Or is it again, you know, the beginning question, is it a subjective thing or it's a property by property basis?
00;13;06;00 - 00;13;14;07
Kunal Dewan
Yeah. So great question. Easy answer is it's a half, half art and half science.
00;13;14;13 - 00;13;14;23
Sam Wilson
Okay.
00;13;15;11 - 00;13;38;13
Kunal Dewan
And the way to look at it is, let's say you have two exactly same properties, literally on one side of the street, right, facing each other, exact same unit count mix, yada, yada, yada, right. And assuming the demographics do not change between the 40 foot wide street, right? Because demographics can change drastically, especially in big markets where you had where we are.
00;13;39;01 - 00;14;03;10
Kunal Dewan
So assuming all that right now, you look at a small one mile radius, it's a long answer to your short question. But I really want to give some inside the way I look at you'll get a one mile radius. Don't go too far. Just one mile, and you can get the income and the demographics and even sometimes the number of people from depending how far you are from the census in that neighborhood, right?
00;14;03;16 - 00;14;28;23
Kunal Dewan
Then you go three mile and you go five miles. So if you can draw these circles based on this income, you know, whatever your cap is, my cap is 33%. 33% is my maximum rent a family would pay. Right? So I backtrack. This is my maximum spendable money on the rent or other expenses, plus -2 to 3%, including amenities.
00;14;29;00 - 00;14;58;05
Kunal Dewan
So let's say if the income is $100,000, that's $33,000 plus minus two three. That's a 36. That's three grand a month. So I'm talking here in Southern California, right? I invest quite a lot in Central Coast in California. So let's say $100,000, $36,000 is my total spendable money when it comes to rent and related expenses. So three grand a month, these two properties, this property is renting out, let's say 20 $900 with some basic finishes.
00;14;59;15 - 00;15;32;13
Kunal Dewan
My property has older finishes and I can pump it up with some flooring and some current up, some nice paint to 30 $100. Right. I'm already ahead of my my underwriting and the market. Yeah. Anything over is not going to create a huge return without compromising my economic vacancy or physical vacancy provided the income in my one mile radius.
00;15;32;13 - 00;15;53;25
Kunal Dewan
The math that I did is changing. So I look back five years or ten years. If the income is changing, the growth in the income is high enough, then I'll build this in my value add plan. But if the income is growing at 2% 5%, well, I'm going to build my disposable income to a similar number. So maybe 20 bucks.
00;15;53;25 - 00;16;28;09
Kunal Dewan
30 bucks. Why would I spend, you know, taking down the walls and adding a loft size living room and a $30,000 CapEx expense when I'm only going to get 5000 dollars extra? That's what I meant by extra value. So look at these numbers at a very molecular level because real estate is not local. It's ultra local. So look at all that and then make the decision what's my right value as I draw spectrum bare minimum value add, desired value add and too much value.
00;16;28;12 - 00;16;42;17
Kunal Dewan
So in every business plan of mine I have a spectrum. So when we present that to our investors, we go with the desired value plan. Many times we don't even have to do that because the rental growth is sufficient or our execution is efficient.
00;16;44;13 - 00;16;54;20
Sam Wilson
I love I love that. And so even in your deal decks, you will you will put out there the one, two, three, would you call that the minimum desired and too much?
00;16;56;15 - 00;17;15;13
Kunal Dewan
I do. Only two and three. So so we actually put to the lender, we talk about everything so we can have the CapEx budget ready if we need it. But internally, so we do two underwriting. One underwriting is internal that I do myself where I know, okay, this will yield here, but too much data sometimes can blindside investors.
00;17;15;23 - 00;17;24;15
Kunal Dewan
So I kind of just pick one. This is the plant based on this these that returns and we know anything over is just cherry on top.
00;17;24;23 - 00;17;56;06
Sam Wilson
Right right. Oh, that's really, really cool. I like I like the way you think through through that I've not quite heard this that clear of an explanation of value add. I mean you hear that term but but but the too much value add idea and how to can quantify and qualify what that is tell me about what you guys are buying in the multifamily space right now and how that has changed over the last 12 months.
00;17;56;06 - 00;18;23;21
Kunal Dewan
Great questions. And we can talk about another hour on just on this topic. A lot has changed in last 12 months. You know, the the deck was cheaper. It's a whole lot easier to execute right now. We all know what the seller is asking and what actually made sense. The gap has widened drastically. I mean, I was reading a report just a few weeks ago.
00;18;23;28 - 00;18;51;27
Kunal Dewan
I think the volume is down overall. Nationally, it was a multiple round. Marcus Millichap is down by like 70% or more. That's a lot. So what we are what we are buying right now, our fundamentals have not changed. 12 months ago, the last year I did, I had a reserve of almost 7% of the equity raised and this lender, not lender, required.
00;18;51;27 - 00;19;15;21
Kunal Dewan
This was our reserve because we knew where the market is going and we still pretty aren't sitting on the equity right now. And I'm actually kind of moved that to a CD just as a back up. So we knew what was coming. We always have the reserves, but now the market has changing, the volume has gone down, the type of assets are coming up online.
00;19;15;21 - 00;19;47;21
Kunal Dewan
The it's hard to make numbers work, but when it works, it is a super sweet deal to the asset we are looking right now. The offer is tomorrow as we speak. The going in cap is in high sixes and R and the treasuries have dropped in last few days. So the debt we are getting in survives. Midwives to be are already in positive leverage right there and the rents are lower.
00;19;47;21 - 00;20;09;07
Kunal Dewan
I don't know that inside details, but I feel that the seller might not be able to execute his business plans. He just wanted to get out, which creates fantastic buying opportunities. So we'll be buying. What we're looking right now is beautiful, fantastic buying opportunities. If we don't deviate from our buy box, the investment thesis.
00;20;09;17 - 00;20;23;27
Sam Wilson
Right, right. Yeah. That's in that I guess that's that's the well maybe we can talk about the types of debt you're taking on and then I want to hear what that buy boxes and why.
00;20;23;27 - 00;20;57;15
Kunal Dewan
Another one of my favorite topics agency debt strictly agency that we're not doing any bridge anything like that fixed my my first syndication first investment this was late twenties 2020s early 2021 when the bridge was like two and a half or less than three. Even then I did a fixed debt and because I believe in it, it's a long term play we in we are in a long term game.
00;20;58;08 - 00;21;35;10
Kunal Dewan
I'm not talking two or three years, you know, even to my investors, my average world is five and seven years. We are talking cash flowing as long as we live. If we exit, we exit. But our goal is to actually refinance and not sell. So top that we're getting is strictly agency debt by box. The buy box is my box by box cannot be the same as your buybacks for anybody else because my buy box is through the lenses of the risks that I can take and is different than yours and the risk that I can take.
00;21;35;10 - 00;22;12;28
Kunal Dewan
I'm not talking aggressive, I'm talking on the lower end because this is not my money. With all my money I could be. I can do whatever I want you know, I can buy whatever car I want was for somebody putting the money on me. Oh, my God. That's I'm going to take it to the next level. So I have these extra layers, my, my underwriting, you know, I have taken the templates from over over the years and I have modified average my own macros and I wrote my own scratches so I can see the spectrum of risks every time I send an ally.
00;22;13;25 - 00;22;47;27
Kunal Dewan
I know at this purchase price what will be my risk and at this purchase price, what are my risk? And the same thing with the business plan. So that by box the investment thesis is different for every person depending on their personal situation. Mine number one is cash flow. I'm a believer that if the property cash flow within year one and the debt is stable, you can ride out any downturn because the horizon is when I die.
00;22;49;21 - 00;23;13;08
Kunal Dewan
So because we have we are planning a long term wealth generation. This is not a cash flow mitigates. So even like right now the deal that we're going to do this week, they're like going out tomorrow, our first year cash flow is in high sixes. Now that's just first year as the operations improve, the A.I. improved, profit improved.
00;23;13;08 - 00;23;42;21
Kunal Dewan
It's going to just going to go up. So down the line, five years, seven years, we going to refinance it and then hold it for eternity and keep churning the cash flow. So that's my number one buybacks, material cash flow. And then the second is now right now in today's market is I'm not going for deep value adds, I'm going for stable and just increase it by effective operations using our vertically integrated team.
00;23;42;21 - 00;24;09;23
Sam Wilson
Those two those two things sound very sound sound policy and procedure. I like I like the way you think through both of those items. Kunal This has been a blast having you come on the show today. I've learned so much from you just in the way that you guys approach assets. You are three investor are passive investor myths we've learned about your kind of journey in the in the real estate space so many things here to take home and consider.
00;24;10;11 - 00;24;22;27
Sam Wilson
I think the what the the third point there on the too much value add that was the one that was really cool or is it was how you calculate what too much value add is so present as with a lot of things to think about here today. Certainly appreciate you taking the time to come on the show today.
00;24;22;27 - 00;24;26;23
Sam Wilson
If our listeners want to get in touch with you and learn more about you, what is the best way to do that?
00;24;28;13 - 00;24;31;25
Kunal Dewan
LinkedIn, like I said, is the best way to reach out to me.
00;24;33;28 - 00;24;42;05
Sam Wilson
Fantastic. We'll make sure we get a link to that there in the show notes. And again, thank you again for coming on today. This was a blast.
00;24;42;05 - 00;24;44;07
Kunal Dewan
It's a pleasure, man. Thank you for having me, Sam.
00;24;44;24 - 00;25;06;08
Sam Wilson
Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts or whatever platform it is you use to listen. If you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories.
00;25;06;08 - 00;25;09;15
Sam Wilson
So appreciate you listening. Thanks so much and hope to catch you on the next episode.