Built To Rent, Built To Invest with Mike Kalis

Mike Kalis – Mike held the position of Partner and President of Copper Bay and oversaw a portfolio of build-to-rent homes growing to over 700 while achieving 98% occupancy, 8.5 CAP rate averages, and double-digit returns to partners.

Prior to that, Mike worked at Pulte Homes in Michigan.

Mike Kalis has been the recipient of the following awards:

– #99th Fastest Growing Company in the US in 2013, according to INC Magazine

– 3-time INC 500 award winner.

– 50 companies to watch list by Governor Rick Snyder

– Stevie Award Nomination for “Most Innovative Company in the United States under 100 employees”

– Crain’s Detroit 20 in their 20’s winner

– Michigan Economic Bright Spot Award winner

– Mike has received recognition in Forbs Magazine, Builder Magazine, Detroit News, Detroit Freepress, DBusiness Magazine, INC Magazine, Build Magazine, Fox Business Network, and many others

Episode Highlights Here:

Mike:

If you’re building a home for rent, the day it’s done, you’ve doubled your money if you put 25% down to make it.

Brett:

What’s the number one secret to building to rent, build to invest?

Mike:

The number one secret is the secret, but it’s the margin that the builders have. So, when we got into this, they’re published. So if you don’t believe me, I mean, the public builders, you can look at their financials. But standard builders will probably sit on a 25% margin on the homes. A perfect builder might be in the 30s. And a poor one might be, you know, in the teens, but you know, for our purposes, we can come in around 25%. And that means that if you’re building a home for rent, the day it’s done if you put 25% down to make it, you’ve doubled your money. The other part, that’s neat if you’ve limited your downside, so I had some people that had gone, what, if the market drops a little while on our homes, you’d have to fall 25%? Before it touches $1 of your equity. So for a lot of people, that’s attractive. So you have a higher upside beta with a lower downside beta. I think that’s probably the number one thing that when people hear build to rent, they go, Well, how does that work?

Brett:

Okay, let me make me break that down. Right. So their margin is about 25 to 30%. Right? And so if you’re doing the work, and you took 25%, down to 10, you got a loan on the rest of it the moment it’s completed. And if you rent it out, you’re up. You’re already ahead. 50%. Is that a fair summary? Mike?

Mike:

Yeah, you’re up about 100% on your money if you put down from a debt stack, you know, the bank likes that because you’re coming in at 50%. Loan to value, right? So that’s a low-risk loan. So you can get very affordable financing on that type of arrangement. But you can use leverage in a pretty unleveraged way. Excellent to make some sense. Makes sense. And the biggest reason people don’t get it is most builders aren’t willing to give you the option. So most builders will say it’s excellent. You can certainly rent one of my homes. It’s listed at 300k. You can buy it at 300k. Thank you very much. Yeah. And we’ve gone and said, you know, you got to start from the very beginning, you got to make the land acquisition, you have to be able to build the home, you have to be able to manage the house, you kind of have to do it from soup to nuts to be able to get the total value.

Brett:

Excellent. What’s secret number two to build the rent and build to invest?

Mike:

The cap rates are surprisingly high. And it’s sort of part of the other one. So if you’re buying anything at 25% below market, you will end up with a cap rate. So our homes end up running a seven to nine cap if that was multifamily? Well, I don’t know, you know, better you’re on the commercial side. What is our multifamily trading at and in California out there right now? Yeah, we

Brett:

I just did a deal for a 3.7 cap. Yeah, here in Sacramento, 48 units, you know, 1964 construction, mostly choose, we’ll see a property, c plus b minus location. But you only needed about 10 to 15,000, maybe 20,000 per unit for renovation with its construction cost to get the rents up by about 500. So they bought it at 3.7. But that Delta was about five to $600 per unit post renovation. However, there’s rent control, and that rent control is limiting. You know how much you can do per year for increases, and it also means most of the tenants want to stay because they know it’s higher somewhere else. So the question is, how quickly can you get the tenants out? Is it Cash for Keys? What number of these things are going on? So yeah, 3.7 for a recent deal that I just closed?

Mike:

Is that reasonably typical day rent controls out there? Yeah,

Brett:

I called California now. I mean, it wasn’t two years ago. But now, there used to be just like cities like Los Angeles or San Francisco. But then, about two years ago, they went statewide rent control. It’s CPI plus a percentage. So, in Sacramento, you can still increase the rent by about nine to 10%. So it’s okay. Horrible. Right. But if you want it to go higher, you must have the tenant vacate.

Mike:

Yeah. And that’s one thing. You don’t have that bar in the Midwest now, Chicago, but we’re located in West Michigan. I would be blown away if that ever happened, just with the different environments and things here. You’ve got a little bit more upside on the appreciation. And so hitting that sort of a cap rate gives you pretty strong cash flow. And relative to multifamily seems pretty good. And that’s the other secret. We discovered this in oh seven. When we started our management company, we met and ended up managing homes in 38 states from one spot. And technology is just fundamentally changed over the last ten years. You can manage single-family homes more efficiently than you can manage multifamily dwellings. And here’s why.

Every single thing is remote. So electronic payments, everything’s made on a portal, we do all remote showings. So we run it through a call center. So we can do showings in Hawaii, California, Florida, or wherever. So it all goes to the same spot. So people get in there quickly. The only thing that’s localized is your local trades and vendors. But it forces us to call the right people. Sometimes when you have on-site management, they’re trying to fix a furnace, but they’re not an HVAC guy. So weirdly, it forces us to say, you got to have an HVAC guy to fix this, and you pay a little bit more, but it gets fixed better. That is something that, perception-wise, for most people investing in multifamily. They think single-family management fees are going to be out of control. And they’re not. For example, we charged 4% to manage single-family homes. That’s pretty reasonable. And we can, and we can do that. All right, just because of the enormous technological improvements over the last few years to do that.

Brett:

Excellent. There are three secrets to technology; realizing that it’s a false belief to think that multifamily is going to be easier, cheaper to manage, and single-family homes, and you probably have a higher quality tenant, a little more private, before renting. And you also have long-term tenants. Is that a fair summary?

Mike:

And parts of it, and I’m part of it. It’s the opposite. So So, I have managed some burdensome homes. We execute homes from Detroit, right? So, so if you want to talk about some of the most challenging stuff, these are the homes that you buy for $20,000, and you run on an Excel sheet, and you go, man, I’m going to make so much money, and then 12 months later, you’re like this was the worst thing that I ever did.

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About Mike Kalis

Prior to that, Mike worked at Pulte Homes in Michigan.

Mike Kalis has been the recipient of the following awards:

– #99th Fastest Growing Company in the US in 2013, according to INC Magazine

– 3-time INC 500 award winner.

– 50 companies to watch list by Governor Rick Snyder

– Stevie Award Nomination for “Most Innovative Company in the United States under 100 employees”

– Crain’s Detroit 20 in their 20’s winner

– Michigan Economic Bright Spot Award winner

– Mike has received recognition in Forbs Magazine, Builder Magazine, Detroit News, Detroit Freepress, DBusiness Magazine, INC Magazine, Build Magazine, Fox Business Network, and many others

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