When entrepreneurs have done everything they can do on a small scale, it’s time to look for ways to grow, says Eda Walldorf, a local real estate professional.
Walldorf has her fingers in a lot of pies, including renovation, new construction, development and more. For the last decade, she and husband Nathan Walldorf, a Realtor with The Group real estate brokerage in Chattanooga, also have dabbled in small-scale multifamily projects.
The Walldorfs recently injected their multifamily work with a growth serum that’s already extended their reach beyond Chattanooga and made them co-owners of four apartment buildings composed of 700 units in Dallas.
“We’ve gone from duplexes and quads to hundreds of units per project,” Eda says. “We’ve been in the multifamily space for over a decade but now we’re focusing on the larger buildings. It’s time to scale.”
Eda and Nathan have tucked this effort in going big under a new umbrella: Walldorf Capital Investments.
The name of the company suggests the Walldorfs are not alone in these endeavors but rather are working with other entities to expand their scope.
“We sought out the best mentors and experts in the nation and invested a lot of time and resources in becoming knowledgeable about the large multifamily space because it’s very specialized,” Eda clarifies.
“Every great business leader tries to partner with the best and the brightest and those who are further along than they are,” adds Nathan. “That’s what Eda and I have done. We built [Walldorf Capital Ventures] on our experience in real estate but have also surrounded ourselves with partners who have been doing this a long time and can ensure our success.”
Under Walldorf Capital Ventures, each apartment building is a single concern with its own group of partners. These cohorts invest not only money but also expertise.
“We form an entity with our general partners and then place each individual in charge of a different aspect of the business,” Eda explains. “Because we’re dealing with large scale projects, we need hands on deck from different specialties, whether it’s asset management, design work, market analysis, underwriting, partners relationships or accounting.”
The Walldorfs are more than ringleaders in these projects; they invest their own money first and then bring their expertise as real estate professionals to the table as the project moves forward.
“It’s to our advantage and our partners’ advantage that we’re experts in the nuts and bolts of all facets of real estate,” Eda declares. “We understand the market, the sales process and how a building is structured from the ground up, and can run a business and manage a property.
“All of this gives us an edge in handling this larger-than-life business model.”
The heftiest investors in this space are insurance companies and pension funds that are searching for secure investments that are ripe for growth, Nathan says. Yet despite the size and deep pockets of the entities with which he and Eda typically join forces, they’ve made a way for smaller investors to climb aboard as well.
“Once we’ve put our money at risk to purchase a building and we’ve deemed it to have profitable projections, we open it up to people who want to enlist at the limited partner level, meaning they put in their money and become part owners but they don’t have to do any of the work,” Eda says. “We do it all.”
This passive participation in an investment allows people with fewer resources to participate in a large-scale project without suffering from any of the headaches that can crop up in a real estate project, she continues.
“We feel like we’re opening an avenue to regular people like us to find a place to park and grow their money that would normally be reserved for the elite or large corporate and institutional investors.”
Avenues of investment can lead to a dead end for speculators. Nathan says the key to more or less ensuring a return is identifying buildings where the group will be able to “organically” raise the rent because the owner hasn’t adjusted the rates to match the market.
Raising the rent increases the group’s net operating income – the number on which the value of the building is based.
“In residential real estate, the value of a home is partly based on the value of the neighboring properties. The nice thing about apartment buildings is their value is based on their net operating incoming. This makes them a more secure model from an investment perspective.”
If calculating the value of a building is not Eda’s favorite part of a new project, it’s probably close. With the kind of confidence that can come with repetition, she grabs a calculator, turns it to face her camera and demonstrates a simplified version of estimating value.
“You take the NOI and divide it by the market’s cap rate,” she begins. (Cap rates are a method of assessing the profitability of a real estate investment. Like stock market predictions, they’re subject to error.)
“Assume the landlord has 200 doors and is charging $1,000 per door a month. You then multiply $200,000 by 12 to get $2.4 million a year in gross rents. If your expenses consume half of that, then the building has an NOI of $1.2 million. You then divide the NOI by the cap rate.”
After Eda punches in these numbers, the calculator displays a quotient of 30 million – the dollar value of her imaginary apartment complex.
“If we find a building where we can raise rent the $200 per door, that’s $40,000 per month, or an additional $480,000 of additional of NOI per month,” she continues. “When you divide that by the cap rate, you can see raising the rent $200 per door gave you $12 million more value. So the building you purchased for $30 million is worth $42 million.
“That’s where the returns come for our partners.”
When computing the value of a project, Eda uses a complex spreadsheet instead of a simple calculator and inputs conservatively assessed variables – including the cost of renovations in buildings with deferred maintenance and the vacancies that result – to ensure the estimate is sensible and not inflated.
“Our last project showed annual rent growth of 5% but we calculated it at 3%,” Nathan says.
The investment period is usually three to five years, Eda says, and returns come in the form of “tips” distributed quarterly or a lump sum when the group sells the building.
Eda admits many people think real estate investments are frightening and risky but says Walldorf Capital Ventures is tapping into a market shift that ensures its viability.
“Homeownership is becoming more elusive and rentals are becoming a more secure way of living. We’re providing dignified and improved spaces for tenants.”
Nathan goes as far as calling large multifamily investments recession-proof. “During a recession, or a time of inflation, that’s hurting the single-family residential market, more people need to rent.”
Eda and Nathan are working to identify opportunities closer to home, including Chattanooga, Nashville and Knoxville, but are not ready to announce anything specific.
In the meantime, they’re enjoying the passive income they’re receiving from the investments they made in the Dallas buildings.
“Passive income is an amazing blessing when other aspects of your business fluctuate with the markets,” Nathan says. “Residential sales have been slower this year so getting into this multifamily business has been a godsend.”