Working Capital The Real Estate Podcast: Recent Episodes
Jesse Fragale
My goal is to provide information about real estate investing that will actually help the average aspiring investor take the steps necessary to start and grow their real estate business!
Returning guest Bob Knakal is the Chairman & CEO of BKREA, a commercial real estate capital markets brokerage company in New York City. Bob was the former Chairman of NY Investment Sales & Head of the NY Private Capital Group within JLL Capital Markets in New York City as well as Chairman of NY Investment Sales at Cushman & Wakefield and Chairman and Founding Partner of Massey Knakal Realty Services, New York’s #1 building sales firm.
In this episode, we talked about:
• Real Estate Market Overview
• Geopolitics
• NY Market
• Team Goals
• AI Impact on Real Estate
• Prospecting Tools
• 2025-2026 Areas of Opportunities
Useful links:
Previous Podcast with Bob
https://podcasts.apple.com/gb/podcast/bob-knakal-nycs-billion-dollar-broker-ep181/id1505750263?i=1000663926821
Michael Munger is an American economist and a former chair of the political science department at Duke University,
In this episode, we talked about:
• Michael’s Bio & Background
• Housing Rights
• Rent Control
• Corporate Income Tax
• Line Legislation
Useful links:
Podcast: The Answer Is Transaction Costs
https://podcasts.apple.com/us/podcast/the-answer-is-transaction-costs/id1687215430
Colin Craig is a President of SecondStreet. In 2018, he was hired as President of SecondStreet.org and played an instrumental role in launching the organization. Colin oversees the organization’s groundbreaking research and storytelling activities,
In this episode, we talked about:
• Colin’s interest in Canada Healthcare
• “How bad is Canadian Healthcare”
• Activity based funding
• 2025 Outlook
Useful links:
Health Reform Now https://secondstreet.org/new-documentary-health-reform-now/
Aliyah Mohamed is Chief Capital Officer at KingSett Capital. She joined in 2022 and has oversight of equity and debt capital strategy and formation, as well as marketing and communications.
Prior to joining KingSett, Aliyah spent over 16 years in Investment Banking at TD Securities, most recently as Managing Director, Real Estate, where she advised clients on a wide variety of mergers and acquisitions, divestitures, initial public offerings and equity and debt, public and private offerings.
In this episode, we talked about:
• How Aliyah Got into Real Estate
• Chief Investment Officer vs Chief Capital Officer Jobs Aspects
• Kingsett’s Main Focus
• Institutional Clients Industries
• Canadian Investment
• Fund Structures
• Acquiring Process
• Acquisition in the Canadian Market
• Diversity in Real Estate
Bryan Caplan is a Professor of Economics at George Mason University and New York Times Bestselling author.
In this episode, we talked about:
- Genesis of “Build, Baby, Build: The Science and Ethics of Housing Regulation” Book with Edy Branzei
- Why Housing Regulations?
- Gino’s View on Financial Intelligence
- Housing Shortages Despite Ample Land for Development
- Urbanisation
- Affordibility
- Rent Control
Useful links:
First episode - https://podcasts.apple.com/dk/podcast/education-economics-and-real-estate-with-bryan/id1505750263?i=1000624154266
Books - https://www.amazon.co.uk/Books-Bryan-Caplan/s?rh=n%3A266239%2Cp_27%3ABryan+Caplan
Gino Barbara is a real estate entrepreneur, he has grown his portfolio to over 350 million in assets under management and is teaching others how to do the same. Gino Barbaro is the co-founder of Jake & Gino, a multifamily real estate education company that offers coaching and training in real estate founded upon their proprietary framework of Buy Right, Manage Right & Finance Right
In this episode, we talked about:
- Government and Economic Policies
- Gino’s View on Financial Intelligence
- Real Estate Investment Challenges
- Happy Money Concept
- Real Estate Market Reactions
- Wealth Building through Real Estate
- Purpose-Driven Financial Goals
Useful links:
https://www.linkedin.com/in/gino-barbaro-03973b4b
https://jakeandgino.com/
Transcription:
Jesse Fragale (00:01.767)
Ladies and gentlemen, my name is Jesse Vergali and you're listening to Working Capital, the real estate podcast. Our returning guest today, Gino Barbaro, as a real estate entrepreneur, he has grown his portfolio to over 350 million in assets under management and is teaching others how to do the same. We could do a long -winded introduction here, but we've done it before and let's get it from the horse's mouth. Gino, how's it going?
Gino (00:23.35)
I'm doing good, Jesse. How you doing, brother?
Jesse Fragale (00:25.509)
I'm doing great. It's been a while. I think over a year since we last spoke. So I'm really excited to talk about what's going on in your corner of the world. In terms of where you're recording today, are you still in Florida? Do I have that
Gino (00:40.182)
Yes, I'm still living in St. Augustine, Florida. I would not leave it for the world. Best place on the planet to live, in my opinion.
Jesse Fragale (00:47.281)
So from, what was it, pizzas, pizzas on the East coast and now in Florida in the sun.
Gino (00:51.342)
Yeah. It's been a big transition. used to live in New York. I left back in 2017. I have six kids. So the kids were the older kids and the younger kids loved it. The two in the middle were like, Dad, what are you doing? You're killing me. Took them a couple of years. But then when COVID hit, everything changed. We're living in the land of freedom down in Florida. And they're like, OK, Dad, now I see why you moved down here. Then I started talking to them about property taxes and about no state income tax. And they're like, how much are you saving?
Why didn't you move sooner, dad? I said, I didn't know. What you don't know, you don't do it. So we love living down here, Jesse.
Jesse Fragale (01:25.339)
Yeah, we're just joking before the show about kind of the Canadian environment versus, you know, Florida obviously being a red state, very different, different experience being a landlord in that, in that state. So we haven't talked like I said, from the outset in a little while. So why don't you give us an update? You know, what, what's going on in your world right now in terms of, you know, what you're seeing in the market and the deals you're working on. I know
Gino (01:33.059)
Yes.
Gino (01:37.035)
I
Jesse Fragale (01:53.179)
from up north here, we see a lot in the news right now. You guys have kind of a crazy presidential run going on. There's the economies on the top of the list for a lot of business people and landlords. So what are you seeing out there and what's been going
Gino (02:08.398)
Well, the first comment that I'd like to make is I never thought I'd have to go on X to get my news. I never thought I'd have to do that. And I'll tell you, Jesse, I was never
Bob Knakal. Bob is a New York city broker. He has been doing this since 1984.
Over that time, he has brokered the sale of over 2 ,300 buildings, having a market value of approximately $22 billion. For 26 of those years, he owned and ran Massey Knakal Realty Services, which was eventually sold to Cushman Wakefield, moved into JLL for a period of time. And then recently, an investment sales and capital market brokerage firm that Bob has started.
In this episode, we talked about:
• Bob’s First Steps in Real Estate
• Geographic Expansion
• Post-9/11 Growth
• Service Diversification
• Approach to Sales
• Client Relationships
• Current Market Trends
• Office Market Dynamics
• Macroeconomy and Interest Rates
Useful links:
Bobknakal.com
BKREA.com
Chad has been in the industrial Real Estate industry since 2005 as a global commercial Real Estate company member and a partner with his local firm. Chad has completed over a thousand deals with clients ranging from small companies to large institutional owners as an active investor. Since 2014, Chad is co-owner of 150,000 square feet of industrial properties. Chad and Jesse also speak with Tyler Cobble once a month or once every two weeks on his podcast.
In this episode, we talked about:
• Chad’s Bio & Background
• First Steps in Real Estate Space
• Asset Classes Outlooks
• Investing Side of Business
• Financing Deals Structure and Challenges
• 2024-2025 Opportunities in Real Estate
Useful links:
Tyler Cauble channel https://www.youtube.com/c/tylercauble
https://www.linkedin.com/in/chadgriffiths/
https://www.youtube.com/channel/UCRc7fHYWp9ThYaReiz8jhyQ
https://www.instagram.com/chadgriffith5
Kevin Katigback, Strategy Director Principal at Gensler. As the Strategy Director and Principal in Gensler's Toronto office, Kevin specializes in using place-making to create inclusive, accessible, and sustainable environments. In his role, Kevin delivers workplace and design strategies to help his clients adapt to disruption and the changing nature of work. For more than 20 years, Kevin has worked with innovative companies to help create and implement high-performance people-focused spaces that capitalize on new technologies and cater to the shifting needs of employees.
In this episode, we talked about:
• Kevin’s Bio & Background
• Client Acquisition
• Global Workplace Survey
• Geography Differences
• Latest Trends in Remote Work vs Office Work
• Hybrid Working
• Company Productivity Measuring
• Must have Amenities
• Resources
Useful links:
https://www.gensler.com/
https://www.gensler.com/people/kevin-katigbak
Walter is an American Austrian School economist and anarcho-capitalist theorist. He was the Harold E. Wirth Eminent Scholar Endowed Chair in Economics at the School of Business at Loyola University New Orleans and a senior fellow of the non-profit think-tank Ludwig von Mises Institute in Auburn, Alabama
In this episode, we talked about:
• Walter’s Bio & Background
• Friedrich Hayek Works
• Austrian Approach to Business Cycles and Economy Recession
• Free Speech
• Monopolies
• Rent Control
Useful links:
Friedrich Hayek “Prices and Production”, “Human Action”, “Man Economy”
Brian Burke is President & CEO of Praxis Capital, Inc., a vertically integrated real estate private equity investment firm, which he founded in 2001. Brian is also a member of the Praxis Investment Committee. Praxis operates on multiple platforms, currently managing active syndications for the acquisition of single-family, multifamily and opportunistic residential assets in US growth markets.
Brian is the author of “The Hands-Off Investor: An Insider’s Guide to Investing in Passive Real Estate Syndications” and is a frequent speaker at real estate investment forums and conferences across the country.
In this episode, we talked about:
- Brian’s Bio & Background
- About Praxis
- Getting Deals
- How “The Hands-Off Investor: An Insider’s Guide to Investing in Passive Real Estate Syndications” Book was Born
- Investor’s Capital Deployment
- Debt Fund
- 2025 Outlook
Useful links:
https://praxcap.com/
In this episode, we talked about:
• Convincing Orders to Sell
• Land and Marketing Listings
• Finding Buyers
• Tips for Negotiating and Closing Transactions
Kane Willmott is the Co-Founder and CEO of iQ Offices, a luxury coworking company with locations in Toronto, Vancouver, Ottawa and Montreal. Kane has over 20 years of entrepreneurial experience, assisting in the startup of multiple real estate brokerages as well as a public company listed on the Toronto Stock Exchange.
In this episode, we talked about:
- Kane’s Background & First Steps in Real Estate
- Co-Working Workspace Evolution
- Enterprise Co-Working
- Co-Working vs Sublease/Lease
- Office Market Overview
- Resources
Useful links:
https://www.iqoffices.com/
https://www.linkedin.com/in/kane-willmott/?originalSubdomain=ca
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica Galley And. on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. ladies and gentlemen, my name's Jesse Ali, and you're listening to Working Capital. The Real Estate Podcast. My guest today is Kane Willmott. Kain is the co-founder and CEO of iQ Offices, a luxury coworking company with locations in Toronto, Vancouver, Ottawa, and Montreal Kane, how you doing?
Kane (37s): I'm good, Jesse. How are you doing?
Jesse (39s): Doing great today. So for, you know, for those that don't know, iQ Offices the largest Canadian node coworking operator with eight locations in downtown Toronto, Vancouver, Ottawa, and Montreal. And I think I've got e everyone there. Is that right? Kane? You
Kane (52s): Got it. Perfect.
Jesse (54s): So, Kane, for those that you know, for those that don't know who you are, are iQ, Offices. What we'd like to do with most guests is basically have a little bit of a backgrounder on how you got into the real estate space, and then maybe we could talk a little bit of about iQ and how you got into that world after.
Kane (1m 10s): Great. Yeah, well, I'll try and make it a short story because I've been in the, in the business quite a while, but I started at a university at Pricewaterhouse, large accounting firm, and I found out very early on that that, that, that really wasn't for me in terms of the job and what I was doing every single day. And, but it, it taught me a lot about, about what I wanted to do really with the rest of my career. And I moved to Toronto that I, I went to school in Waterloo, moved to Toronto, and got into brokerage in 1998 and had the great fortune of working for Craig Smith and Brian Murphy.
Craig Smith started Asher Urban Realty. And I went over and started that with him about a year into my career. So I had the opportunity to really go through, starting up a business very early on in my career, in a fairly low risk way from an opportunity cost perspective. And, and I had a lot of great mentorship and guidance from Craig Smith. So from there started another brokerage with another partner, ultimately took a company public, and then started a company called Spire Commercial Realty, another brokerage with Alex Sharp, who's my business partner now in iQ Offices.
So we started Spire in 2009, focused on investment sales, and then in 2012 we got into iQ. So that's like the, the short genealogy of, of how we got to where we are now. But I can say in terms of why we started iQ, I started in office leasing in 98. And what I found in 2011 when we started looking at this as a business model, is that office space was transacting in t
Chris Picciurro is a highly respected expert in US-based Tax Planning and Strategy for Real Esate Investors, with international recognition as a presenter on the subject. He is based in Franklin, TN, where he currently resides with his family. Chris holds several accreditations, including a CPA, MBA, PFS, and ARA. He is an accomplished public speaker, recognized for delivering informative and engaging presentations at notable events hosted by organizations such as the National Association of Tax Professionals (NATP), Michigan Association of CPAs, and the Memphis Investment Group. He also previously participated as an Adjust Professor at Baker College and Davenport University.
In this episode, we talked about:
- Chris’s Bio & Background
- Canadian Investing in the United States
- Dealing with Losses in Real Estate
- Depreciation
- Offsetting Gains
- Tax Considerations
- Asset Disposition
- Resources
Useful links:
https://www.chrispicciurro.com/
https://www.linkedin.com/in/picciurro/
https://www.facebook.com/YourRealEstateCPA/
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica Galley And. on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. ladies and gentlemen, my name's Jesse Alii. You're listening to Working Capital. The Real Estate Podcast. My returning guest today is Chris Paterno is a respected expert in US-based tax planning and strategy for real estate.
Investors with international recognition as a presenter on the subject. He's based in Franklin, Tennessee, where he currently resides with his family. Chris holds a number of different accreditations, including CPA, MBA, PFS and ARA. Chris, welcome back to the show. How you doing?
Chris (53s): I am amazing, Jesse, thanks so much for having me back. I really enjoyed our episode a few years ago and, and we still get people asking questions about it. So, you know, I'm, I'm excited to be back here honored and there's been some changes over the last few years that we wanted to make Canadian residents that are doing business in the United States aware of you have a an amazing following, amazing community. So I'm always, again, always honored to come back on the show.
Jesse (1m 22s): Well, I appreciate it. Yeah. you know, from time to time I get these questions about the, the original interview we did. So we'll have some link in the show notes for that. I think we also put it out on YouTube. If you just type in investing in US real estate from Canada and you put my name Jesse Fragale or Chris's, you'll probably be able to pop that video out. But to make things easy, we'll also put a link in the show notes on that one. So, Chris, we've, we probably haven't talked, if I look at this episode, that was December, 2020, which is crazy to think it's been that long.
Wow. So I always say there's a lot has happened over the last couple years, but before we even kind of get into it, why don't you give a little bit of a backgrounder for listeners, kind of who you are, how you got into, into real estate, and, you know, what you do today for, for individuals.
Chris (2m 22s): Absolutely. So, yeah, my name, my name's Chris Picciurro, again, CPA Love Real estate investing. I and I have been a CPA here in the States for well over 20 years, the last 15 years niching in helping real estate investors
Nick Hill is a host of the Canadian Real Estate Investor podcast. He’s a mortgage agent, Real Estate investor, and works in brokerage and lending services through their company, LandBank.In this episode, we talked about:
• Nick’s First Steps in Real Estate
• Canadian Real Estate Investor Podcast
• Specifics of the Canadian Real Estate Market
• Interest Rates Environment
• 2024-2025 Opportunities for Real Estate Investors
• Resources
Useful links:
https://www.instagram.com/mybuddynick/?hl=en
https://www.linkedin.com/in/nick-hill-337a8762/?originalSubdomain=ca
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica Galley And. on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. ladies and gentlemen, my name's Jessica Galley and you're listening to Working Capital. The Real. Estate Podcast. My guest today is Nick Hill, an investor real estate professional mortgage broker, and one of the hosts of the Canadian Real Estate Investor Podcast Nick.
How's it going?
Nick (39s): Very well, longtime listener. Honored to be, honored to be a, a guest. So yeah, happy to be here. Happy to, happy to chat. And man, the bio makes me sound pretty good, I guess. Eh,
Jesse (50s): It's not bad, eh, I don't know. Was it the, was it the mic or the content?
Nick (55s): Maybe the guy saying it. I'm not sure.
Jesse (58s): Oh, that's, you're too, you're too nice. So, Nick for, for those that don't know, maybe you could give a little bit of a, of a background for, for basically how you got into real estate, and we could talk a little bit more about kind of social media and, and the, the podcast that you guys have. But why don't we start with a little bit of a, a background on yourself?
Nick (1m 18s): Yeah, appreciate that. I don't know how far I'll go back here. I've, I've kind of always just been attracted to the entrepreneurial side of things. Started a lot of businesses, kind of my late teens, early twenties, originally wanted to be a lawyer. Started talking to lawyers when I was in university. I was watching a lot of suits at the time and realized that that was nothing like reality. So quickly. Finished up my degree, went into construction engineering management, which kind of put my career trajectory into the construction side of things.
So I worked on condos as a project coordinator. I worked at Sanofi Past, which is a big pharma company in, in north Toronto on the CapEx team. Did that for a few years and kind of wanted to get more in the business side of things. So I transferred out of the construction side of things, making a really good salary, and decided to get into commercial real estate where, you know, Jesse, there is no such thing as a salary.
So did that for, for a while as a junior associate at Ellington, which kind of little offshoot of of Collier, some of the top guys there, went and started their own shop. Did that for a while. Great experience, great exposure. Got into the business development world kind of within the tenant fit out space in, in commercial real estate. And from there, just kind of coasted along for, for several years when the pandemic hit, I actually just before the pandemic hit, I decided I was gonna finally dip my toes in and start trying to build my own personal real estate portfolio.
So started buying small cap residential properties, couple duplexes here and ther
Mr. Gordon Wadley is the Chief Operating Officer of Dream Office REIT. Mr. Wadley provides leadership to the overall asset strategy of Dream Office REIT’s Toronto portfolio. Mr. Wadley has held progressively senior positions within the company since he joined in 2011.
In this episode, we talked about:
- Gordon’s First Steps in Real Estate Space
- Asset Classes Overview
- Thoughts on Co-working Space in 2024
- Interest Rates
- Office Space Conversion
- 2024 Outlook
- Advice to Individuals who Consider Making a Career in Real Estate
Useful links:
https://dream.ca/office/
Lauren Cohen is a cross-border lawyer, realtor, best-selling author, international speaker & business immigration strategist with over 25+ years of personal and professional experience, thousands of clients successfully invested in and relocated to the U.S., and tens of millions of dollars in investments secured:
In this episode, we talked about:
- Lauren’s Bio & Background
- Immigration Investment
- Best Timing for Real Estate Investment
- Geography of Investment
- Types of Visa
Useful links:
https://www.eb5investors.com/
https://www.linkedin.com/in/lauren-a-cohen-9b54b11a2/
https://www.instagram.com/laurenesq1/
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica Galley And. on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. ladies and gentlemen, my name's Jesse Fragale and you're listening to Working Capital. The Real Estate Podcast. We have a returning guest on the show today, Lauren Cohen.
Lauren is a US immigration lawyer, Lauren a US immigrant from Canada is a serial entrepreneurial realtor, cross-border. Legal strategist. Bestselling author and global keynote speaker. Lauren is the founder of Investing Across Borders, the only concierge full service, investment and immigration advisory company helping clients navigate through the complex journey of cross-border real estate investing business set up and expansion and securing us visas. Lauren, how you doing?
Lauren (1m 1s): I'm pretty good. How are you doing? How's the weather? Ah,
Jesse (1m 5s): You know what? It's not bad. It's okay. We're not in the, we're not in the negative weather, but it's very, I feel like we've been in London in Toronto for the last month.
Lauren (1m 14s): Oh, that much rain, huh? A lot of gray. Huh?
Jesse (1m 17s): Rain a lot of gray. It's dreary, but you know what? Can't complain. you know, I'm not, the winter jacket isn't fully out yet, so we're okay. How about you? You're still in Florida?
Lauren (1m 28s): Yes, sir. I will not be there in January. Anytime in any January. Anytime soon.
Jesse (1m 36s): Fair enough. Yeah, I'm sure it's, it's a lot different right now in terms of the weather there. Yeah. Lauren, it's been, it's been quite a while since we last spoke. We had you on the podcast and we can link to that probably, I'm gonna say two years ago, if not, if not more. During,
Lauren (1m 53s): During Covid, was it the last time?
Jesse (1m 55s): It was, it was definitely during some sort of lockdown.
Lauren (1m 59s): Yeah, at the tail end I think. Yeah. Yeah, it's, well, you know, you have so many lockdowns in Toronto, which were good for me, but not so good for you guys, so, yeah.
Jesse (2m 9s): Well it's funny when people say the C word on the podcast, we, we don't know if they're talking like if it's a US individual, I don't know, you know, when it took place. 'cause it was different for us than, than down south. Very,
Lauren (2m 21s): Very, very.
Jesse (2m 23s): Yeah. So Lauren for, for those that you know, didn't listen to the first podcast and, and you know, just want to know kind of yo
Omar Khan is a Returning Champion - the Founder and Managing Partner at Boardwalk Properties. Omar has advised on $3.7 billion in capital financing and M&A transactions, as well as securing $50+ million in equity from private and institutional capital. He is a graduate from the Rotman School of Business (University of Toronto), and a CFA charter holder with 10+ years of investing experience across real estate and commodities. As the principal of Boardwalk Wealth, Omar is primarily responsible for developing strong relationships with private and institutional investors, brokers, and strategic partners. He has closed on over $450 million of assets across TX, GA, FL, and SD.
In this episode, we talked about:
• Omar’s Bio & Background
• Canada vs America's Entrepreneurship
• Initial Steps in Real Estate Investing
• Asset Classes
• Agency Debts
• Forecast for Retail, Industrial, and Multifamily Asset Sectors
• The Impact of Current Macroeconomic Changes on Omar’s Investment Philosophy
• 2024-2025 Outlook and Opportunities for Investors
Useful links:
https://www.boardwalkwealth.com
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica Galley And. on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jesse Fragale. You're listening to Working Capital. The Real Estate Podcast. My Returning guest today is Omar Khan. Omar is the Founder and Managing Partner at Boardwalk.
Properties. Omar has advised on 3.7 billion in capital financing and M and a transactions, as well as securing over 75 million equity from private and institutional capital. He's a graduate from the Rotman School of Business at the University of Toronto and a CFA charter holder with 10 plus years experience in investing across real estate and commodities. As, the principal of Boardwalk Wealth Omar is primarily responsible for developing strong relationships with private and institutional investors, brokers and strategic partners, and has closed on over 500 million of assets in Texas, Georgia, Florida, and South Dakota.
Omar, welcome back. How's it going? Hey man,
Omar (1m 13s): I prefer the term Returning. Champion.
Jesse (1m 15s): Yeah, we'll put that in the, in the show notes. Yeah, it, it's been a while man. I think we were just talking before the show. January, 2021. Nothing has happened between then and now.
Omar (1m 27s): Yeah, I mean, you're a big hotshot Toronto broker, you know, so nothing's happened. I mean, I know things are exciting for you, but I'm just steady, Eddie.
Jesse (1m 35s): I like it. So for those that that did not listen to the first episode, which I think was number 40, if you want to go to working capital podcast.com, I'm sure you can find it or wherever you listen to podcasts. But Omar, what, what has been going on in your world? Maybe you could give the, the listeners a bit of a background as to kind of how you got in the industry and add a little color to the, to the Bio.
Omar (1m 59s): Look, my family is a business family. That's not why I got into the industry, but I guess that's why I might have had the bug to have my own business, as you may, I live in the US now. I live in Dallas, but obviously what a school in Canada, Canadian citizen did all of that stuff. Worked at R-B-C-C-I-B-C. Enova is an oil and gas firm and had great set of experiences in Canada. And then I moved to the
Ashley Kehr purchased her first rental property in 2014 and since then has grown her buy-and-hold portfolio to over 30 units. She has experience in residential and commercial properties. She accredits much of her success to the use of partners on several real estate deals and creative financing. Ashley developed a passion for real estate after quitting her staff accountant job to work as a property manager. Within several years, she had created two property management companies, which she ran for over five years. Her speciality was creating systems to work efficiently and remotely within the companies. Ashley Kehr is the co-host of the Real Estate Rookie Podcast. Just a few years removed from being a beginner herself, Ashley is now helping newbies figure out actionable steps to get their first deal. She has a dual degree in finance and public accounting and recently became a licensed insurance agent.
In this episode, we talked about:
- Ashley’s Background and First Steps into Real Estate
- Journey with Bigger Pockets
- Decoding Asset Class Shifts Over Time
- Long Term vs Short Term Rentals
- Interest Rates
- 2024-2025 Outlook
Useful links:
Instagram https://www.instagram.com/wealthfromrentals/?hl=en
https://www.ashleykehr.com/
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica Galley And. on this show we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jesse Fragale. You're listening to Working Capital. The Real Estate Podcast. Our returning guest today is Ashley Kerr. Ashley purchased her first rental property in 2014 and has since then grown her portfolio to over 30 units.
Ashley is the author of Real Estate Rookie, 90 Days To Your First Investment. So for those that you know, didn't listen to the first conversation, it's been a few years since, since we last chatted, maybe you could give a little bit of a background for the listeners of, you know, how you, how you kind of came into real estate and more specifically what you've been doing the last couple years. 'cause I know you're fairly active online and I know that, you know, you've been affiliated with BiggerPockets for the last few years, so if you could speak to that, that'd be great.
Ashley (1m 5s): Yeah, sure. So to get my start, I actually was an accountant. I hated my job and I quit it and I was just gonna be a stay at home mom. My husband, he was a dairy farmer. And so right after I quit as an accountant, I decided to get pregnant, have a baby. And my neighbor growing up, who was a really good family friend, I was best friends with his kids growing up. He said, I have a 40 unit apartment complex I'd love for you to manage. So that was my first kind of insight into real estate.
Growing up, I knew the family was very well off that, you know, he had made investments And, he owned a couple businesses that I knew about, but I never knew about the real estate part of it. And so that was my experience as to like what you can actually do. And when I first started working for him, he had me sit in and help him acquire another business. And the way he was able to acquire this business was actually leveraging his multifamily property. He had refinancing it, pulling the equity out And, he used the cash to buy this new business, And.
he took me to the closing table. He let me like write out the checks of this huge amount and like right there, like I can still, you know, see the orange shag on the atto
Tyler Cauble is an Investor and Broker in Commercial Real Estate
In this episode, we talked about:
- Tyler’s Background and First Steps into Real Estate
- First Deals
- Retail Real Estate Challenges
- Broker - Investor Transition
- 2024-2025 Outlook
Useful links:
https://www.instagram.com/commercial_in_nashville/
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica Galley And. on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. ladies and gentlemen, my name's Jesse Galley and you're listening to working capital, the real estate Podcast. My guest today is Tyler Codwell. Tyler is an investor and Broker in commercial real estate from Nashville.
Tyler, welcome back.
Tyler (35s): Jesse. Honored to be here, man. Thanks for having me on.
Jesse (38s): Anytime, man. So, you are a returning guest. It's probably been about a year since you were last on the podcast, but we have been kind of going back and forth, I think biweekly or bimonthly, whatever the correct term is for that on kind of chatting basically commercial real estate from a broker's perspective, Broker and investors perspective. So that's been a lot of fun. So I thought it would be great to have you on and, you know, talk to my audience a little bit about kind of the background of what you do and chat a little bit about where we're at right now in the market cycle and, you know, where you're seeing opportunities.
Obviously, you know, there's a bunch of different markets that are telling different stories. You're in Nashville, I'm in Toronto, we, you know, we chat about all the cities in North America and kind of generally speaking, but yeah, I, I thought it'd be great to, to have that conversation. So for, for people that didn't tune into the first podcast, maybe you could give a little bit of a background of kind of how you got into real estate and, and what you currently do now, Ty.
Tyler (1m 38s): Yeah, man, it's gonna be a fun conversation. you know, appreciate you coming on the brokers round tables. Those have been a lot of fun. And you know, it's, it's, it's the content that you and I wish that we'd had when we first got started, right? I mean, that's, that's why I'm doing a podcast so much. And I know that's why you do it. It's because, you know, back when we were getting started, nobody was doing this stuff and so it was so frustrating to learn everything. So, so of course appreciate what you're doing and love the podcast. But yeah, man, I got started back in 2013 as the in-house leasing agent for a boutique development firm. Had zero knowledge about commercial real estate.
I didn't even know that somebody represented Chipotle and put them in there. Never even thought about somebody owning those buildings. Hmm. So it was quite the learning curve getting started. And, and of course I never realized how lucky I had it until probably three or four years into the business when I, most of my friends had graduated college 'cause I was a dropout. They were graduating college and trying to get into commercial real estate, and some of them were interviewing 50 times and not getting a job. So that's when I kind of realized like, oh man, I kind of, I might have struck gold here, but I focused, you know, solely on our in-house assets, some office retail and industrial, and got those leased up in about two years.
Then I started looking into development projects, put my first development deal together, which was 42 town homes and then left and started my own fi
Ian is Chief Investment Officer at CrowdStreet, overseeing its marketplace, an online commercial real estate investment platform that has completed over 650 offerings totalling over $25 billion of commercial real estate.
- Ian’s Bio & Background
- Interest Rates Policy
- Real Estate Pricing
- Potential Opportunities in Real Estate 2024-2025
Useful links:
Previous episode https://www.buzzsprout.com/2246698/episodes/13585761
https://www.linkedin.com/in/ianformigle/
https://www.crowdstreet.com/
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica Galley And. on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. My name's Jesse Ali. You're listening to working capital, the real estate Podcast. My guest today is Ian for Mely, chief Investment Officer at Crowdstreet.
CrowdStreet is one of the largest online private equity real estate investing platforms. Ian, how are you doing today?
Ian (39s): I'm doing good, Jesse. It's great to be back on the podcast.
Jesse (42s): Yeah, it's fantastic to have you back on. I think, you know, you're one of the perfect guys to talk to right now in this current economic and, and real estate environment that we're in right now. So for those that that want to check the original episode, you can go back to that and I think it's, it's probably been close to two years now, maybe a little bit shorter than that, but it seems like time has been going by fairly quickly here, given the last couple years. But for those that don't kind of know Crowdstreet or your background, Ian, maybe you could just give a little bit of a, a backgrounder on, on what you do at Crowdstreet.
Ian (1m 19s): Sure, yeah, thanks. From a high level, first just high level on Crowdstreet is, you know, we're an online equity syndication platform credited investors, you know, typically in the US I think there's, we do actually have some Canadians Jesse that invests on the platform, if I recall correctly. But, you know, we're, we're, we're bringing deals to the, to a marketplace that are generally located in the United States. We have syndicated about 4.2 billion in, in, in total aggregate equity since our inception, which dates back to April of 2014.
That's been across a lot of deals, I think upwards of 800 deals at this point. I joined Crowdstreet in the summer of 2014 after the platform had gotten live, but essentially got its second deal on the platform. So I guess I've served as the key decision maker on, you know, two through N of deals since then. So been a, been a lot of work over those years. It's been, but it's been interesting to see a lot of deals come and go. Our platform is historically about 50% multifamily, 50% everything else, everything else being essentially we look at deals in the hospitality space, industrial, retail, you know, pretty much all the major food groups, even self-storage.
We don't really do land deals. That would be the, probably the one, one area of real estate that we don't tread into. And we've done deals both from an acquisition standpoint and a development standpoint, and our general MO is to, you know, partner with operators and developers across the United States who are looking to gain access to syndication at a greater scale. Bring that into their, you know, the, their form of their capitalization of deal
Andrew Drexler is First National's Assistant Vice President and Team Director in the Commercial Financing division. Andrew has originated more than $4 billion in Commercial Financing.
In this episode, we talked about:
- Andrew’s Bio & Background
- About First National
- Asset Class Breakdown
- Commercial vs Residential Lending
- CMHC Fees
- Debt markets
- Apartment Sector Construction
- Interest Rates Outlook
- Real Estate Opportunities
Useful links:
Previous podcast with Andrew: https://podcasts.apple.com/id/podcast/real-estate-financing-development-and-student-housing/id1505750263?i=1000539900581
https://www.firstnational.ca/
Jackie Greene is Vice President of Economics. Jackie has been serving ITR Economics’ clients since 2005.
Over the years, Jackie has proved to be a critical member of the ITR Economics team. She has elevated her skills and expertise, reaching new heights in advanced forecasting, gaining a deep understanding of the business application of ITR Economics’ trend analysis, and developing a keen awareness of how to incorporate our insights into business strategy best.
In this episode, we talked about:
- Jackie’s Bio & Background
- Passion of Economics
- Current Real Estate Environment
- Inflation
- Interest Rates Policy
- Debt Market Overview
- Debt Income Metrics
- Recession
- Industrial Space
- Employment Issues
- US Economy Opportunities
Useful links:
https://hubs.la/Q023QSkD0
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica Galley And. on this show we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All, right. ladies and gentlemen, you're listening to working capital. My name's Jesse Fragale and my guest today is Vice, president of Economics Jackie Green of ITR. Economics. How are you doing Jackie?
Jackie (32s): I'm doing great. Thanks for having me.
Jesse (34s): Pleasure to have you here. This is your first time on the podcast. So what we typically like to do with, you know, with new guests on the show is talk a little bit about your background as it relates to real estate and Economics and kind of how you made it through, through the journey to where you're at today.
Jackie (52s): Well, let's see. I have been with ITR Economics since 2005, so that means I was here prior to the housing boom and the housing bust, well actually the early part of the housing boom and the bust. So I've seen the whole runup, I've seen all sorts of crazy situations. It's been really fascinating from an econ standpoint. But I also am human and recognize that these are real. People realize everyone's actually skin in the game. This is not a real numbers only game, but I try and look at it from a numbers perspective so that you can make more informed decisions and help you put you and your family and your circle of who matters to you in a better position.
So that's the take I always have on is no emotional impact, but just helping you have the information so you can make a better decision.
Jesse (1m 37s): Right on. So was was Economics what I mean that was, I assume your path in in school and it's obviously a passion today. How did, what was that like, just kind of how did that roll out? I find that people in this field sometimes come from different, different places. Happy to hear that.
Jackie (1m 56s): Well actually, I've officially been working for ITR since 2005, but realistically I've been quasi involved with the company since I was probably about 10 years old. So it's been one of those things that I've always had interest in. I've always been trying to figure out what's going on and really I love this stuff because it helps me see what's coming next. It helps me know the future so I can plan better, be in a better position for me, my family and help the people around me. So once you kind of see that, you get to see the future first, you can't imagine doing anything else. Yeah,
Jesse (2m 25s): That makes sense. Okay, so let's dive into a little bit about kind of the current environment. It's topical right no
Cadence Capital works with investors who are dissatisfied with the low returns from savings accounts and bonds and investors who are concerned about the volatility of the stock market.
Cadence Capital puts discerning investors’ capital to work for them by investing in exceptional multifamily properties in the best markets nationwide. Demand for multifamily rental units continues to grow and is driven by both the preference of certain demographics as well as unaffordable single-family homeownership options.
Cadence Capital is based in Toronto and partners with investors for whom the stability of real estate investment is appealing but the stress of property ownership is not. We give our investors the benefits of real estate investment through syndication, which is a group investment in a multifamily property.
Peter Linneman leads as Founder and CEO of American Land Fund Management, KL Realty, and Linneman Associates. He is the author of Real Estate Finance and Investments: Risks and Opportunities, the quarterly publication, The Linneman Letter, and more than 100 scholarly publications.
In this episode, we talked about:
- Peter’s Book: Real Estate Finance and Investments: Risks and Opportunities
- Office Real Estate Market Overview
- Opportunities in Real Estate
Useful links:
Previous episode: https://podcasts.apple.com/ca/podcast/state-of-the-market-and-real-estate/id1505750263?i=1000557554818
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica Galley And. on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. My name's Jesse Fragale. You're listening to working capital. My guest today is Peter Linneman of the c e o and Founder of Linneman. Associates. And Peter is a returning guest.
So we had him back on the show not too long ago, but we were talking before. A lot is changing in the commercial and residential Real Estate world that we thought. We, you have you back on Peter and we could chat a little bit about the environment we're in and, and you know, any crystal balling you have for the future. how are you doing today?
Peter (49s): I'm doing terrific. How about yourself?
Jesse (51s): I'm doing great. Thanks for coming back on the podcast. For those that haven't seen or listened to that first episode, you can check that out online, wherever you listen to the podcast or YouTube. And also for people that don't know, you know, Peter, it's, you're pretty well known in most commercial real estate offices, is kind of writing the, the Bible in Real Estate, and that's the, the finance book Peter, you'll, you'll be able to gimme the full title of it, but it's pretty much the, the Blue Bible that if you're taking some sort of Real Estate or Real Estate Finance course, that that's gonna be, that's gonna be mandatory reading.
Peter (1m 28s): Yeah, just it's called Real Estate Finance and Investments Risk and Opportunities. It's been around now for a long time in various editions. I don't even know what edition we're on. Bruce Kirsch has joined me as authoring it, and it's called The Blue Bible. I have nothing to do with that. It's because the book covers have been blue always over the years of slightly different shades. So I didn't know it was even called the Blue Bible until it had been out about five years.
And people came up to me and started saying that, and I go, oh, so I guess it's an honor.
Jesse (2m 4s): You know what, it's funny, the, the book, at least the way I came to that book is that when I started investing in Real Estate, the, there was kind of a difference between the, the the, you know, what you would get in school in terms of the, the background and types of investment in Real Estate and then what you would get at actual books that are geared towards Real Estate investing. And I found, I found that there wasn't much overlap between the two. And when I found, I think your book, I, I think it was in my M B A that the first time I saw your book in, in first year, and it was a Real Estate Finance and Infrastructure course.
It was the first book I saw that was almost speaking the investor's language in terms of Real
Michael is the founder, President and Chief Executive Officer of Allied Properties REIT. Prior to entering the Real Estate business in 1988, he was a partner at the law firm of Aird & Berlis LLP, specializing in corporate and real estate finance. He is also a Director of EQB Inc. and Equitable Bank.
In this episode, we talked about:
- Mike’s Bio & Background
- Mike’s View on the Office Market: Downtown and Suburbian
- Climate Risks
- Interest Rates and Monetary Policy
- Inflation
- Mike’s Advice to Individuals Who Want to Get into Real Estate
- Future of Mike Emory
Useful links:
https://schulich.yorku.ca/faculty/jim-clayton/
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica Galley And. on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Michael, welcome back. Thank you. We're on working capital, the real estate Podcast.
I have with me today, Michael Emery, founder and executive chair of Allied REIT. Mike, how you been? I've
Mike (37s): Been great. Thanks. It,
Jesse (38s): It's been quite a while since we last did this.
Mike (40s): It has, and in the intervening couple of years, my grandchildren have grown up. They're now 5, 5, 3, and three and endlessly enjoyable for my wife and I.
Jesse (53s): That's great. I feel like my dad's in the same situation right now that, that period in your life. So great. That that is a great time for you. For those that didn't hear our first episode, anybody that wants to check that out on YouTube, Michael Emery, working capital, you just type that in. It should come up. But for those that didn't hear that first episode, quite a bit has changed over the last couple years. If you could bring people up to speed as to, you know, what you do at Allied and a little bit of your background.
Mike (1m 20s): Sure. As we probably discussed a couple of years ago, I started life as a lawyer but didn't spend much time practicing law. I was able to get into the industry in 1988, a small company called Allied Canadian, which basically evolved into Allied Properties, REIT, the public entity that we know today. The last two or three years have been very interesting for Allied.
They have been challenging in a way. Certainly the pandemic created its own complex of issues which we've worked through very successfully. The current cyclical decline that we're living through has, has created a new but rather normal series of issues. I've been through many cycles, many, much worse than the cycle we appear to be going through now.
They are, in many respects, disturbing and disorienting, but they're also curative. They eliminate excesses within any economic system, and I think that's actually what's happening. It's been good for Allied because we've been able to take the change over the last three years and use it as an opportunity to strengthen our operating team. Our business ultimately is not acquisitions, it is not development.
Although we do both of those things. Our business is operations and our success or lack of it derives almost entirely from the quality of our operations. And we've bolstered our operating teams dramatically over the past three years. We are, I think, a preferred employer. So we are able to attract the best talent in the industry, and we've done exactly that over the last three years to the point that we were able to implemen
Travis Watts is the director of investor education at Ashcroft Capital and a multi-family apartment investor. He has been investing in real estate since 2009 in multi-family, single-family, and vacation rentals. Mr. Watts dedicates his time to educating others who are looking to be more "hands-off" in Real Estate.
In this episode, we talked about:
- Travis’s Bio & Background
- Passive vs Active Investing
- Transition Into a Full-Time Passive Investing
- Deal Vetting
- Geography of Deals
- Finding Real Estate Deals
- Investment Philosophy
Useful links:
https://info.ashcroftcapital.com/travis
Neal Bawa is a Returning Guest. Neal is CEO / Founder at UGro and Grocapitus, two commercial real estate investment companies. Neal's companies use cutting-edge Real Estate analytics technology to source and acquire OR build large Commercial properties across the U.S., for over 800 investors. The current portfolio of over 4800 units, with an AUM value (upon completion) of over $1 Billion
In this episode, we talked about:
- Neal’s Updates
- 2022-2023 Real Estate Market Overview
- Mortgage rates
- Debt Structure
- Single Family vs Multi-Family Markets
- Inflation Rates
Useful links:
Past episode: https://podcasts.apple.com/se/podcast/strategic-multifamily-real-estate-investing-with-neal/id1505750263?i=1000580909466
Webinars: https://multifamilyu.com/
Bryan Douglas Caplan is an American economist and author. Caplan is a professor of economics at George Mason University, research fellow at the Mercatus Center, adjunct scholar at the Cato Institute, and a former contributor to the Freakonomics blog and EconLog
In this episode, we talked about:
* Bryan’s Bio & Overview of His Activities as an Economist
* Toronto vs Florida Housing Policies
* The Myth of the Rational Order
* Rent Replacement Strategy
* Bryan’s Books
* Canada’s Immigration Policy
* Family Sponsorship
* The Case Against Education Brief
* Don’t be a Feminist
Useful links:
Books: https://www.amazon.com/Books-Bryan-Caplan/s?rh=n%3A283155%2Cp_27%3ABryan+Caplan
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Mark is a CERTIFIED FINANCIAL PLANNER™, a three-time #1 Best Selling Author and the owner of Lake Growth Financial Services, a financial firm in Chicago, Illinois. Over the years, he has helped hundreds of his clients take back control of their financial future and build their businesses with proven, tax-efficient financial solutions. He specializes in building custom-tailored financial strategies that are unknown to typical stock jockeys, attorneys, or other financial gurus. As host of the Not Your Average Financial Podcast™, he shares some of his strategies for working with real estate, paying for college without going broke, and creating an income in retirement you will not outlive.
In this episode we talked about:
- Mark’s Background
- Getting Started as a Financial Planner
- Approaching Clients
- Be your Own Bank
- First Few Questions to ask Real Estate Investors
- Debt Aspect
- Mark’s Advice to Beginners in Real Estat
Useful links: https://kickstartwithmark.com/
The book “The Bank On Yourself Revolution: Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future” by Pamela Yellen
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Amanda is a Managing Director of Keystone CPA, INC. Amanda received her accounting degree from UNLV. As a CPA and real estate investor, Amanda has helped countless investors across the nation to supercharge their wealth building through proactive tax saving with her top-selling Amazon books as well as her teachings on prominent publications such as Money Magazine, Google Talks, and CNBC. Amanda brings over two decades of tax planning and compliance experience from working in Big 4 Public Accounting as well as public and private companies.
In this episode we talked about: * Amanda’s Updates and Changes * Tax Strategies * Depreciations * Trump Tax Regime * Cost Segregation Analysis * Bonus Depreciation * Partnership Losses * How much to Spend on Accounting * Tax Designation * How to structure your RE investments
Useful links: Books: “The Book on Tax Strategies for the Savvy Real Estate Investor: Powerful techniques anyone can use to deduct more, invest smarter, and pay far less to the IRS!” https://www.amazon.com/Book-Strategies-Savvy-Estate-Investor/dp/0990711765 “The Book on Advanced Tax Strategies: Cracking the Code for Savvy Real Estate Investors” https://www.amazon.com/Book-Strategies-Savvy-Estate-Investor/dp/0990711765 https://www.keystonecpa.com/ https://www.keystonecpa.com/eBook-Download Tax Saving Toolkit https://www.instagram.com/amanda_han_cpa/
Mark Kenney is a President and Chief Executive Officer at CAPREIT Mark Kenney joined Canadian Apartment Properties Real Estate Investment Trust (CAPREIT), a TSX listed company, in 1998. In 2019, Mark was appointed President and Chief Executive Officer. As Canada’s largest publicly traded provider of quality rental housing, CAPREIT currently owns or has interests in approximately 67,000 residential apartment suites, townhomes and manufactured housing community sites well-located across Canada, the Netherlands and Ireland. In 2020, CAPREIT was included in the S&P/TSX 60 Index. With over 30 years of experience in the multi-family sector and as President and Chief Executive Officer, Mark is actively involved in creating and implementing the strategic vision for the organization through the direction of company policy and oversight of the crucial divisions within CAPREIT, including property management operations, marketing, procurement, development, and acquisitions. A frequent contributor to BNN Bloomberg and other media, Mark is a passionate advocate for the role of Real Estate investor
In this episode we talked about: * Mark’s Background and How he Got into Real Estate * The Comparison of the Commercial Real Estate World of the 80s-90s and nowadays * Difference between Commercial Real Estate and Residential Real Estate * Pricing and Valuations of Industrial Multi-Residential * Supply in Real Estate * Real Estate Deals in Suburban and Rural Areas * Development Costs and Charges * Areas of Investment into Manufacturing Housing * CAPREIT Focus in terms of Real Estate Projects * 2023-2024 Interest Rates Environment * Advice to Newcomers
Richard Epstein is our returning guest. Richard is an American legal scholar known for his writings on torts, contracts, property rights, law and economics, classical liberalism, and libertarianism. He is the Laurence A. Tisch Professor of Law and director of the Classical Liberal Institute at New York University, the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution
In this episode we talked about:
- Historical Perspective of Land Use and Regulation
- Government Real Estate Agencies
- Inflationary and Interest rates Environment
- Macroeconomic Outlook
Scott Pickett serves as the Vice President of Acquisitions of Post Investment Group. He has been in the Business for over 17 years and has invested over 3 billion into Real Estate In this episode we talked about:
- Scott’s First Steps into Real Estate
- Philosophy of Deal Structure
- Capital Raising Strategy
- 2023-2024 Outlook on Multi-family Real Estate
- Deals Creativity
- Going to the New States
- Interest Rates and Inflation numbers 2023-2024
- Real Estate Upcoming Opportunities
- Scott’s Advice to Beginners in Real Estate
- Resources
Useful links:
Working capital Podcast Book “ The Philosophical Investor” by Gary Carmell
Trapp podcast
Contact: Head of Investor Relations: achrisakis@postinvestment.com
William Strange is a Professor of Economic Analysis and Policy at the Rotman School. William is former Editor of the Journal of Urban Economics (with Stuart Rosenthal), and he served in 2011 as President of the American Real Estate and Urban Economics Association. He works in the areas of urban economics and real estate. His research is focused on agglomeration, industry clusters, labor market pooling, skills, private government, real estate development and real estate investment. In this episode we talked about:
- William’s Background and how he got into Real Estate
- Rotman School Real Estate Program
- Paper Analysis of Skyscrapers
- Macroeconomic Outlook
- Urban Economics Resources
Useful links:
Book “Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier” by Edward Glaeser
Book “The New Geography Of Jobs” by Enrico Moretti
https://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Strange.aspx
August Biniaz is the Co-founder and COO of CPI Capital. CPI Capital is a Real Estate Private Equity firm with its mandate to acquire Multifamily and BTR-SFR assets while partnering with passive investors as Limited Partners. August was instrumental in the closing of over $208 million of multifamily assets since inception.
August educates real estate investors through Webinars, YouTube shows, Weekly Newsletter and one-on-one coaching. He is the host of Real Estate Investing Demystified PodCast - https://podcasts.apple.com/ca/podcast/real-estate-investing-demystified/id1650186768
In this episode we talked about:
- August’s Background and how he Found his Niche in Private Equity
- Nuances and Differences between Investing in the US and Investing in Canada
- Single-Family Rental
- Deals Syndication
- August’s Geography of Deals
- Syndication Structure
- Limited Partnership
- Syndication VS Joint Venture
- Difference between Funds and Syndication
- State of the Economy Overview
- Advice to Newcomers
- Resources and Lesson Learned
Useful links:
Books: “Best Ever Apartment Syndication Book” by Joe Fairless
“Raising Capital for Real Estate: How to Attract Investors, Establish Credibility, and Fund Deals” by Hunter Thompson
https://www.linkedin.com/in/august-biniaz-23291460/?originalSubdomain=ca
https://www.cpicapital.ca/
https://www.youtube.com/channel/UCBliV4We30bjaKqmqri8jQg
Joel has 40-year track record in industrial real estate. He co-founded Epic/Savage Realty Partners in 1991 where he oversaw hiring and mentoring 60 industrial real estate professionals, many of whom became his partners. His group sold the firm to an international real estate company in 2014 and Joel started Brit Properties. As an industrial real estate broker and owner, Joel has secured over 2,000 industrial property leases and sales. His greatest accomplishment is maintaining valued relationships spanning five decades.
In this episode we talked about: * Joel’s Background and Getting Into the Wild West of Real Estate * Fiscal Policy Response * Mentorship * The transition from Brokerage to Investment * Equity Raise * The Advice to Individuals who Syndicate Deals * Resources
Useful links: https://britproperties.com/
Brian Beaulieu is the CEO and Chief Economist of ITR Economics and the Returning Guest from the Episode 67
In this episode we talked about:
- Fiscal Policy Response
- View on Interest Rates Increase
- 2023 Real Estate Trends
- Rental Prices
- Macroeconomic Perspective
Useful links:
https://www.itreconomics.com/
https://www.linkedin.com/in/brian-beaulieu-28481977/
https://workingcapitalpodcast.com/real-estate-inflation-and-government-policy-with-economist-brian-beaulieu-ep67/ - episode 67
Brian is Managing Partner at DealGen Partners, a deal origination company that currently manages $2.7 billion in Buy Side Mandates. Since 2016, DealGen Partners has generated over $900M in deal value. Through the combination of their outreach strategy and network of partners
In this episode we talked about:
* Brian’s Background and Journey in Real Estate
* Value of Metrics
* His View on Strategic Investors
* The Macroeconomic Real Estate Environment
* Trends in Real Estate
* Geographic Preferences
* 2023-2024 Opportunities
* Brian’s Advice to Individuals who are Entering the Real Estate space
Useful links:
https://dealgenpartners.com
www.linkedin.com/in/brianscanloncmo/
Jeff Flemington is a Principal and Director at Avison Young. He works in a Brokerage Part of the Business. Jeff commenced his career in commercial real estate in 1994 and specializes in account and transaction management for large corporations. Jeff’s strengths include portfolio and strategic planning, negotiation, financial analysis and site selection/disposition work. Jeff’s experience also includes strategic planning, analysis, negotiation and implementation of real estate disposition and consolidation projects for various industry sectors. He has a proven track record with companies in the healthcare, consumer packaged goods, technology, financial services, government and supply chain and logistics space.
In this episode we talked about:
* Jeff’s Start of Real Estate Career
* Jeff’s view on office leasing
* Transactional Aspect of Leasing
* View on Office vs Hybrid Working Model
* The Interest Rate Environment
* Jeff’s Advice to Individuals who are Entering the Real Estate Space
* Asset Classes
* Building a Network
Useful links:
E-mail Jeff.flemington@avisonyoung.com
Phone: 416 435 7128
Ryan Gibson is the President, Chief Investment Officer and Co-founder of Spartan Investment Group (SIG). He has organised over $250 million of private equity for Spartan’s projects. Ryan has experience managing and developing SIG projects in challenging markets. For SIG Ryan is responsible for Investors relations and capital raises for projects.
In this episode we talked about:
- Ryan’s Background and Journey into Real Estate
- Self Storage World
- Self Storage Asset Classes: Benefits and Downsides
- Purchasing Real Estate Key Metrics
- Finding Acquisitions
- Investors Relations
- Interest Rate Environment
- Underwriting Deals
- 2023-2024 Opportunities
Useful links:
https://spartan-investors.com/
E-mail: Ryan@spartan-investors.com
Linkedin: https://www.linkedin.com/in/ryan-gibson1/?trk=public_profile_browsemap
Paul Moore is a returning guest on our podcast. He is the founder and CEO of Wellings Capital. Paul is the author of Storing Up Profits: Capitalize on America's Obsession with Stuff by Investing in Self-Storage. He is the go-to expert on investing in self-storage, and the king of profiting from storage units in America.
In this episode we talked about:
* Paul’s Background and Journey into Real Estate
* Paul’s View on Self Storage
* Raising the Capital and Finding Deals Operations Overview
* Investment Philosophy
* Warren Buffett's Rules for Real Estate Investing
* 7 Unique Paths to Commercial Real estate Investing
Useful links:
https://www.wellingscapital.com/resources
The book by Paul Moore "Storing Up Profits" - https://store.biggerpockets.com/products/storing-up-profits
Tyler Cauble is an Investor and Real Estate Developer in Nashville, Tennessee. He is the Founding Principal and President of the Cauble Group
In this episode we talked about:
- Tyler’s Background in Real Estate
- Using Brokerage to break into Commercial Real Estate
- First Deals - Raising Capital
- Asset Classes
- Interest Rates
- Nashville it terms of Investment
- Investing in Office Buildings
- Future of Hybrid Working
- Next 12-24 Months Real Estate Opportunities
- Mentorship, Resources and Lessons Learned
Useful links:
https://www.youtube.com/c/TylerCauble?app=desktop
Tyler Cauble Youtube channel
Book “WALKABLE CITY: How Downtown Can Save America, One Step at a Time”
By Jeff Speck
https://www.instagram.com/commercial_in_nashville/?hl=en Instagram
Transcription:
Jesse (0s): Welcome to the Working Capital Real Estate Podcast. My name's Jessica Galley and on this show we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name is Jesse Fraga and you're listening to Working Capital, The Real Estate podcast. Special guest on the show today is Tyler Cowell.
Tyler Cobble is an investor and real estate developer out of Nashville, Tennessee. He's the founding principal and president of the Cobble Group. And we had the pleasure of sharing a stage at Bigger Pockets, what was it, three weeks ago, Tyler?
Tyler (45s): Yeah, man, it feels like it was so much longer than that.
Jesse (48s): I know really well, first of all, thanks for coming on. It's, it's great to have you on the podcast. How you doing today?
Tyler (54s): Yeah, Jessie. Doing well, man. Thanks for having me on this show. I'm excited to dive in further into those topics that we kind of discussed at bigger pockets, you know, cause we only had, what, an hour or so to, to kind of talk about them a little bit. So it'd be good to go a little bit deeper. But yeah, man, excited to do this with you.
Jesse (1m 10s): Yeah, absolutely. Well, like all the guests that come on that, you know, on their first appearance, I always like to get a little bit of the flavor of your journey in real estate, how you got into real estate. I know we're somewhat similar in that at at one point I believe you're a commercial broker and we chat a little bit about that on stage. But yeah, for listeners, why don't you give us a little bit of a background in for yourself in real estate?
Tyler (1m 34s): Absolutely. Yeah, very similar background. So I started in commercial real estate back in the summer of 2013 as the in-house leasing agent for a local boutique development firm here in Nashville. And really just started off on, on shopping center and office leasing cuz the, the firm that I worked with had about 550,000 square feet of retail. We had about 60,000 square feet of office space and a couple hundred thousand square feet of industrial. But it was really a, a residential firm focused on, on that side of development.
And so got to sit in on all the development meetings every week and after a couple years, kind of learned how to put a deal together and went out and put my first development project together, which was a 42 unit town home development. And then shortly thereafter wrote a book on leasing commercial real estate called Open for Business. Kind of targeted towards small business owners cuz one thing that I saw over and over again was that they just got themselves into trouble left and right cuz they didn't know what they were doing. They weren't represented by a broker and it caused a lot of problems.
But after that development, after that book left and started my own firm started the Cobble group, which is just a commercial real estate brokerage focused on mostly investments today in, in, in the Tennessee area. But we do triple net leasing across the country. I've got Parasol, which is a commercial property management company. We currently manage a little over 2.1 million square feet of assets. And then I've got Hamilton development, which is where I spend probably the majority of my time now focused on mostly neighborhood development.
But we've done everything from a six bay car wash that we converted into five micro restaurants and a bar all the way up to a 32 acre site with 330,000 square feet of retail that we're currently master planning to tear down and develop about one and a half million square feet on it.
Jesse (3m 23s): That's awesome. So the, the initial kind of foray into real estate as a broker, was the, was the plan always to pivot to investing in real estate or was it something that kind of happened naturally? What did that process look like?
Tyler (3m 36s): Yeah, it was really something that kind of happened naturally. I didn't really even think I wanted to get into commercial real estate. I was, I did really well in sales the summer that I graduated high school and decided to drop outta college because of that. And I figured, hey, if I can make 30 grand in a summer as a 19 year old, I could go make, you know, a hundred thousand plus a year working sales full time. So I'm gonna go do that. And then ended up working as a project manager for my grandfather's construction company for about three months before I got the job as the in-house leasing agent and a development firm.
So it kind of just came naturally after having fallen into the business and seeing how that's how things works.
Jesse (4m 19s): Yeah, that's great. So we talked on the, on the panel that we were on about breaking into commercial real estate as opposed from residential real estate. The first couple deals that you did outside of the company that you were working with, so the, the first ones you did on your own or, or privately I guess you should say, because you know, none of these deals are 100% on our own. What did that deal look like? Was it, was that in the commercial space or did you, did you start in resi and then kind of move over?
Tyler (4m 46s): Yeah, it was, well so the, the first development project I did that was resi, it was 42 town homes. That one's very different from, you know, kind of what we've done ever since. But my first real project that I did, you know, relatively on my own without the development firm was an office building. It was a little two tenant office building that was completely vacant when we bought it. It had been mostly renovated and I, I fell into it, this was probably about five years into the business. I had been thinking I wanted to buy commercial real estate for quite some time, but could just never get over the, you know, the scary thoughts that we all have getting into our first deal.
Right. And it fell into my lap in the best way possible. We were helping a client buy it on the brokerage side. They couldn't get their financing. We, we assigned the contract to another client who also couldn't get their financing for different reasons. It wasn't because there was anything wrong with the, the deal. And then so after that we were like, well you know what, just assign it to me and I'll figure this out cuz you know, we've been working on the property for probably four months at this point. I'd really figured it out. I liked the project and so I called a couple of guys that had known me for five years at that point and just said, Hey, it's funny, like I always talk about this deal with my underwriting now cuz I was literally on the back of a napkin.
It was like, I think we can rent it for $12 a square foot and it'll take us, you know, 18 months to stabilize this property. And you know, they just said, Yeah, we'll give you 50 grand each and threw money into it, You know, now comparing that to 17 spreadsheets of underwriting on all the deals that we do, it's, it's hilarious to think back on, but it was a good deal. It was a good first deal. And later that year I ended up buying three more buildings. So once I, once I got over that fear of acquiring the first property, I just realized like, oh yeah, it's not that big of a deal, let's go for it.
Jesse (6m 35s): So the financial model didn't seem like the most difficult part of that deal in terms of, you know, the first couple deals. What do you, what did you find at the beginning if, if anything was the biggest challenge that you had? Whether that, you know, came from the capital raising side, from the operations side? What did that look like?
Tyler (6m 52s): Yeah, so the, the, the problem that we have on our projects today is the same, you know, problems that we had kind of early on in the projects. It's just the raising capital side of things. You know, my skills lie in the acquisition side of things. Finding deals off market and putting the idea on the project together and then executing on that and operating it. So we, we actually have worked very well with the just capital partners, right? Where they come in, they give us the cash, they don't want to do anything else and we just execute the deal.
The, the first deal we ever did was it, it gave me a false sense of how easy it is to raise money. Cuz I literally made two phone calls and they both said yes. And the, the next capital raise we did really put me back in my place. It was went from $50,000 raise, or I'm sorry, 125,000 raise to a $400,000 raise. And that was when I realized like, oh yeah, okay. You know, raising money is not always easy when you have to bring in multiple investors, there's a good chance somebody's gonna back out for any number of reasons, right?
They could love the deal and, you know, they're, they could crash their car and need to buy a new car, right? So there's, there's so many different reasons why somebody could back out, but that's why we work, you know, like I was saying so well with Capital Partners because they come in and fund it and we come in and just execute the deal.
Jesse (8m 13s): Yeah, I think even we, when we chatted about ways to break into real estate or commercial real estate in general, like there's these, all these aspects. There's the ops person, there's the person that's great with financials. There's a guy that's or gal that's great at finding deals and then there's the capital raise where that might be an individual where they are just, you know, all they do is raise capital or have the kind of the, the gift of, of raising capital or finding sources for capital for deals. And I think we underestimate that. You know, it's so hard to be good at any one of those verticals, let alone try to do everything on your own.
Tyler (8m 46s): That's right. Yeah. I mean I, I think you really should have partners that bring their own strengths to the table, right? I mean, you wanna flesh those out and make sure the partnerships work. But you'll get VC firms, venture capital firms, they will almost exclusively will not invest in single partner businesses cuz there's just too much risk, right? What if that guy gets hit by a bus tomorrow, who's gonna run this company? You'll get Shark Tank, right? They almost always love to invest in partnerships over a single person because it just reduces their risk.
And, and there's no way that one person can be good at everything, right? Because if you're, if you're trying to be a jack of all trades, you're probably not, you're probably gonna miss some stuff on everything, right? Yeah. And they would rather you be the outstanding development partner and this guy's the the finance guy, right? Or girl, either way that you want to do it or however you need to divide those responsibilities up. I think it's a a pretty savvy way of, of building your business and getting that security for your potential capital partners.
Jesse (9m 44s): Yeah. We always say in our brokerage it's finders, miners and binders, right? People that find the deal, people that can maintain relationships. And then the ones that, that are closers, I'm sure there's, you know, there's other ones, but those rhymes. So those, those must be right.
Tyler (9m 56s): That's right. Yeah. That's actually, I'm gonna have to keep that finders, minors and binders. I like that a lot. I mean, and yeah, you think about it like your, your personality will also kind of help determine which one of those you're gonna be really good at, right? Like, I've got a beard, I'm covered in tattoos. I'm not gonna be the guy that's golfing at a country club every Thursday, Friday, Saturday. Right. But I've got partners that they absolutely love doing that stuff and it's been incredibly effective for them on the capital raising side.
Jesse (10m 21s): Yeah. And it's just, it's funny how some, some areas that you think that somebody will have the strength in and it turns out they're, they might be great in something completely different. Like you're doing a, a value add and you find it, one of your partners is just really good at communicating with the traits people and, and it's, and it seems like a good fit. They respect him or her and, you know, some of that, some of this stuff doesn't, you know, you don't plan everything out. Some of this stuff happens by osmosis and by a certain deal that you're working on,
Tyler (10m 50s): Right? Yeah. It just falls together naturally. And, and what I've found too, you know, I think a lot of people that are just getting into commercial real estate think that they need to have that figured out all on the front end. And yes. Does it help to have the capital partner, does it help to have the general contractor and the attorneys and the brokers and the property managers? Absolutely. Right. But the chances of you having the right team on board day one are pretty close to zero, right? I mean, the people that we were working with when I first started my development company night and day, compared to who we're working with now.
And that's because as you grow your needs change, right? I can't be working with the same engineer on, on a, you know, $575,000 office building as I am on a hundred million dollar multifamily deal. It just doesn't make any sense.
Jesse (11m 38s): Yeah. So speaking of kind of things changing in terms of when you first started the type of assets that you were buying back then, how has the asset class or the, you know, the investment philosophy changed from then if it has at all to now and, and the deals that you're looking at now?
Tyler (11m 55s): Yeah, so since I started kind of in the, the office and retail world mostly, I've never been afraid of office and retail and, and it's been interesting to see how people have reacted to those two asset classes over the last three to four years. You know, when everybody's freaking out saying the building's on fire and running away, to me, I'm like, man, that's an opportunity. Like right now, I'm sure we'll get into this here in a minute, but interest rates, interest rates going up, buyers developers are pulling back massive opportunity. And if you're building an apartment complex right now, or you start in the next few months, you'll be one of the few apartment complexes delivering, right?
Which means you'll probably have a very aggress lease up. So to me there's, there's, there's always an opportunity in situations like that.
Jesse (12m 36s): So let's talk about interest rates in, in terms of, you know, let's kind of frame it from the perspective of you have people that, like you said, are looking for deals now. So they're going to negotiate with, with interest rates in mind for sure. And, and be hypersensitive to what they can get, whether they should do floating or fixed. And then you have the bucket of people that are, you know, had interest rates locked in at a, at a low rate already that are, you know, working their deals. And then there's kind of that in the middle where you have people that are doing short term debt and it's in a floating kind of environment and they're probably saying, you know, shit, we didn't expect, we didn't put this in the proforma for interest rates to double.
So I, I imagine that with, with those three different type of user groups, there's opportunities like you're saying to come in now with, you know, with the reality of where interest rates are today with a little bit more information. Is that kind of kind of the way you're looking at things right now?
Tyler (13m 32s): Yeah, absolutely. I mean, I think, I think the people with the, the shorter term debt, they're the ones that are gonna be in trouble, right? I, I would rather, I mean, we're working on a multifamily deal right now. That'll be, you know, somewhere between 250 to 350 units depending on how we decide to lay out the site and go, if we go with garage wrap or podium and we have the option to lock in a six and a half percent interest rate or do a floating arm, right? And we can see how well, you know, in, in two years interest rates will probably come down.
So locking it in now might not benefit us in the future, whereas that arm is gonna be high right now, but it could come down pretty significantly in two years. But I'm looking at it and going, I'd rather just lock in at six and a half percent today and just have the surety of, you know, hey, you know what, if we end up overpaying in the future, we, we overpaid so that we could have a little bit of peace of mind so that we know that, you know, I mean, look, if, if World War Three breaks out interest rates are gonna skyrocket and the last thing that anybody needs is for their interest rate to go to 10 or 12%, right?
Cause then you're talking about a massive amount of defaults and you just can't make that deal work. And so, you know, that six and a half percent walk in I think is good. I, I I think, like I said, I think developers, buyers are pulling back and that's gonna create a massive amount of opportunity for people that are cash buyers, right? We've got a client that just sold a vineyard outta California for 120 million cash and we're doing almost, so we're helping them kind of build this portfolio. This is on the brokerage side and they are, we're starting off in the triple net investment side.
And since we're coming in as all cash buyers in an environment where interest rates are too high to make the spread work on preexisting cap rates, we're negotiating these cap rates way up. And we know in two, three years we'll be able to throw 30, 50% debt on these properties just to keep it very safe for them. Keep their, you know, debt service low and pull that cash out at much cheaper rates than we have today. Thereby increasing that spread that they're able to get on some of the most secure assets you can buy even more.
So yeah, definitely opportunity all around.
Jesse (15m 42s): And for those listening, you know, I know not everybody's kind of in the commercial world, on the triple net side, you're just simply mean, You're simply saying that the additional rent, you're, you're downloading to the tenant. So the taxes, maintenance, insurance, you're, you're basically having the tenant pay for those?
Tyler (15m 57s): That's right. Yeah. So all of the, so the tenant pays the rent and then they pay for any of the additional costs of owning that property. So typically, like at a multifamily property, right? You may or may not have the utilities passed on, but you as the property owner will pay for the property taxes, the building insurance, landscaping, you know, anything to do with the property. Whereas in a triple net, you know, take a Starbucks or a Walgreens for example, they will pay for those expenses on their own or reimburse the landlord for it, especially on the commonary maintenance side because let's face it, Starbucks has an image to ahold and that actually directly impacts their business if that's not getting done.
And there are landlords out there that might try and, you know, cut the budget a little bit and and skip by and save some money. So they prefer to have those expenses on their books.
Jesse (16m 44s): Yeah. And it's interesting how things have changed over the last, even the last year or two where kind of caps, I'm not sure in your market, every market seems to be a little bit different, but putting caps on those controllable operating expenses, I think at, at the very least, whether landlords are allowing it or not, but at the very least we're seeing a, you know, a different percentage cap because we're not in a 1% inflation environment anymore. We're, you know, closer to 10 probably in the states. More than that, I don't have been.
Tyler (17m 11s): Yeah, I mean we used to kind of cap everything at around 5% annual increases on the controllable expenses. Yep. And then we more commonly got into 10% per year. And I wouldn't be surprised if people are now capping it at 15% and just saying, Look, we don't know. We don't know what we're gonna get charged. We can't control it. I mean, they're technically your controllable expenses, but you know, if labor costs go up and your landscaping doubles Yeah. And that's just market now. You really can't control that.
Jesse (17m 39s): So given the environment that we're in right now, I'm not sure for your local market in Nashville, well first of all is, is Nashville Nashville kind of where your playground is? Where, where you like to invest or you, are you in other markets or even outta state?
Tyler (17m 53s): Yeah, so we've got, most of our assets are in Nashville. We do have one in Chattanooga and one just across the border in Georgia from Chattanooga, which a lot of people don't know this, but Chattanooga MSA actually crosses into Georgia. So technically Chattanooga. But we, we have helped, like I've got clients that are buying property all over the United States. I was just in San Antonio for a client that was doing a 10 31 exchange. I was up in Milwaukee. But as far as our investments go and, and just my investment philosophy, I prefer to, to be able to have, you know, hands on protection of the asset.
Cuz again, that's, that's our skill set. But we'll, we'll probably expand outta that footprint at some point once I've got a bigger team.
Jesse (18m 37s): So given Nashville right now, it's, it's been a while since I've looked at the numbers, but I remember it was kind of the darling of the apartment industry for a while where there's just deals and deals and, you know, even maybe a year ago, seeing the numbers, the, the unit price of prices have gone up or went up substantially. Is that still the case? Is it, is it a, an expensive market or is that the reason, you know, you're looking into these, you know, potentially secondary markets?
Tyler (19m 4s): Yeah, I mean we try and play in whatever sandboxes nobody else is really paying attention to. Cuz I've been able to find a lot of value that way. So, you know, within Nashville we look at the emerging corridors. So we try not to, you know, so Nashville's kind of bisected by the river, right? So there's, there's downtown and South Nashville, which is on the south side of the river and there's East Nashville, which is technically on the north east side of the river. And that river kind of cut off all of the old money, which is south of town from really developing on this, this side of town.
And so there was a huge opportunity there to be so close to downtown and have, you know, all these cool musicians, your artists in Nashville kind of live on that side of town. So it was very easy for us to jump over here and start doing cooler projects. You know, if you're, if you're trying to buy multi, you know, build multifamily right now closer to the urban core of Nashville, it's tough because land prices have gotten so high, construction's so high, then you have to turn around and get the rents. Even though we're 53,000 residential units short of a comfortable market in Nashville, it's, it's, it can be tough to make those deals work, but we're finding deals on those emerging corridors where, you know, maybe you've gotta put up with a, a, a car lot across the street or a van at bank or you know, whatever that is.
But we're still five minutes from downtown and I don't think that people moving here from New York, Chicago, LA have any issues with that. And they've actually proven that over the last 10 years. And so that's kind of where our, we're finding our opportunities. Chattanooga was, was 100% a yield move, right? I bought a 41,000 square foot nine story tower out there for 1.8 million. Hmm. I mean, just the price per square foot, you know, in Nashville it'd be at least 10 times that in the same location.
So, you know, the, the opportunity there to just make more on your cash for relatively smaller projects was, was too tempting.
Jesse (21m 1s): So when you're looking at, let, let's move to some of the, the office discussion. When you're looking at these assets to purchase, you know, for those that don't know, it's, it's very similar to the kind of the apartment side in a sense, in the sense that, you know, you look at your tenant profile, you're looking at lease expirations, you're looking at the quality of the tenants because you know, the, those are the building blocks of the valuation of your property. Are you doing anything different with how you proforma office buildings than, than say you were two years ago?
Or is kind of the fundamentals pretty much stayed the same?
Tyler (21m 38s): Yeah, so for me the fundamentals have stayed the same only because the type of office that we were investing in just happened to be the type of office that did find during covid. So we're more of the class B and class C office assets on what I call the urban core adjacent. So not your immediate downtown, just in the neighborhoods surrounding it. And those are a lot of small business owners that lived in the neighborhood and they wanted to get out of the house, right? You'll get a lot of these class A assets that are in downtown cores and those are really the ones that are taking probably 90% of the hit because a lot of these people don't wanna drive downtown and work in a 300,000 square foot office building with, you know, a lot of other people they don't know.
Now that's starting to change, right? I mean, there's a ton of companies that are moving back and I, I don't think that that's gonna be a permanent move forever, right? I mean, having office space in the downtown cores is far too convenient for way too many big companies. Cuz you know, think about it, their workforce can live all over anywhere in the city and get there. Whereas if you go to the south side of town, maybe there's only one interstate or a couple major thorough bears that'll take you there and it just makes it a little more difficult. So, you know, I I would say the, on the office side of things, it hasn't really changed.
We always do look at, you know, how can we make this more of a mixed use type of asset? How can we bring some other draw to the space that would make an office tenant say, yes, we would take this over, you know, the straight office, straight up office building down the street. You know, can we add a coffee shop? Can we add a food truck? Can we add, you know, something? Can we add a bar, something cool that would just give them an opportunity to have more meetings or, you know, help create more of a company culture within the project.
Jesse (23m 25s): So most people on the brokerage end of things, or even on the investor side are sick of talking about this in the commercial real estate space. But I have to ask, in terms of the future of work, the future of, of of office space hybrid working, what, what's your view on that? What, what do you see unfolding in the, let's call it the kind of short to to mid term? So say like a year to five years out, How do you see work evolving, if at all?
Tyler (23m 55s): Yeah, I mean, I think if you're, you're focused on office space where you're catering to probably 50 or fewer employees, you're probably gonna have no issues, right? A lot of these smaller companies don't wanna spend the money to go fully remote. It's much more difficult for them to manage a workforce remote than it would be for say, you know, Bridgestone who has thousands of employees and they haven't gone back to the office here in Nashville, right? I think that, and, and again, we saw that through covid. I mean, I was, you know, waving at my neighbors from, you know, across the hall when, when I was still working in the office because everybody was still coming in.
I think that there are certain aspects of everyday offices, right? That, that maybe accounting, right? Does accounting really need to be in the office? Probably not maybe once, twice, three times a week just to make sure that they're caught up in having whatever meetings they need to have with other team members, but they don't necessarily need to be permanently in the office, right? And so there can be some accommodations that get made there. Whereas if you're in sales, right, and you're having to go work with a team, or if you're on, you're a tech developer, right?
And you're working with a team, I mean, chances are you're probably gonna have to be in the office more. So it'll be interesting to see, I know we've seen some companies move more toward, you know, they've lessened their office spaces, right? And they have people on shifts, right? Like, you come in Monday, Tuesday, Wednesday, and then the, the second shift comes in Thursday, Friday, or however they're deciding to do that. I think that that's gonna end up becoming just another trend, kind of like open workspace, right? Like everybody 10 years ago was saying the open floor plan is the way to go.
We can pack everybody in here like sardines. It's so efficient. And then they found out that none of the employees liked it. It made everybody less productive. I think that that's kind of what you'll see for some of these offices. Now, if you've got a bad work culture, your employees will 100% not want to come into the office, right? So it's kinda like, how do you actually make this a great place to work where your people want to be there?
Jesse (25m 60s): Yeah. It, I think it's definitely like the situation's definitely exposed some, some cultures that probably had issues prior to this. In terms of like the workplace, I think it's, it's an open question on that. If, you know, the trend, the aspect of coming in on a hybrid model, in a lot of ways it makes sense. The, you know, it's like the, there's a great book I was talking about recently with some of the brokers in our office, Fanatical Prospecting by Jeb Blo, you know, Sales Gravy's a great podcast. Some of the guys didn't hear about it, but there's Parkinson's law, which, you know, you'll, you'll basically expand time to take, expand time to take the item A the task at hand will kind of fill up that amount of time that you give it.
But then there's the other one, and I can't remember remember what it's called, but it's basically a contraction of time. And it's kind of similar to, you know, when you have a vacation and you gotta do a bunch of things, all of a sudden you, you, you move mountains and you figure out stuff that you could do in one day that would take you a week because you have that, that plan. And what I've found is that the, comparing that to the work week, a lot of what we do, we can do four out of five days a week, especially like we're in sales, it's a little different, you know, we'll ju we'll work regardless. Like we'll take up that amount of time because our function is different.
But certainly I think that companies, you can do things in four days. I think the challenge that we're seeing with companies that we work with is when you start giving the option for hybrid, all of a sudden Mondays and Fridays become the days that if you're gonna give people three days a week, those are obviously the ones that they're gonna choose to have off. And that creates a problem. So we've had to adjust even in, in our organization and we have, you know, 5,000 plus employees.
Tyler (27m 37s): Yeah. I mean how do you, how do you handle that the right way? Right? I mean, if every company in the world starts taking off on Mondays, there's gonna be a lot of customers or deals that just don't happen or, you know, you struggle to get things moved forward. So yeah, I mean I think that, you know, having people work in shifts or whatever, I mean, you know, we were looking at, what is it Iceland, where they actually have a three day weekend, Like every company there, you know, takes a three day weekend. Hmm. And they are just as productive as United States.
And, and I thought that that was really interesting. And so we've been studying that model, trying to figure out how we can make that work in our company as well so that we can, I mean, I'd love to take Friday through Sunday off. I own my own business. That will never happen.
Jesse (28m 20s): Yeah, I was gonna
Tyler (28m 21s): Say work every day. But that, that's a cool thing for the employees, you know?
Jesse (28m 25s): Yeah, absolutely. I think it's, you know, it is one of those things that we'll see evolve. I think what's, what I find kind of fascinating is that people, you know, that talk to us and that are in the commercial space and talking about how this is a new thing and obviously the pandemic was a new thing, but I think, or at least in my, you know, experience, I've seen this trend kind of just get pushed into high gear. I, I saw a trend of hybrid working and, and not just me, a lot of people in our space did see this trend and it was really a matter of technology catching up and, and kind of the will for companies to, to push it and kind of the pandemic I think just heightened all that.
Tyler (29m 4s): Yeah. I think the best way to look at it that I've heard is we just shot ahead 10 years. Yeah. Right? Like that's, that's basically what happened. Everybody figured out, you know, oh, you know, Zoom existed, right? I mean we're recording on it now. Yeah, Zoom existed prior to the pandemic, but wow did their, you know, subscription rates significantly jump. People found it. They realized, oh okay, we can use this for a significant amount of our meetings. Let's just do that. So I I I think that people just adapted technology that was already in use. It'll be interesting to see what comes out of it, right?
I mean you look at 2009, 2010, all the companies that came out of that to serve some issues, right? You had ride share come outta that lift. Uber, Airbnb came outta the downturn. So I'm excited to see what comes outta this one. But yeah, we just kind of shot ahead 10 years.
Jesse (29m 52s): So we ask four final questions to all guests that come on the show. But before we get to that, I just want to talk a little bit about where, or, or ask you what you think the opportunities, we touched on it a little bit are gonna be where the opportunities are gonna be in terms of, you know, the next 12 to 24 months as we're in a very precarious time. I think a lot, a lot of things are changing at once, inflation interest rates. So I'm gonna ask you to crystal ball it and I know that nobody can, but I'd love to get your thoughts.
Tyler (30m 24s): I wish I could, I'd be Warren Buffet by now, but I would say, you know, let's bring it down by sector, I mean multi-family. I think the opportunity is if, if you're willing to go ahead and move forward and pay a little bit more on construction costs and pay a little bit more on interest rates, you'll be one of the few products delivering. And I think there's something to be said for that, for having a very aggressive lease up on the back end to say that it's worth it. I think on the office side it's gonna be a lot of exploring what are the other amenities that you can really add to office space that will keep companies interested in leasing space from you that nobody else is doing.
Right? I mean, come on, having a meeting room and a little cafe downstairs. I mean it's like most office buildings, I'm sure you see this all the time. It's like they haven't changed since the 1980s and you look at multi-family apartment complexes and in the last 15 years, the amenities that have been added to apartment complexes is insane. Yeah. There's one here in Nashville that has the biggest pool I have ever seen with a volleyball court. This is all on above the parking deck by the way. Volleyball court. A yoga studio with a yoga instructor that comes in.
They've got a CrossFit gym, they've got an indoor like Topgolf simulator. They've got like four or five barbecue pets, hammocks every, I mean, you know, like compare that to 20 years ago, they're like, here's a grill outside. Yeah. You know, they've just totally changed the programming. So I think you,
Jesse (31m 48s): You gotta come to the front to get the key.
Tyler (31m 51s): Yeah, exactly. Exactly. So I think, I think looking at office through the lens of multifamily is a really interesting way to help urge that into the future industrial buy anything you can that's sewn for industrial and start building it. I mean you cannot, you can't do enough of that right now.
Jesse (32m 9s): You can find it.
Tyler (32m 11s): Yeah, exactly. I mean cuz it's, it's so cheap to build and, but the problem is a lot of the industrial, especially in the southeast, has been closer to the urban core. Guess what? It's getting torn down because there's a higher and better use such as multifamily on that site now. So not only are developers not building that product cuz they're focused on, you know, million square foot plus logistics and distribution buildings for like Amazon and e-commerce, but the stock is getting taken away. So where are all of the construction companies going?
Where are your local little e-commerce stores going? And then retail, Just look at it differently. There's nothing wrong with retail. I mean, look at, you know, you got these big boxes you have to fill, call church, call a gem, do something unique in that space. Do self storage, right? There are so many things that can take up big box spaces. Don't be afraid of it. You know, retail isn't dying, it's just changing, right? I mean, you gotta think of what is Amazon proof.
So that's, that's kind of my, my, my crystal ball there.
Jesse (33m 16s): Right on. All right, so we got four questions. I'll, they're pretty, pretty short, pretty self-explanatory. I'll hit you with them here.
Tyler (33m 24s): Let's go.
Jesse (33m 25s): All right. For the younger people listening kind of touched on it on our panel, but your view on mentorship or, or you know, what young people can do to break into our industry?
Tyler (33m 36s): Go find somebody that's doing what you want to be doing and just figure out how to be in their life. Right? I mean see if they'll go, go out for coffee with you if so by the, by the damn coffee, right? Like I've had so many people that have re not that I need somebody to pay for my coffee, but it just, it leaves a really good impression of you of like, I'm taking this seriously. I know you're giving me your time just by the, it's five bucks. I think that any way that you can provide value to that person, do it. Because you gotta think like these commercial real estate professionals are incredibly busy, right?
We've got so much going on. It's really tough for for us to take time out of our days just to have a meeting. Not that we don't want to do that. It's just like, I mean, you know, up until we were on this, I was on a call literally one minute before cuz I've been on calls all day and this guy's called me like three times and I haven't had a chance to call back. And so anyway that you can provide value I think. And then, and then as soon as you get a foot in the door, you know, if you gotta go work for free, do it right. Be the guy that just brings coffee to the office in the mornings. Cuz eventually somebody's gonna say, Hey will you go do this?
Will you pull me some comps? Will you, you know, whatever that opportunity is and then jump on it and you'll get into it. I've had buddies that had, I had one guy that had over 50 interviews in the commercial real estate industry and didn't get a job. Wow. It's tough. It's really, really tough. But you know, once you get that foot in the door, the sky's the weapon.
Jesse (35m 2s): It really is. I tell you, I tell you younger people, especially if they want to be first of all in commercial, it really is the hardest part is just getting in. Once you're in you can, you know, navigate and explore the, explore the studio space as they say.
Tyler (35m 16s): That's right.
Jesse (35m 17s): What was something that you wish somebody had told you when you started out? Whether that's in brokerage or investing, just, just something you, that was a hard lesson you had to learn.
Tyler (35m 26s): Ooh. I would say commercial real estate is not linear. You don't take stair steps. You experience hockey stick growth. The first couple of years were really rough for me as a broker cuz like I told you, I made 30 grand that one summer in sales. Yeah. And so when I started looking at a commercial real estate, after I got offered the job, I was like, oh man, I'm gonna come in here and make over a hundred thousand dollars my first year and just we're gonna be off to the races that I can't believe how hilarious that is. Now looking back on it, I made, I busted my tail and I made 40 grand my first year, which most brokers don't.
Yeah. My second year I was looking at my tax return, I literally made like 40,500. I was like, what am I doing? I made $500 more my second year. I need to go get into a different industry. Well the third year after you actually have learned a little bit, you've made some contacts and you, you know more about the process and how things work. You just work more efficiently. Made 120 grand. Yeah. Right. And then it's just gone up ever since there. And so it's all about just getting in understanding that those first few years are not gonna be the easiest, but it will all pay off the more you teach yourself during that time.
Jesse (36m 41s): Yeah, that's funny. It is a, it's a funny industry. You know, you're gonna make 35, $40,000 but you're wearing a thousand dollars suit in your first couple
Tyler (36m 48s): Years. Oh my gosh. Yeah. I spent all of my money un unbuttoned downs and, and nice pants and shoes and it's funny cuz now, now that I am where I am, I wear t-shirts and jeans and don't have to worry about that at all. Yeah. But yeah, it's, yeah, you've gotta spend money to at least look successful.
Jesse (37m 7s): Yeah. And you're absolutely right. It's like it is not linear. It's hockey stick growth and like the big thing is like that hockey blade might be really long for a long time. Yeah,
Tyler (37m 17s): That's exactly right.
Jesse (37m 18s): Awesome. What are a couple resources that you would recommend, whether it's a book you've recently, you know, recently read or a podcast that you've been on lately?
Tyler (37m 31s): Yeah, I mean I think obviously go check out Jessie's YouTube channel. I've got a YouTube channel as well, teaching people a commercial real estate. I think that those are, those are great resources, right? Cuz when you and I were coming up, nobody was doing that. We did not have that opportunity. I mean, I tried to learn from anybody I could and everybody was just like, you know, swatting at me like I was a fly because nobody wants to teach you anything in this industry. I think that, so the book that I almost always recommend to people is Walkable Cities by Jeff Spec. It is one of my favorite books.
It's really on urban design. So not even necessarily commercial real estate specific, but the way that they talked through how a great city is designed and how commercial real estate, residential real estate design actually impacts everybody's daily lives. Hmm. Completely changed how I looked at my projects. So it's kind of like, kind of the things that you can't put a dollar value on, but you need to spend the money on and you know, it'll come back in the end and benefit you. And so a lot of development companies actually ignore that because they can't quantify it.
Yeah. But the value is there. So those are, those are some great resources.
Jesse (38m 37s): That's great. I've never heard of that. It reminds me a little bit of, I think it's Dr. He's a per, he's a PhD. Gly is the last Edward Gly and it's triumph of the city and a lot of it has to do with urban planning and, and design and how we have different, you know, different ways that design happens as a result of people being in a place rather than designing it that way. And taking, taking kind of notes on, on that aspect of it.
Tyler (39m 5s): Yeah, I think you know, it, it talks in the book, it talks about Nashville and it talks about Vancouver, it talks about Portland and, and Nashville and Portland are almost exact opposites. Portland did not want interstates. Nashville went all interstates. And you could see how that impacted. And then Vancouver, what I love about Vancouver is very early on, before the development got big there, they created view sheds and they created all of these development requirements to make sure that the city doesn't hide the beauty that made it right.
And I think that's really, that's why Vancouver is still one of the best cities you could visit to this day. It's just such a great place to be. You still feel like you're in the mountains even though you're in a city. You know, they've just done such a good job of preserving that. Yeah.
Jesse (39m 51s): Yeah. It's been a while since I've done the Western Canadian thing. Gotta gotta get back out there. Yeah. Okay. So listen, I've, I've kind of gone over time here. I want to make sure that we put a couple links on where people can reach out to you. Obviously the YouTube channel, any other place that you know if people want to connect or see content that you're doing where they can go?
Tyler (40m 11s): Yeah, YouTube channel's. Just my name, Tyler Cobble. And then if you wanna connect with me, Instagram is by far the best way. If you DM me, I will answer questions and that's just commercial in Nashville with underscores between it. Or you can just search my name. Tyler Cobble.
Jesse (40m 27s): My guest today has been Tyler Cobble Tyler, thanks for being part of Working Capital.
Tyler (40m 31s): Thanks Jesse
Jesse (40m 46s): You so much for listening to Working Capital, the Real Estate podcast. I'm your host, Jesse Fraga. If you like the episode, head on to iTunes and leave us a five star review and share on social media. It really helps us out. If you have any questions, feel free to reach out to me on Instagram. Jesse for galley, F R A G A L E. Have a good one. Take care.
John Cochrane is an economist, specializing in financial economics and macroeconomics, the Rose-Marie and Jack Anderson Senior Fellow at the Hoover Institution. Previously John was a Professor of finance at the University of Chicago Booth School of Business and before that at the Department of Economics. Josh is also an author of the Grumpy Economist blog.
In this episode we talked about:
- John’s Background in Economics
- Interest Rates & Inflation
- Modern monetary theory
- Milton Friedman
- Market outlook
- Fiscal policy
- Macroeconomic Environment
Useful links:
https://www.johnhcochrane.com/
https://johnhcochrane.blogspot.com/
Transcription:
Jesse (0s): Welcome to the Working Capital Real Estate Podcast. My name's Jessica Galley, and on this show we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, you're listening to Working Capital, the Real Estate podcast. I'm talking with John Cochran today. John is an economist and the Rosemary and Jack Anderson, senior fellow at the Hoover Institute.
He's a former professor of finance at the University of Chicago Booth School of Business, and the Department of Economics, and the author of a great fantastic blog that you should check out The Grumpy Economist. John, how you doing today?
John (45s): Good, thank you.
Jesse (47s): So we talked a little bit before the show, John, you know, the podcast itself, the listeners that we talk a lot about the kind of environment that we play in as entrepreneurs and real estate investors and that being the economy. And you have a up a book that, you know, I heard on another podcast the Fiscal Theory of the Price level, which will put a, a link to and despite the title and to scare anybody off. Maybe you could give a kind of an overview of first of all, maybe your background in economics and, and kind of the work you do, and then we could chat a little bit, a little bit about the book.
John (1m 22s): Great. Let's see. I'm, I'm economist and I've been thinking about money and inflation since 1982 and I've split my time between thinking about that and thinking about stocks and bonds. So money inflation, business cycle stocks and bonds and a whole bunch of other things. Being an economist is a wonderful thing because we, you can, you can jump from one thing to another and, and actually, you know, make real contributions in lots of places. The book is called The Fiscal Theory of the Price Level.
If you Google me and find my website, you'll find the book. You will also, the book is full of equations and designed to convince my fellow economists that they need to come over to this. There are some essays on the same website, which I re recommend. You start with, fiscal histories are particularly like no equations and tries to tell a different story about where inflation came from and where it's going in the US over the last, in the postwar period. The basic idea is where does inflation come from?
Not so much too much money chasing too few goods, but more importantly, too much overall government debt relative to what people think the government is willing and able to pay back. And if you're sitting on say, oh, 30 trillion of government debt and you think government is, is good for about 20 trillion of it, what you do is you try to get rid of that. It's terrible invest. What do you do with an overpriced investment? I think everybody understands this. What do you do with an overpriced house? You sell it. But if we all try to sell government debt, then the only thing we can do for it, it is, oh, buy houses.
And we've been put upward pressure on the price of goods and services. So that ultimately is where inflation comes from. That doesn't mean the Fed doesn't have a big role to play, so I won't bother you the equations, but interest rate policy still is quite important in figuring out where inflation will go. But it isn't everything and when people are, are, don't fundamentally trust the government, there's really not that much the Fed can do about it. The Fed can kind of smooth it out for a while, but there's not that much. So I'll, I'll stop there and we can see how deep you want to go into theory or into explaining the real world or into real estate.
Jesse (3m 34s): Yeah, I think what would be interesting is that from, you know, it wasn't too long ago, we were oh 7, 0 8, 0 9, it was a different environment from the financial crisis, but we had lower interest lowered interest rates to such a degree where people were starting to question the traditional, the traditional economic framework where we have interest rates at this low amount. We had quantitative easing, but we didn't seem to have any inflation. Maybe you could talk a little bit about, you know, what mechanisms were at play during that time and, and if there is a, you know, if there's a logical connection between that environment, you know, what past that and, and where we're at right now.
John (4m 13s): Yeah, so I don't buy there, there's a lot of blah blah about how the Fed kept interest rates absurdly low over 10 years and so forth. Really the Fed is not that powerful. The Fed cannot keep real interest rates low for actually 20, 30 years that they have been very low by historical standards that has to come from the real economy. The Fed can move things around for a year or two, but in the end, very low interest rates come from real factors and interest rates were low, inflation was low.
People were willing to hold the government's debt part that the fiscal situation in the US wasn't great, but there wasn't a lot of news about it. And I think at least not just 7, 8, 9, but also throughout the 2000 tens when interest rates remained low despite deficits. I think the people holding us treasuries say, Look, us is a great country and yes, the CBO reports are scary, but America will always do the right thing after we try everything else.
As Winston Churchill, I guess did not say, but he should have said, and you know, that fixing the long run fiscal problem in the US is not that hard. We just have to sit around and decide we want to do it. So sooner or later we'll do it. I think the, the five, no, why are we having inflation now? The government in the pandemic printed up $5 trillion of new money, well, it printed up three and, and borrowed another two and sent people checks. And that's, that is just massive.
And I, I think people are starting to question, is the government really good for it? And we're seeing that not just in the US and tumult the treasury market. We're seeing that in the uk. We may be starting to see that in Europe as well. Well, so I think that kind of explains the difference. Now, I'm, I'm telling stories, but at least there's plausible stories here.
Jesse (6m 5s): So when it comes to the understanding that in the entrepreneurial space and real estate and the greater economy that we, we go through cycles, we go through time of growth, we go through time of contraction, Is this just an artifact of, of just the modern economy that we're gonna have ebbs and flows and we're gonna have times where, you know, the, the getting's good and, and then times when it's not so not so great. Or is the, is the chief goal the ultimate goal to have some sort of normality that plays out for a longer period of time?
John (6m 36s): I think everyone's goal is normality that plays up for some period of time. And you're asking a deep question, which I won't answer, is how much of fluctuation, especially in, in real estate is, is natural to the economy? How much of it is a, you know, some pathology of the private economy that some government might be able to fix someday? And how much is induced by government policy? I would say for real estate investors batten down the hatches. We're on our way to a tough time. This one is pretty obviously induced by government policy and, and not just monetary policy and fiscal policy.
You know, we, we saw certainly in 2007, 2008, how the regulatory environment encouraged booms and busts. And I think our current regulatory environment makes matters worse rather than makes matters better, you know, subsidizing the boom and then pulling everything back in the bust. But it's certainly where we're heading now is, I think ask your parents and grandparents about the 1970s. I think it's fairly clear we have a burst of inflation that that comes from somewhere. I think it comes from the, you know, the massively overdone stimulus, but take your pick where it comes from.
You know, in the 1970s we had inflation that came from fiscal policy. Johnson wanted the Vietnam War and the Great Society, and then we had also oil price shocks. Ah, welcome to the 1970s. You know, get your flowered shirts and your bell-bottom jeans out cuz oil price shocks get things going. The fed is late to the game and then the fed slams on the brakes. Does that sound familiar? So I think it's fairly clear where we're going to go. Our fed has woken up and I think it's a, I can't really bet on where the economy's going, but I think, I'm pretty sure what the fed's gonna do.
As long as inflation remains high, the Fed is gonna keep raising rates 75 basis points a shot. And so we will see how, what I don't know is if that will lower inflation, how long that will lower inflation, but the fed's gonna keep raising rates. I think it's fairly clear that is going to cause an economic slowdown, if not a recession. I mean they're, what they're trying to do is add just enough recession to offset the boom. You know, you're trying to land a plane, they call soft landing. You're trying to land a plane while the engines are gone full tilt, which ain't that easy.
So they're trying to add enough and, and typically the fed fed adds more recession. So I, I think it's quite possible we head into recession, but the mechanism of what the fed's trying to do is raise interest rates. And that what does that hurt? That raising interest rates doesn't so much make you go out for burgers less often. And so often demand for restaurants raising interest rates is designed to to to lower interest sensitive spending. Okay. Unpack fed speak codes, that means you, Mr real estate, the design here is to raise interest rates, which lowers house prices, makes people less willing to sell houses, lower raises, mortgage rates makes it harder to buy houses.
So, you know, the whole point is to try to soften down a real estate boom. Not made any better by our country's ridiculous zoning planning and other bureaucracy that I, so I live in Palo Alto where it's just infuriating Yeah. Where house prices have been driven very, very high. Not so much by too much demand, but by just the refusal of the government to allow usli.
Jesse (9m 58s): So I was just speaking with you before the podcast. I was just coming back from San Diego. I live in Toronto and and Canada and, and I find that Ontario here is pretty similar in policy too. A lot of the California policies when it comes to real estate. I do wanna ask about a specific thing here on inflation, but before we do on that real estate, on the real estate topic, what we saw for the last few years was an extremely high, especially in our markets and the major markets in the states, an extremely high push on asset valuation, specifically in industrial and multi-res and low, low cap rates, which don't always follow interest rates, but you know, the spread is, is usually somewhat consistent.
I guess the question here is we do have inflation now we have a business real estate where we do pass on inflation typically to our customers, ie. Renters. But what do you think that the, and I I take asset values not just in real estate, but the stock market in general. I think the question often people have is how do we have the valuations going one way from the asset perspective in, in, but inflation hitting people in a different way on the consumer level like the, the interplay there.
John (11m 10s): Yeah, thank you. You put on my asset pricing hat. I mean one of the most fundamental things you have to understand with asset pricing is that when interest rates go up, values go down. When bond yields go up, bond prices go down. And so why are we seeing the stock market go down? Why are we seeing property values go down? You know, every asset, there's two things. There's the cash flow and there's the discount rate go, you know, back to school. Here we go.
Why? Because if an alternative investment can get you a higher rate of return, then you know you're gonna pay less for, you know, this, this whatever investment we're talking about a house or a stock or whatever. In some sense that's good news for very long run investors. When you see all asset valuations, stocks, bonds, real estate going down at the same time, what you're seeing that that effect is just the required rate of return going up, but it means the underlying cash flows are the same as they were before.
So unless you have to post margin Mr UK pension funds or you know, unless you're cash constrained in some sense, the long run investor can just wait it out. It means that those, you know, the dividends you'll get from your stocks haven't particularly gone down the, with the rents you'll get from your house or in fact going up and you know, you can have rising rents and lower property values. Well because the required rate of return goes up. So if you can just wait it out, those, those rents are there.
Now also the, the rents are rising. You know, you, we have to put our inflation hat back on. If you are not, if something isn't going up 10%, it's going down. That goes for everything. Anything that's not, you know, if your rent, if your rent is only going up 10% a year, then it's just treading water, relative inflation. If your wages are not going up 10 per nine, 10%, they're going down. Hello, this is to my boss.
So that, I think that's why it's possible both things they go opposite direction. Now, on top of that, we are I think heading into at least an economic slowdown, if not a recession. And that will bring, you know, pressure on, on the dividends and the cash flows, on the rents and so forth. And real estate is, I shouldn't be telling you about real estate, you know, way more than me, but location, location, location, yeah. So there's all sorts of low rents in, you know, Gary, Indiana or places downtown San Francisco. Places don't wanna be, people don't wanna be anymore.
So it depends on being in the right place, which is where people still wanna be and where unfortunately you're on the wrong side of this, where governments don't let competitors build apartment houses to, to lower their ends on.
Jesse (14m 2s): Yeah. And I think part of it, to me it seems it's the imperfect nature of especially real estate. You know, we can be as sophisticated as we want on the commercial side, but it, I think the stickiness of prices is, is just that very real aspect that the bid ask spread is still there. And owners don't want to admit that they're gonna have to write down to a certain extent these assets. No,
John (14m 25s): I must, this is one from an economist point of view, this is one of the most classic puzzles of real estate. Why is it in soft markets people clinging to yesterday's price rather than, you know, why don't, why don't we have just auctions? You know, I'm gonna say yeah, people keep hoping for it to turn around on, on the downside. And so trading volume falls when the prices are going down. There must be something about, you know, not willing to recognize Mark to market losses or,
Jesse (14m 53s): I I, yeah. I think it's part of the reason that so many investors I would take, take myself included, get into real estate, it's that I can't press a button and sell the thing. I think it's just the aspect that the the the cost, the, the selling costs is so great. But I I totally get what your, your point of view cuz we deal with in commercial real estate and we're supposed to be these sophisticated investors, pension funds, REITs and Yeah, I think that yeah, they just, they clinging to yester yesterday's or last year's price. I think that's, well
John (15m 23s): I know some of them like university endowments. Yeah. Have a cynical view. Why do university endowments like Stanford's invest in a lot of real estate and not just Vanguard total market portfolio and save themselves in van, in Stanford's case, $800 million a year on fees. Well, not marking at the market every year is, is very convenient for not saying, Oh we lost 20% of your money last year on occasion. But I dunno, that's, that's a pet theory that may be false.
Jesse (15m 51s): So, So John, there's a quote that I know you're, you're very familiar with and it's, i i I venture to guess it's somewhat of a misquote cause I don't think it takes the whole quote into account, but it's from Milton Freeman and it's that inflation is always an everywhere a monetary phenomenon. I think he was a little bit more specific, but that's usually the headline. What are your thoughts on that? Because I think you're, you're kind of proposing that fiscal seems to be an equation, part of the equation that, that the mon the mons have left out.
John (16m 23s): Yep. I think Friedman was 90% right and he was maybe 99% right in 1935 and 1965 and, and less so today, most of the episodes that you look at, he was deeply historical in fact based, he wasn't a big lots of equations theorist, but most of the episodes he looked at were cases where governments were printing up money to finance deficits and therefore causing inflation. You, you know, why is Argentina, Venezuela, Zimbabwe having inflation?
Not because their central bankers are too dumb to know what they're doing, but because they are, they they want to spend money and they can't tax it and they can't borrow it, so they print it. Now that is money in that case is just another form of government debt. So, you know, fiscal theory and monetary theory agree entirely. If the government is printing up money to finance a deficit, you get inflation. And that's, I think what we just saw. Now, the disagreement is, is much more subtle.
Suppose the government drops 5 trillion bucks from helicopters, you feel great, you go out and spend it, you create inflation. But suppose at the same time they tell you, Oh by the way our burglars went to your safe and took 5 trillion of treasury bills out of the safe. Or more realistically, you know, they send you a stimulus check for 10,000 thousand bucks, but they also say, Oh by the way, your taxes are going up 10,000 bucks today. Now will that cause inflation? What I've just done is I've, I've wiped out the question of, of wealth, the feeling that this stuff is, is yours to spend and we've just changed it to you have too much money and too few bonds, so the composition of your portfolio is a little off.
You have too many fives and tens and not enough twenties. Is that gonna make you go out and spend like crazy? Hmm, not so obvious. So in fact, the core monitor is prescription is that you can, all that matters is controlling the quantity of money. Don't worry about the quantity of bonds so that if you take in money and give out bonds or gi or take in a bonds and give out money, that's crucial for inflation. Whereas I think it's the overall quantity that that really matters. And, and you can see that's a much less obvious proposition.
Jesse (18m 42s): So his, his prescription, I think, you know, I think generally was that from, from a policy standpoint was that we have some percentage, I don't something similar to a Taylor rule where we are going to raise, raise kind of rates at a consistent percentage each year. I think, I think if I remember there was a, a video or quote, he said, just get a computer and replace the Fed. You know, what, what was, what was the perspective there? What was his, his intent and and what other policy mechanisms do you think like writing this book that, that we have at our disposal or the fed does?
John (19m 18s): Yeah, so to just, to, let me finish the last thought and and add to your question in Friedman was, was right, there's nothing logically wrong about what he said, but it's a world where money really matters. Where, where in Friedman's world you had to cash a check at a bank and get out cash on Friday if you wanted to eat dinner on a Saturday. So, so to let them use, there were no credit cards, there was no I iPhone and he was also thinking of a world where government, nobody worried about the US government paying back its debt.
So if you look at the footnotes, it was always, oh by the way, you know, this only holds if everyone trusts the government to pay back its debt. So there's a very real sense in which, you know, he gave a logically coherent theory for a different world. And we live in a different world. We live in a world where, where we have credit cards, where the money that matters reserves, pays interests. And where we're a little bit worried about Gartner, Now let's back to your, let me now answer your question. Friedman advocated that the Fed should just let the stock of money grow at 4% a year and just, you know, get rid of the huge building and the press conferences and the 15,000 economists and others just let money grow at fourth percent.
He did not argue that this was the best, a perfectly rational all seeing, you know, central planner could do. He just recognized that the Fed is run by humans and they're gonna get overenthusiastic and they're, they're, his analogy was, it's like a, a shower you'd turn on the hot and it would get too hot and turn on the cold and it would get too cold. Just leave it alone and it'll be okay because in his historical analysis, mo the Great Depression as well as many of the postwar sessions were caused by the Fed being too late to the party and then, you know, not just taking the punch bowl away, but, but you know, throwing ice on everybody or or whatever.
Now in 19 eight, the problem first problem with that is in 1980 the Fed did try to just control the money supply and we found out it didn't work. So controlling the money supply it, it led to a lot of volatility and I think even Friedman recognized it. But John Taylor came along and said, well the Fed doesn't have to control the money supply. It could be much more predictable. It can set interest. That's what our fed does. Our fed sets interest rates. It doesn't even pretend to control the money supply because that doesn't, we discovered the real world is the head of theory, the real world discovered controlling the money supply doesn't work.
And and theory is just now with, with my book and some others catching up. So John Taylor has, has this approach, well, okay, the Fed setting interest rates, but rather than sit around a table and, and burn the incense and wave the dead chickens and, and consult the astrologers and figure out what to do, Freedman was right. Being more predictable, not not just figuring out on a base would be much better for markets for everybody because as you know, as, as everyone is everybody's guess, all the volatility in the economy is guessing what the Fed is gonna do.
This is a deep point, you know, what is the financial press about all the time? Is it about how many, you know, the zoning sanity comes to the zoning council of Palo Alto or is it about people moving to, to Toronto is gonna drive no drive housing prices, It's all about what's the Fed gonna do, what's the Fed gonna do, what's the Fed gonna do? So you can tell right there that the Fed by making off the cuff decisions, is in, in in, is putting volatility in the economy. So Taylor came up with this Taylor rule raised interest rates systematically with inflation, which was designed to work like the money growth rule to make it very clear and transparent to stop us guessing all the time about what the Fed is going do.
It, it isn't, Taylor does not claim it's perfect. He doesn't claim that that the god that the Fed thinks it is couldn't do better. The all-knowing, all seeing perfectly rational economic planner of course could do better. He just recognizes the fed's human, it's a bureaucratic institution. It's, it's liable to group think it's gonna be late. And that expectations matter so much. Being clear and transparent about what you're gonna do is, is better than the current, just make it up as you go along.
So there's your, Sorry, you asked a question for a history of monetary economics and you got it.
Jesse (23m 49s): So there is no homo economists out there at the Fed.
John (23m 54s): Homo Bureaucratics is the best we can hope for and you know, we all criticize the Fed. I I I criticize the Fed and I think too harshly cuz I know most of the people at the Fed and, and let's just be clear, these are really good people, these are really smart people. The 1500 PhD economists, I think that's the number that they, as well as the ones at the Bank of Canada are really good, really smart people. There's no corruption here, but they didn't see the biggest inflation of, of your lifetime coming.
So they've got a whole, you know, staff of their, their mandate is inflation. They have a huge staff of economists, the best people in the world at it. They just couldn't see it coming. There are limits to what bureaucracy can do. So simple and transparent has some advantage. Not cuz people are bad or corrupt, it's just, you know, the best bureaucracy in the world can't, you know, we, we saw the Soviet Union fall apart for just that reason. Planning don't work.
Jesse (24m 54s): So I had a podcast, I think about a year ago now, two podcasts. One was a, the name is escaping me, but it was a professor from George Mason on the one hand. And on the other hand it was a bond trainer. A bond trader locally here. And we were talking about modern monetary theory and you know, for listeners, you know, look it up. I I hate to, I hate to do that, to have a huge explainer. But basically what I, you know, you can just tell by the nature of those two conversations or maybe not one was very, very much in favor of it, one was questioning its existence just high level.
Maybe you could, you could kind of get your view on what mon modern monetary theory ex expounds or tries to expound and, and has this last year or last two years, has that, has that been the nail in the coffin for them or has that been, has that bolstered their theory? How do you think that has played into what we've seen now as two second, you know, blurbs in the news that was this really to, from my perspective as a layperson, kind of a fad of economics for, for a while?
John (25m 60s): Yes, it was. If, if your listeners are interested, I wrote a review of Stephanie Kelton's book in the Wall Street Journal, which you can find either there or on my website, which goes into much more detail, modern monetary theory. What was a fad? And one way of noticing it's a fad is that they wrote popular books, Three quarters of Stephanie Kelton's book is about the wonderful ways the government can spend printed money and how desperately important it is to spend the money. Not, not so much why printing it won't cause inflation.
And it was a bunch of sort of, it's interesting, you look at the citations, they stop in the 1940s there was some ideas warmed over from the 1940s with zero contact with anything anybody has done since now maybe everything we've done since 1945 and economics has been wrong. You know, fields and the social sciences go off on fads before I think Kasey and economics was, was one big mistake too. But at least you have to, you know, if you wanna persuade people, you have to at least show that you know what they said and and why it's wrong.
And it did. It was superficially plausible. It, it, there were some ingredients you can take some good ingredients and, and, and just, just cuz the soup is rotten doesn't mean every ingredient was rotten. So they had one insight that, yeah, governments, they, one of their things was governments that borrow in their own currency don't have to default cuz they can just print up money to pay back the debt. Yeah, that's right. And if that causes inflation, they can just raise taxes to so soak up the money. Yeah, that's right. But they took that and and merged those with a whole bunch of things, you know, then the rotten parts of the soup go in to make, make the claim.
I think Kelton said there always is slack in the US economy. Now that's a quote. And the present tense of the verb is also a quote. And we just found out the end of slack in the US and Canadian economy. So we're done. There is not always slack in the US economy if you print up a lot of money and send it to people as Kelton, as Kelton asked, all the modern monitors said, print out money sent to people. Don't worry, there won't be any inflation. It's the clearest prediction you can ask anyone to make. They made it, boom, we printed up money, sent it to people and what do we get?
Inflation. So I, I hope that one goes on, on the dust bin of history, but it was never serious. And certainly you should look in, in today's media world, you have to learn to be an educated consumer and, and one way in which you're an educated consumer is to look at a theory and ask now of, you know, the theories that are, that are accepted by the mainstream are typically wrong and academia's full of all sorts of politically convenient theories.
But, you know, if it's completely out of the mainstream, you know, that does raise an alarm bell that you should, you should ask. And this one was, was one such. And, and if it's also, if you can see that it's all totally motivated by a political agenda, then that should also raise some alarm bells.
Jesse (29m 2s): So I have one of my favorite books here by Joseph Schumpeter recommend anybody that's never heard of Joseph Schumpeter, check out his work. I think, you know, you'll hear terms like creative destruction. One of his favorite quotes just on your point of, of politicians, I I always like was politicians are like bad horsemen who are so preoccupied with staying in the saddle that they can't bother to figure out where they're going. And you know, it's unfortunate that a lot of the, the policies that you know, that we're trying to get at here are, I guess, you know, tied up in, in the political process
John (29m 36s): If I could just, so it's fun to make fun of monitors, but I think we need need to recognize what a watershed moment inflation is for much more serious and well worked out economic ideas for 10 years. All of the worthies of economic policy, all of the government agencies, all the alphabet soup of international agencies, were talking about secular stagnation. That we just have lack of demand, that we need more fiscal stimulus. That the key to prosperity is to borrow or print money and hand it out.
You know, don't worry about the supply side of the economy whatsoever. Even Janet yell herself that our congressional testimony was asked about, Oh, should we run another one point whatever, $6 billion of government spending? And she said, don't worry about it. Interest costs are so low, interest rates are so low, you know, you can make the payments. I think what, you know, one of the, one of the greatest fallacies of real estate, let's get back to real estate, is don't worry, you know, as you look at the monthly payment, here's the big McMansion, Oh, but I don't have a job, don't worry about it.
Get this adjustable rate mortgage with the teaser. Look at the monthly payments you can afford. The monthly payments. Well Janet Yellen went up and said, we can afford the monthly payments. Don't, don't worry about going big. That has hit a brick wall of reality with inflation. And, and here these are all of the, you know, Larry Summers for example, who to his great credits saw the inflation coming before anyone else. But he had spent 10 years saying secular stagnation, our problem is lack of demand borrow. And, and we, it turns out that supply wall boom was a lot closer than we thought it was about like, you know, we, we were 1% away from the supply wall in the beginning.
It wasn't 10, 20, 30% away. So this just, this is a watershed, a bunch of ideas by very respectable people were totally wrong. And our economic challenge now is much harder. It's get the sand out of the gears. Increasing supply is not about throwing money on it, it's not about sending people checks. It's about fixing the zoning code. And can you rehab a commercial building in Manhattan to be apartments? No, because the zoning doesn't let you have bedrooms on the interior.
It's a great man and glaz parts, you know, you have to fix every single thing that's wrong in the economy. That is totally different. But that's where we are. So this is a big, big moment.
Jesse (32m 1s): Yeah. And even on the, the cane side of, you know, I don't the context of it, but the, the idea that markets can, markets can stay irrational longer than than they, than you can stay solvent. I think from the real estate perspective was just this idea where you saw very sophisticated investors buying prices at asset values where it just made no sense. There was negative leverage in some situations and just this idea that, that you there would just continue to be a hockey stick graph, especially here in, in this city and certainly in other ci major major markets in the states.
John (32m 33s): Well a fact of all such booms is you gotta ride the bubble while you can and you, you can make a lot of money buying, flipping, hoping to gut it doesn't crash before you can sell the darn thing. And that can go on for years and years. And if you just sit that out, if you say, oh, you know, properties overvalued stocks are valued, well, you know, three, four years go by and all your buddies are getting rich and you're sitting there, you know, if you go short losing money on your short positions, if you just sit it out, you know, playing golf while they're all getting rich through it's stuff to do.
Especially if you are, you know, working on someone else's behalf.
Jesse (33m 10s): So John, I just wanna be mindful of the time here. I do, I do have a question in chapter four in your book you talk about debt, government debt. And I wanted to kind of go a little bit more granular. I don't know the figures for the states offhand, but I know that Canadian household debt is, is debt to disposable income is is quite high. I believe it's 1.84 for every dollar, you know, Canadians have in consumer debt. What's your take on on that micro-economic aspect of, of the family debt within the family and then that impact into kind of this grander, you know, macroeconomic environment that we're in?
Is it something that you look at?
John (33m 50s): Well, I can offer some sort of general, So there's government debt which has to get paid back by raising taxes, but not raising tax is really by economic growth. Your only hope for the government paying back its debts is if they let the economy grow. Cause if, if you raise tax rates, that kills the economy. So you kill the tax base, you don't, you don't get a lot of taxes. Now private debt is a different matter. Let's remember, you know, your, your mortgage is is my pension. So everyone's liability is someone else's asset.
And it's funny how, you know, all of our economic policy, blah, blah, we simultaneously love and bemoan the same thing on the one hand, oh, you know, too much debt people can't pay back. On the other hand, not enough debt. Send more debt to my constituents so they can buy houses, which is it, you know, we want, government wants us to consume more, but it also wants us to save more and to pay more taxes. How's that happening? And, and you know, a lot financialization is great economies grow because entrepreneurs can borrow to finance new businesses because real estate developers can borrow to build apartments for the rest of us, they're doing us.
I don't know why they're so maligned. They do us a wonderful service. You wanna build your house on your own. How about somebody who knows what they're doing, do it, but they need to be able to borrow to do it. So debt that can be paid off is not so much a problem. Now problem comes in when debt can't be paid off, but risk in return. Guys, I think we need to get back to an economy where risk, we all understand if you buy Tesla stock and, and it turns out that hydrogen and and not batteries is the way of the future, or China shuts off the supply of batteries, you know you're gonna lose your, your money or you know, GM turns out to know what they're doing, you're gonna lose your, we all understand equity holders losing your money.
Now somehow, if you buy something called debt and, and you're getting a 5% return where everyone else is getting a 2% return, you're not supposed to lose money every now and then. So, you know, even debt is a great thing. Risky debt's a wonderful thing, you know, but cafe at em Thor, we need to understand as society that, that making risky loans is a great and wonderful thing, but you're gonna lose money every now and then and don't go crying to grandma government every time you lose your money. Now, you know, debt is, why do we worry about too much that we worry about if it turns into financial crisis?
And that's, you know, that's a problem. That's what the Nobel Prize just gave was given to Diamond and Member Yankee and felt that big about. Is that,
Jesse (36m 27s): Which I believe you, you just read or wrote a blog about, right? Yeah,
John (36m 31s): I just wrote a blog post about it, which is, you know, there's, we, we as a society need to get around, stop having financial crisis. Now that means the debt must be able to lose money when the, when it defaults in a way that isn't so incredibly painful for the society as a whole. And that I think is a failure of government regulation. We, you know, why do we regulate banks? Let's look at a bank's asset portfolios, the bank's asset and compare it to, I don't know, Tesla now, whose assets are more risky, whose cash flows are more risky, a bank or Teslas, you know, by, by three orders of magnitude.
Tesla Bank is, has a, has a portfolio of government guaranteed loans. I mean possibly, you know, yet where are all the regulators? The regulators are all looking at the bank. Now why is that answer? Because banks are leveraged up to the hilt and if they lose enough money to go under, they're, they're kind of big monopolies and, and they, our economy loses the capacity to, to make new debt. So why is that? We need to get the leverage out of the banks. And then you get to a financial system where people can default on debts and it doesn't bring the whole thing crashing down.
So debt's good, default is good, let it happen. Default is reorganization. We just need to not, you know, we kinda have a hostage here. The banks have taken the whole economy and and holding it hostage saying, you know, you government can't let anyone fail or else, and, and it's our political and even the Fed a financial crisis is not the possibility that somebody somewhere might lose money someday on some investment. No, you know, risk and return.
Entrepreneurial capitalism lose money. Financial crisis is when, when, when there's a run on short-term debt and that brings down the banking system. We, we can fix that.
Jesse (38m 26s): It's, you remind me of a, i we'll put a link to it. A really good, I dunno if it was an essay, but it was years ago, Thomas so wrote comparing the American Depression and the branch banking system that we have in Canada. Cuz you know, oftentimes people think Canadians, that we have these five large banks, which we do, or four depending on who you're asking. But we have an extensive branching system. And it was a, it's was interesting to see the difference of branching where it wasn't allowed in states during that time, I guess right after the depression.
But we'll put a link for anybody that's, that's interested. Now
John (39m 1s): This is great important and, and I, you know, I wanna say something. So something nice about Canada, Ben, this is what Ben Bernanke got the Nobel Prize for, he said in the US and the Great Depression. Why was the Great Depression so bad? Well, cause all the banks failed. Now why did the banks and then once the banks failed, not all the banks, sorry, I'm exaggerating. Many banks failed in many places. And when the banks failed, they closed down. And the people in those banks who knew in, you know, Lincoln, Nebraska, who was good for it and who wasn't, who knew how to make loans, they were unemployed.
Why did that not happen in Canada? Well, because, because there are many ways to stop a bank run. And one of them is if a local bank fails, somebody else can come in, a large national bank can come in and buy up the assets, keep the people who know how to make loans employed, you know, stiff the creditors, stiff the stockholders, but keep the operations going. But that needs, the US had had prohibitions on on branches, It had prohibitions on interstate banking. There was no way all the mechanisms of saving a bank and keeping the profitable parts going didn't exist.
And they did exist in Canada, which is why your Great Depression was a whole lot better than ours. Now that doesn't mean the only answer to this is to have a monopolized banking system with four big banks. That, that kept Canada out of a crisis in the Great Depression, but that also leads to a certain amount of financial sclerosis. And so I, I don't want to endorse crony capitalism as the only answer, but it did, it did work better in that circumstance,
Jesse (40m 35s): Economics, real estate and Canadian banking history. John, I think we covered it all today.
John (40m 40s): Thank you. It's a great pleasure.
Jesse (40m 42s): John, for individuals that that want to connect or reach out, where can we send them? We'll put a couple links in the show notes.
John (40m 50s): My website, john h cochran.com and my blog, The Grumpy Economist. And if you just Google John Cochran, I come up first.
Jesse (40m 60s): This is Working Capital. John, thanks for being a part of it.
John (41m 4s): Thanks. Great pleasure.
Jesse (41m 11s): Thank you so much for listening to Working Capital, the Real Estate podcast. I'm your host, Jesse for Galley. If you like the episode, head on to iTunes and leave us a five star review and share on social media. It really helps us out. If you have any questions, feel free to reach out to me on Instagram. Jesse for galley, F R A G A L E. Have a good one. Take care.
In this episode we talked about:
- 2023 year for Investment
- How to get into Commercial Real Estate as an Investor
- Inflation
- Recession
In this episode we talked about:
* Multifamily property in Toronto
* 7 Plex
* Raising Money for the Deals
* Units Turnaround
Transcriptions:
Dave (0s): Everyone. Dave Debo with another episode of the Property Profits Real Estate podcast today zooming in from Toronto, a fellow Canadian, a multifamily investor, a podcaster, a YouTube channel guy, a bigger pockets contributor, an overall good guy, Jesse Frago. How you doing today, Jesse?
Jesse (30s): Dave, I'm doing great. Thanks for having me on again.
Dave (33s): My pleasure. So, Jesse, I'm excited because today we're gonna be taking a look at one of the deals that you and your team are actually working on right now in the multi-family space in Toronto and what you're doing with this property, how you're adding value to this property, and the difference that a couple of years can make. So why don't you give us a little bit of a backstory about the deal that we're, we're gonna take a look at today?
Jesse (59s): Yeah, absolutely. Well, like I said, thanks for having me on. I always enjoy talking to you, Dave. It's, it's been too long since last time, last time we spoke. So this property, it, it's a multi-family property in Toronto, so we did a capital raise for the property. So, you
Dave (1m 16s): Know, so just give us an idea. Toronto is, Yep. The most expensive market, I believe in Canada, right? Were that, or Vancouver, but their neck and neck, What size of a property was this and, and what are we looking at price point?
Jesse (1m 29s): So if there, you know, depending on the Canadian market, but for sure if you have an American listeners on, So the property we acquired for it was 3.5 million. The, this is kind of the surprising part. This is a seven unit builder.
Dave (1m 43s): Seven units, yeah. So seven. Got
Jesse (1m 45s): It. And, and if we sold it today, it would probably fetch something closer to 5 million. So now I, to caveat that this is a property in Forest Hill, which is one of the most expensive neighborhoods in, probably in North America, but certainly in Canada. So it's a little bit of a different animal. I would say that in Toronto, Vancouver, somewhat similar in the 300,000 to 400,000 per unit, those are pretty average prices, but this one being 500 or six, seven, it's because it's more of a boutique building.
So,
Dave (2m 20s): Very cool. All right. So this is definitely a, a high end kind of a property high end area. I guess the question would be is how are you guys adding value on top of that?
Jesse (2m 32s): Yeah, so one of the things was, number one, the first, you know, you, you make your money when you buy the deal. I think, you know, my relatives, number of my relatives told me multiple times and you know, you know, I'm, I'm in brokerage, so my day job is in the commercial real estate space. One nice aspect of that is when I do prospect as an investor, it's, it's not too dissimilar from that in that this was an investor, sorry, this was a vendor I called off market wasn't, they weren't planning to sell. And I basically, you know, laid out the fact that we're acquiring properties like yours and would you consider an unsolicited off no brokers?
You know, I'm a broker, but I always tell them no brokers, because, you know, it makes them feel better that they don't have to pay a fee. Right. And that's how, that was kind of the impetus of, of the deal. And so number one, off market, that was the first aspect of value add. Number two was these were oversized suites. So it's not very common in, in Toronto to have an apartment building that has 1200 square foot Wow. 1100 square foot suites. So the bones were, was something that we thought we could really add value to.
And there's this kind of term condo quality and you know, we have a bit of a, a shadow market in condos, you know, in Toronto that apartments are, our older stock condos are newer, so most apartments don't have built in dishwashers don't have laundry in suite. So our value add was to take these older suites, renovate them and install dishwashers, quartz countertops, basically turn them to condo quality and target a bit of a higher rent than is currently in place.
So that, that was the kind of value add of philosophy with it.
Dave (4m 16s): All right. So it wasn't necessarily to take seven units and turn 'em into 10 or 14 units, it was to make the seven units condo quality and increase the, the rent that you're getting on on those,
Jesse (4m 30s): Correct. Yeah, yeah. Correct. And the thing where we didn't not inquire or look into the development potential, so one other aspect, if anybody knows Toronto, downtown Toronto we're Forest Hills, right by Eggington, which is a light rail transit line Wow. That the feds have put billions of dollars into in the province. So a lot of times when you talk about real estate investing, you go to the path of progression, you know, progression in whether there's an airport, there's transit.
So for us, we knew that the stop was literally a hundred meters away from our property. And typically what happens is anything within 500 meters of these stops, the ability to add density to those neighborhoods increases. And we've seen it time and time again. So the idea and you know, we always, we never assume with development, but the idea was that there was a potential for adding density. We talked to different architects and code consultants, they kind of verified that for us without having to go out and, you know, spend the tens of thousands of dollars.
So we kind of put that in our back pocket. Right. Didn't value the property like that, but it was a nice value add that when we were raising capital, it could be kind of a sweetener potentially to the deal.
Dave (5m 43s): Very cool. So Jesse, do you mind if I ask you a few questions about, about the deal? Sure. So remind me, how much did you pay for it in the first place? You got this off market, So what was the initial price that you paid?
Jesse (5m 54s): 3.5 million.
Dave (5m 55s): 3.5. And what do you think fair market value was for that property? Did you get, did you get a bit of a deal on it because you were able to buy it off market?
Jesse (6m 4s): Well, if you told, if you ask the vendors away, right? Yeah. Yeah. So I, I believe we did because again, being a real estate agent, we were able to pull comps as you know, and my other sponsor partner, you know, he would just send me stuff, look with this when, so look, you know, you always like counting the money that's, that doesn't exist yet. So,
Dave (6m 26s): But give what, what do you think Fair Market
Jesse (6m 29s): Does? So, so I think Fair Market, if if they did a competitive process and put it on the MLS or on the market, they could have easily got 4 million for it.
Dave (6m 37s): Okay. So you might have created $500,000 in instant equity right from the get go. Right. Nice little cushion there. Excellent. Okay, so what were, were all the units the same? Were they all like two bedroom type units and and what was the rent that was getting charged?
Jesse (6m 53s): Yeah, so what we had was four of those large oversized units that I mentioned and then two, sorry, three smaller, smaller units. So the rent that was in place, it, it was, it, it those units, sorry, on the commercial real estate side, I always speak in, you know, per square foot per month. So whether it was, you know, $3 and 50 cents, but to, to make it simpler, those units that were the larger ones, we estimated that we could rent those out for anywhere from 3,200 to 3,700 depends depending on your sensitivity analysis, Right, Right.
You know, perfect scenario versus, you know, you have trouble with it with
Dave (7m 30s): Those 30, 3500 maybe kind of thing. Yeah.
Jesse (7m 32s): Let's yeah, say low three thousands to be conservative. Yeah. Those ones were getting rented out anywhere from 1200 to 1600, so
Dave (7m 41s): Wow. So like less than half.
Jesse (7m 44s): Yeah. And, and that's where, you know, with cap rates, especially prior to covid and everything with cap rates so compressed that little, you know, even a hundred dollars times 12 divide that by a three cap or a 3.3, you start to add substantial value to the building.
Dave (7m 60s): Well, yeah. And as if you're able to double the rent you're adding Yeah, it's huge. That's a fascinating idea. Hold that thought for a second. Hi there, this is Dave Debo and real estate investors hire me to raise capital the right way. Why? Because most of them are stuck with two small of a portfolio and they don't know how to attract investors and raise money for their deals. So I help them to connect, capture and close their ideal money partners. Bottom line, when you've got a deal, you're gonna have the capital to do it.
So go ahead and book a no cost Capital clarity session with me at book a chat with dave.com. Again, that's book a chat with dave.com. Okay, now here's the other question. Both Ontario and BC are famous for having very, very friendly laws towards tenants, especially Ontario. It's absolutely, it's criminal if you ask me. So you've got all these, I imagine this, this, there weren't very many vacancies when you bought this seven unit building.
Were there?
Jesse (9m 3s): No, there weren't. And so how is, yeah,
Dave (9m 5s): How so, so then the question is, sounds good to go in and renovate and do all this, but doing renovations is very, very difficult to do in Ontario, especially throughout Covid. So how are you able to turn these units around and start getting fair market red for them?
Jesse (9m 21s): Yeah. Well first I should say the you're absolutely right. I mean the is a very tenant friendly province. It's not, you know, it's you, I'm sure you're the same, You speak with Americans depending on the state, you know, basically it's like our world in commercial, the end of your contract's, the end of your contract. So we definitely went in with the perspective that that was gonna be the biggest operational challenge because there's other things that you can quantify and you know, there's this thing where you can eliminate risk, avoid risk, mitigate or reduce. And this is one of those things where it's, it's very difficult because you could have somebody that just decides they don't wanna leave.
And then there's always the danger. Like there are projects where they, the tenants start to get political, start calling newspapers or start organizing, which I'm not against organizing, whether it's employees or tenants, but you need to make sure you're doing everything above boards. So that is to say the strategy that we came to, and I, and this is currently what the majority of people syndicating in Ontario do if they're doing everything above board, is that they are looking at making an agreement with the current tenant and saying that we want to add value to the, to the building.
We want vacant possession in the unit and we want to come to an agreement with you. And those agreements basically are, are what we consider an end of tendency agreement. And you know, whether that's getting the
Dave (10m 43s): Cash for keys kind of thing is whatever
Jesse (10m 45s): Cash for keys, or it could be, it could be, you know, you're gonna pay a year of rent at their new location or, or you know, whatever the way you structure it. And you gotta be very careful about doing, you know, how you go about this. The last thing we wanted was, you know, our, you know, being in the Toronto star as as a landlord like that, like you said, does a ren eviction. And for those that don't know is, you know, a ren eviction. When I hear that it's basically that you use a, not a loophole, but you use the, if you pull a permit, you can, you can have vacant possession of the unit, but you're required to ha to give it back to the tenant after the renovation.
And what some unscrupulous landlords have done is use that as a reason to boot somebody. And then, you know, if that person comes back or not, they just re relet the place. And the tenant laws are so in favor of tenants that once the tenant leaves the new tenant basically takes precedent and trying to get that tenant out right is challenging. So that's, that's the way we approach it and there's pretty substantial numbers and you really need to figure that out in your, in your analysis and, and Oh, for
Dave (11m 52s): Sure. Cause I mean if you, you, if you got seven people that you're, you've gotta pay a full year's rent for at fair market rents, let's say whatever, 2,500, 3000 bucks a a month each times 12 times seven. I mean, my mouse's not that good, but that's a hell of a lot of money. Yeah. All
Jesse (12m 12s): Right. It can, it, it can run away from you very quickly. And that's why, and and also too, I think especially in, in our part of the world, and I think in just any environment like this that that it is in favor of the tenants. The tenants, they're not, they're, they're starting to get savier and they realize that if, if you're paying me 10 15, if you're offering at the outset $10,000, I'm, I probably can get a lot more than that. There must be a large value at, and it's, it is unfortunate because the last thing that I've talked to every landlord I talked to, they don't want to do things.
For the most part, the landlords that are running their investments as an investment business, they don't wanna have a situation where they're doing backdoor deals. Yeah. It would be easier to have a clearer understanding of the laws and do things above board. But we operate in this environment and, and I think it's the reason that a lot of people will turn away from Ontario because it's the precariousness of, you know, one, one politician comes in and then they make a few laws here and then another one and then they flip. So yeah, it's challenging, but, so where are
Dave (13m 17s): We living? And and then they wonder why there's a housing shortage, right? Who the hell wants to be a, a landlord when it's so in favor? We've got this huge asset that we spend millions of dollars on yet, you know, you, the government takes your control away from it. I mean it's,
Jesse (13m 32s): Well, and, and that's the, I think, you know, the, the government here where they basically said that there, you couldn't raise over a certain amount, which is kind of our law now. It's somewhat tracks to inflation used to very, Yeah.
Dave (13m 44s): Now inflation's gone up too high, they can't do that anymore.
Jesse (13m 47s): Yeah. So, and I mean what happened was then they said, Okay, well we'll carve out for new developments. Because what they found was developers are like, Well wait a minute, we're not gonna build anything then. So
Dave (13m 56s): Yeah, yeah. Challenge. So this particular deal, this seven plex, Yeah. What did it look like? When did you get into it? How far along the process are you now? What's changed? What stayed the same throughout the whole process?
Jesse (14m 10s): Yeah, so geopolitical unrest in the Ukraine Global pandemic couple, a couple things.
Dave (14m 15s): So, so you got this like right before Covid hit?
Jesse (14m 18s): No, it wasn't right before covid. It was, I believe the close was July last year. But you, you know how these things go if, right, the, the negotiation happened way, you know much, you know, the acquisition or finding the property was when we were in a different, a different world, right? And yeah, I think what what changed was, well, number one, we knew right off the bat, if you remember the beginning of Covid rental rates paused and it, if they started to go down and even though asset values remained high, we started to think, okay, maybe safe, just as an example, a $75,000 or a hundred thousand re renovation to make at the Taj Maha and get these really, really high premium rents.
Maybe that's not achievable anymore. So should we go a $60,000 renovation and go with a b kind of, you know, instead of the high end, but more of a, like, we're trying to figure out where that sweet spot was for, you know, bank for a buck. So that was number one. Well that should be number two because number one was the back to the aspect of of not looking like just a landlord that is kicking people out is that we're now in a pandemic. Yeah. And you know, I'm sure it's colder out of by you and some of the, in some of the cities closer to you, but it gets very cold in Toronto as well.
And we're coming into the winter and we're in a pandemic. So this idea of going through our negotiation process with tenants, it just wasn't the right time. It was, you know, we, we didn't wanna start the relationship like that, especially in that environment. So that, that just, we, we had to put that on hold and we had to adjust to that. The, the biggest one right now, as you know, not surprisingly, is interest rates, right? Because when, when we're doing these type of deals, we're not getting stabilized debt right at, out at the outset, right?
Because we want do these renovations and we want to increase the value of the property. So whatever that debt is, a year or two year, our case and majority of cases, you're gonna have, excuse me, variable debt. So that's something that we're very happy that we raised as much as we did to just be careful and have reserves in case we have a situation like we do now. So those are the kind of the big ones. And, you know, talk to me in a year, I'll, I'll tell you if there's, if there's any others.
Dave (16m 35s): So how, how are you in the process of getting these units turned around?
Jesse (16m 40s): So we've, we've turned over one unit so far renovated. So that one we've put a tenant in and that was one of the smaller units. Then we have two tenants that are, that we have negotiated with to have vacant possession of those units. And we are, you know, it's funny, we were little worried we weren't gonna start this process as well as we did once we decided to go down this road where now we're just kind of holding off right now because, you know, we want to have a capital preservation and we want to be careful cuz you know, these renovations, they don't grow in trees, right?
So you have to not just pay, come to an agreement, but you're putting out quite a bit of capital. So right now, I think what we're trying to do is just be very prudent with our capital and that's kind of where we're at right now. And I think we're, we feel like we're in a good spot right now and we're gonna keep pressing on with the renovations. And I guess to your question before the other piece is construction, you know, supply chain, everything's taking twice as long. A lot of things has cost. Yeah, yeah. The old construction twice as long and twice as much.
So I think we're, we're just, we're trying not to roll too quickly because a lot is happening and we just wanna be, you know, prudent about it.
Dave (17m 53s): Yeah. Fascinating stuff, Jesse. Well thank you so much for sharing this case study with us. I think we got a lot of good value and nuggets out of your experience, so thank you for sharing that. And if people wanna find out more about you, check you out, listen to your podcast, which I highly recommend, what should they do?
Jesse (18m 11s): Yeah, you can go to iTunes, Spotify, Working Capital, the Real Estate podcast. I post different videos from bigger pockets that I've been on, or sometimes I'll post the full length video if I think it's, it's a value add on YouTube. So Jesse for Galley and yeah, I mean just Google my name if you wanna reach out, if you have any questions, I'm always happy to chat about real estate.
Dave (18m 34s): Sounds good. Thank you very much Jesse, and thank you everyone for tuning into this episode and we'll see you on the next one.
Speaker 3 (18m 41s): Well, hey there, thanks for tuning into the Property Profits podcast. If you like this episode, that's great. Please go ahead and subscribe on iTunes, give us a good review. That'd be awesome. I appreciate that. And if you're looking to attract investors and raise capital for your deals, then I'm gonna invite you to get a complimentary copy of my newest book right back there. There it is, The Money Partner Formula. You can get a PDF version@investorattractionbook.com. Again, investor attraction book.com.
Take care.
Eric Chadderdon is one of the founders and a Managing Partner with Gibby’s Capital Investments, a real estate investment firm headquartered in Dallas, Texas.
He spent over a decade in direct sales and management before making the transition full time to multi-family real estate. He managed sales teams across the country and personally has hired and trained close to 1000 sales reps in his career, many of them are top level performers. He has now learned the ins and outs to multi-family investing, acquisitions, asset management, networking, and the process of due diligence. He’s made some of the strongest partnerships with other fast-moving, calculated, and successful real estate investment entrepreneurs.
In this episode we talked about:
- Eric’s Bio & Background
- First Real Estate Deals
- Raising Capital
- The ideal investment property
- Real Estate Debt
- De-Risking your Portfolio
- Mentorship, Resources and Lessons Learned
Useful links:
Book “Failing Forward: Turning Mistakes into Stepping Stones for Success”
by John C.Maxwell
Book “Raising Capital for Real Estate: How to Attract Investors, Establish Credibility, and Fund Deals” by Hunter Thompson
Linkedin: https://www.linkedin.com/in/gibbyscapital-ec/
Facebook: https://www.facebook.com/eric.chadderdon
https://gibbyscapital.com/
Webinar: https://gibbyscapital.com/webinar/
Neal Bawa is CEO / Founder at UGro and Grocapitus, two commercial real estate investment companies. Neal's companies use cutting edge Real Estate analytics technology to source and acquire OR build large Commercial properties across the U.S., for over 800 investors. Current portfolio of over 4800 units, with an AUM value (upon completion) of over $1 Billion
In this episode we talked about:
- Neal’s Bio & Background
- Team Evolution
- Neal’s view on today’s Real Estate Market
- Real Estate risk
- Lesson Learned for Real Estate Investors
- Syndication
- Signs of recession ahead
Useful links:
https://multifamilyu.com/
Webinar “The Impact of Inflation and Interest Rates on Real Estate”
https://www.youtube.com/watch?v=vau-jpggStQ
Transcription:
Jesse (0s): Welcome to the Working Capital Real Estate Podcast. My name's Jessica Galley, and on this show we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jessica Galley, and my guest today on Working Capital is Neil Bawa. Neil is a returning guest. He is the CEO and founder of Grow Capus, a commercial real estate investment company in the US with a billion dollar portfolio.
The Grow Grow Capus team acquires and builds multifamily and commercial properties across the US spanning over 10 states. How you doing Neil?
Neal (43s): Fantastic, Jesse. Good to be back on.
Jesse (45s): Yeah, it's great to see you. It's, it's been some time, I thought, you know, I thought we'd have you back on and, you know, we could talk about the, the last year or year and a half, I guess, since we last spoke, and we were just kind of joking around. Not much, not much of note has happened, so maybe it'll be a short podcast.
Neal (1m 3s): Oh, whoa. I I think we should break it up into 16 sections if you wanna discuss a year and a half, but we'll, we'll make it, we'll make it short and sweet.
Jesse (1m 11s): Yeah, no, fair enough. And that was all tongue in cheek. I know we've had quite a bit change since the, the last time we spoke. Not just, you know, in the economic environment, but in a lot of different ways with the dis different asset classes being affected differently in real estate. Perhaps what we could do is, for those that haven't heard, the first podcast that we had you on, I recommend checking that out. We talked a lot about analytics, about different areas in, in the states where you invest in, how you look at properties a little bit more on the acquisition side, so I encourage everybody to check that episode out.
But for those that have not, have not heard that one yet, why don't you give a, just a little bit of a background as to, you know, who you are and, and how you got into this industry.
Neal (1m 56s): Sounds good. So, I'm a technologist, geek or nerd, and I'm just trying to apply technology analytics and data science to real estate. And today it happens to be multi-family and build the rent that I'm applying it to. Who knows, two years from now, it might be something completely different. So I'm, I'm a fan of Big Data and how it can point you in the right direction and how few people actually use big data. People use Excel spreadsheets all the time to make decisions and that's really great, but Big data is something completely different.
Doing monthly analytics is completely different. So that's something that I'm known for. I started investing in real estate just to, for my own, you know, portfolio. The first seven years of all of my real estate investments did not have any other investors money. It was just my money. And I started seeing some very interesting trends, started doing some number crunching. This was back in 2009, 2010, and invented a system called Location Magic that I started showing off at meetups in the San Francisco Bay.
First time I showed it off, I had four people. By the time, 10th time I showed it off, I had over a hundred people, you know, nerds and geeks at Silicon Valley, after all. And they were very interested in what I had to say because I was pointing to the fact that there are cities, unknown cities in the US that have incredible ridiculously large amounts of profit and low prices, and that's what the location page system points them to. And that is available for free. There's no purchase, no subscription, no upscale, you know, up, you know, nobody's gonna buy, sell you anything in the future as well.
And you can go check that out@multifamilyyou.com, that's multifamily, followed by you.com. And I think now it's called the webinars called Real Estate Secrets or something like that. But you can, you can check it out there. And I, more than 50,000 people have watched it. If you go to you to me.com, you'll see it. It's an older version, by the way. So it's better to look@multifamily.com, but you'll notice that there's 10,000 people taking it with over 1,005 star reviews. So it's analytics, it's data, it's it's step by step instructions on how you can improve your acquisitions process.
And that's what we are known for. And you know, around 2014, I needed more capital, so I sent out an email to all the people that were following me, and I was really surprised that I was able to buy a 237 unit with, with their money. So unlike, you know, most people that sort of step up to it, I, I was able to get in pretty quickly. And since then, 31 projects, 830 current investors and about a billion dollar portfolio, all of which is really an a, an application of data science and data analytics.
So, you know, be cruel.
Jesse (4m 38s): So we didn't talk about this as much last time on the podcast, but the, the team itself, because you're obviously doing, you know, pretty substantial deals in terms of the, the size. How has the, the team evolved from, you know, when you were kind of building this company to now, you know, the size that it's at right now, because we, you know, we all start with, you know, the accountant, the lawyer, and then it kind of grows into acquisitions, grows into, you know, so how, how did that team evolve in, in terms of the, the footprint?
Neal (5m 9s): So it evolved completely differently from everyone else's because I have some rather crazy beliefs. I am known as the mad scientist of multifamily. And the biggest belief that I have when it comes to teams is that it makes absolutely no sense for all team members to be in the us. So what we do is, for every team member that we add in the United States, we add two team members in the Philippines. So there are 19 full-time employees in the Philippines now. They all work Pacific Hours eight to five. They have their own managers and their own directors and their own recruiters and their own HR all in the Philippines.
We don't use third party companies. We basically, you know, hire them directly and they all work from home. And so by adding them to US employees, we've been able to scale. So our acquisition team, for example, is a senior director and a junior manager and two people in the Philippines. And those Philippines people have thousands of tasks that they do to make our acquisitions process more efficient. Our marketing team has four people in the United States and nine people full time in the US in, in the Philippines.
So essentially the team's gotten pretty big. We now have 29 employees that either work with us full time or there's a couple that work, you know, four or five hours a day with us. And that has allowed us to scale. So once again, I believe this is use of technology because outsourcing is a established use of technology and the fact that everyone doesn't do it is a complete mystery to me. I have no idea why, you know, people don't do it. I mean, I keep them so busy that I have two executive assistants. One of 'em called you half an hour ago to confirm this, this, you know, podcast.
So I have two of 'em because one of 'em just can't take the load.
Jesse (6m 49s): Yeah, I find that more and more we're starting to see this, the use of, of people overseas, I find it's really, it comes down to being able to train them. You know, if you just hire people overseas and you just think that they're gonna magically know your business and understand it, then yeah, you're gonna realize that it's not that useful. But if you train them properly and you integrate them into what you're doing, and, and I find that you gotta stay up, up to date with them or, or you have to have touch points that are fairly fairly com or fairly consistent in terms of how much you communicate.
But it sounds like, sounds like you guys are firing on all cylinders right now. So in terms of the, you know, compared to last year, obviously, you know, we we're in an environment right now with interest rates we haven't seen in some time inflation numbers that we haven't seen in some time. You're a contrarian by nature, you know, from our conversations. Why don't you talk about what your thoughts are, you know, over the last year or even less, what, whichever timeframe you want and, and how you are looking at the market in real estate right now.
Neal (7m 52s): Absolutely. Well, my first thought is don't buy anything. Simply buy nothing today. Makes no sense. Wait six months, you'll get much better deals, You'll get the same deals that you're getting now because those deals are going to basically go get into contract and then whoever's doing the underwriting will discover that they cannot make the deals work and they'll come back to the market and you'll probably pick them up for, let's call it five to 10% less. So they nothing beil right now. I wouldn't say nothing. I mean we are buying one property, so there are exceptions to that rule, but with that property, you know, we were lucky with that one because it was a bounceback from before.
So we did get a significant discount there. But we have shut down our acquisitions department. So we are, you know, we have, we have a lot of development projects going, 17 of them. So we are luckily able to move our acquisitions people to the development side for the next six months, but we have no intention of buying anything for the next six months because it makes no sense to do that. So let me, you know, and this is not an easy explanation, so it'll take me a little bit of time, Jesse, to explain it. So, you know, if you look at the rate hikes that have happened, the first rate hike that the Fed made only happened in March and it was a very gentle one.
It was 25 basis points, and then the Fed went in for 50 basis points in May, then they went in for 75 in June, and then they did another 75. So, and now you know this, this is being recorded in, in mid-September and there is a fed meeting this week and almost a hundred percent of people believe that the Fed will raise by 75 basis points. So in other words, the Fed has basically raised interest rates by two and a quarter percent or 225 basis points since May, May, June, July, August, September.
So in five months, five months interest rates or the Fed funds rate have gone up by 2.25. And there is absolutely no way that prices could have adjusted that fast because let's look at 2015 to 2018, the Fed increased interest rates by the same amount that they have increased them now, but they did it over three years. Three years to do what we just did in five months. So the market all along had a chance to adjust to that, that process.
The banking, the lending, the hard money people, they all had times to adjust. No one has at any time to adjust to this. And here's the worst part of that news. If the Fed were to have stopped at, you know, at where they are today, the fed funds rate is at 2.25, if they would've stopped, I wouldn't be saying what I'm saying today, but last week's inflation report was so awful and you saw what it did to the stock market that now the Fed has to go way above a 3% fed funds rate.
There are two, 2.25, now they have to go to maybe 3.5, 3.754, right? So that much is now clear to the marketplace. And it wasn't last week. So I was singing a different tune two weeks ago because I, I felt very strongly that inflation would come down when we saw the November, the September numbers, I was wrong, everyone else was wrong too. And so now we are going in for a fed rate that is potentially 75 to a hundred basis points above what everybody else said. For those of you that don't know what that basis point stuff is, essentially that means is interest rates will be 1% higher than we thought they would be.
So, and, and that increase in interest rates will happen in the next six or seven weeks, which is why I think properties will not pencil because if you're paying four and a half cap today, you're paying too much. You should be paying five cap for properties. So five cap is the new four and a half cap, and four and a half cap was the new four cap because in January everything was selling for four cap or under four cap, right? So January was this, this crazy bubble. So it, you know, Q4 of last year, Q1 of this year was this crazy bubble where you could sell, you know, old properties in the seventies built in seventies and eighties and you could sell them for under four cap, right?
So then the market adjusted to about four and a half cap by let's say September. And now it has to adjust to closer to five cap by February. And so that's what I'm saying today, it makes no sense to buy a multifamily property because I'm not aware of anybody doing five cab deals and everyone should be doing five cab deals. Cap rates go up when interest rates go down now that it's not a one to one. So if you, you know, interest rate goes up by a hundred basis points, your cap rates will go up by 0.4 or 0.5, right?
But that 0.4, that 0.5, it hasn't happened because we just got this inflation report. And so now it's, this is the first time this week, last week when people could have possibly known that the fed's gonna go up another a hundred basis points. So how could there be an adjustment?
Jesse (12m 49s): Yeah, the, so the, the spread itself, it we're saying we're seeing some wonky stuff happen with the, with yields right now cap rates and your interest rates. But if you're looking at deals right now or you're looking at your current portfolio, let's start there. You know, the number one piece here is don't buy anything right now. So we're, we're trying to let the dust settle for a little bit in terms of current, current real estate holdings is the, what are your thoughts there? Is it something akin to de-risking figuring out a different structure, structure not, not to having variable debt.
Is there anything on the front of current assets that you recommend for investors or that you're doing yourself?
Neal (13m 32s): Oh no, I, I'm, I'm not recommending to anyone that you get fixed rate debt because simply because rates are going up doesn't mean that they won't come down. My analysis over the last 61 year suggests that when the Fed goes up sharp, they put the economy into a recession. 100% of the time they've done this nine times six of those were pretty sharp, all six were recessions. And then what people forget is the Fed is not trying to punish the economy. The Fed is trying to prevent hyperinflation and it, they're, they're doing exactly the right thing.
I wouldn't change a thing that the Fed is doing awesome. I mean all of our political, you know, institutions are paralyzed and useless. The Fed is actually a well functioning organization. They're not perfect. They make mistakes. They waited too long in this instance they shouldn't have, but they are a data driven organization and so they're doing their job and because they're doing their job, you have to understand that they will also do their job once the economy is in a recession. Once the economy is in a recession, the fed's job is not to raise rates, it's not to hold rates, it's to cut them.
If you are not sure about this, go back. And this is easy to find data on the web, you know, look at how quickly the fed cuts, cuts rates once we are in a recession. So the short answer is, I believe that one year from today the Fed will be cutting rates. I don't know if they would've just started cutting them. I don't know if they would've finished their cutting cycle, who knows, But they would be somewhere in a cutting cycle a year from now. So I want, I'm only interested at this point in, in floating debt because I'm just gonna go through a year worth of pain.
But if I fix the rate, if I go in for a fixed rate and those fixed rates are high, then I get no benefit from the down the downward, you know, leg. I, I'm, I'm getting hurt by the upward leg cuz my fixed rates are pretty high right now, but I don't get the benefit of the downward leg one year or 18 months from now. So it makes, to me it makes zero sense to get fixed rate debt on anything.
Jesse (15m 32s): So I guess the, in that case it would really be, you should hopefully you bought right prior to this and you're not, you're not on the knife's edge when it comes to the investment properties that you have or acquired prior to this because we're now in a place that sounds like the only way you can really prepare for the increase in borrowing costs is to have debt that is variable, but that you gave yourself enough of a sensitivity or enough of a buffer that if we had experienced stuff like this, you, you know, you can actually be able to maintain the investment and get to the other side of it.
Are you finding that investors had not been doing that the last couple years in terms of the underwriting?
Neal (16m 12s): Some have, some haven't. I mean, let's, let's slice and dice what you just said, right? Yeah. So number one, your borrowing costs are going up because you are, you are, you know, every time the fed increases rates, you're borrowing costs go up the following week, right? So number one, you should have purchased a rate cap, right? So, you know, my rate caps are five and a half or six. So the while there is enormous pain, it's not unbelievable pain because there's a rate cap that takes effect number two, in addition to the rate cap, you should have raised more equity.
So I even on properties that I bought seven months ago in the last month, I've gone and raised an extra a hundred thousand dollars. That person gets a higher irr, good for them. I'm keeping that a hundred grand. I have no use for it. I'm just leaving that a hundred grand there in case I need it. Every property that is 20 million, it's a hundred grand. If it's a 40 million property is 200 grand and that's just insurance money. Yes, it lowers IRS of the project. My investors are smart enough to understand that they should be thanking me for doing that as opposed to, you know, beating me up for it.
And sometimes I'll raise 200 K for a property if it's not doing particularly well or, or if it's rate cap is high. So I think those are things that we need to do. The number third, the third thing is be honest with your investors and do what I'm doing, which is cut off distributions. Right now the properties are still in a good place because rent have been increasing. Cash flow is, you know, in many of them is higher than you projected. Stop giving your investors distributions. Tell 'em I'll be happy to give you all this money, but I'm gonna leave it in my bank for the next six months while I see what happens with the economy.
So you've got three levers to pull your rate cap raising extra equity and stop doing distributions. Before you think about refinancing.
Jesse (18m 0s): When it comes to the, the piece of stopping distribu, or actually, sorry, on the equity front, I, I'm just curious how you typically organize that with your investors. Is that something that you're doing as a capital call when you, when you start seeing some headwinds or is that just at the outset?
Neal (18m 19s): No, I'm, we're just raising it from one investor, right? So like a lot of folks, we have full-time managers and we basically, you know, most times we have nothing to sell. There's no raise that's open. So they've got, they're talking with 20 investors a week, so in a month they're talking with 80 of them. And so when we have to raise a hundred or 200 grand, we send an email out to those 80 and somebody takes that share, they're actually lucky because nothing's really changed with the property.
The premise hasn't changed. We think that we will exit those properties well, but there's a short term cash crunch, which hasn't occurred yet, but we have a hundred percent believe that it's going to occur in the next six months. And so we're selling another share. We, we, we always make sure that we give ourselves some headroom. We don't always raise to the max level that's allowed by the ppm. So there's always room there to, to go a little bit further.
Jesse (19m 13s): Now, when you say a capital crunch, are you talking generally in the, as a result of the economy or in in inve the investment specifically?
Neal (19m 21s): I think I'm just talking about it in terms of interest rates increasing my mortgage and you know, that takes me to the point where the property itself may not be cash flowing, right? It might be breaking even or something like that. Well if it's breaking even then I wanna have extra equity just in case it gets worse.
Jesse (19m 39s): What do you think the takeaway from the last year is going to be for investors that had at least, you know, in our market, I, I'm not sure if you saw yours, we saw a lot of operators that kind of came outta the woodwork. It seemed like everybody was either, especially with industrial and multifamily, but in general you saw a lot of people coming outta the woodwork, never raised capital before, got into a very hockey stick like graph and, and kind of rode the wave. What do you think the lessons learned, you know, when the dust settles here is are going to be for, for investors in the investor community in general?
Neal (20m 11s): Well, I, real estate's slow moving. I don't think that any lessons that are have been learned yet. I think they'll all be learned over the next 18 months. But I think that the taxi driver syndicator and the IT professional syndicator, I think we're gonna see less of them 18 months from today because they realized that they were on this amazing hockey stick. And when, you know, when, when it got to the point where it was tough, a lot of these people are just gonna go back to their jogs jobs, whether it's the taxi driving or the IT professional.
And so we're gonna see a shake up in the industry in the next 18 months as we start seeing projects either fail or not do well. Failing is, is very unlikely. I'm not predicting a crash, but I think that you're gonna see a pretty large percentage of projects that were purchased in the last two years not hit double digit IRS if the Fed raises by another a hundred basis points. Now a lot of it also depends on how long the Fed stays, where the, you know, at that level I'm not, I I don't worry about the Fed raising interest rates, I worry about the Fed raising interest rates and then inflation not going down.
So the Fed stays at the top because when the Fed is staying at the top for more than three months, they're really hurting the US economy, but they have no choice because inflation's still high. So if inflation comes under control even at 4%, I don't think that there's any lasting damage to the economy. There's not any lasting damage to the multifamily industry. So people just simply have to hold, find a way to hold for the next 18 months. And then I think that their original irr, they should still be able to get close to it.
So a a lot of lessons really here are, are, and for me, I mean this is a big lesson is I didn't pay enough attention to inflation. I thought inflation was transitory because the Fed was saying. So I think the, the big lesson is even the Fed cannot compute black swan events like Covid and the money that we plugged into the market, they don't have the ability to do that. So you've gotta be very careful in the future that you can get into a highly inflationary environment. And so that's the big lesson to learn here. I don't know if there's more lessons to learn for, you know, all these syndicators,
Jesse (22m 24s): Would you, what would you say for, for those that had gone into an investment raise capital and now we're in this environment and not that they are underwater, but they had not projected these, you know, the interest rates where they are today or a lot of the syndicators that were doing value add and now they're, they're in the middle of that value add and in a very shaky place. Are there any tools in the tool belt at that point now that you know, you're underway with the investment to be able to hold, you know, hold it till, till hopefully, you know, we come outta this and, and you know, and then we're past this environment.
Are there any, is there anything for that investor that he or she can do?
Neal (23m 3s): Raise equity now don't worry about your irs, worry about your investor capital raise money now You can still raise it. I think you'd have trouble raising it in January.
Jesse (23m 15s): So if it was part of a current investment, it would be the possibility of going back to the, the investors and say,
Neal (23m 22s): I'm not suggesting cash call. Just add in another investor or two, give yourself a couple hundred thousand dollars of room. Right? I have more room than that simply because I've never hesitated to put my money in. I'm sitting on a large amount of cash in my banks. I'm very liquid because I have a predatory approach to the marketplace. I believe that in April, you know, April, May next year there'll be lots of cheap land and there will also be properties that we will be able to pick up at 10 or 15% off of today's prices.
It's not gonna last for a long time, but April may up next year is I think where we will get some, some bargains. So I'm basically sitting on a bunch of money and I don't hesitate to put that money into my properties if it goes upside down. But not everybody has that advantage. So raise capital, my friends, don't worry about the irr.
Jesse (24m 12s): So I guess in that case, depending on the PPM and the agreement with your investors there, you know, there's gonna be dilution to the, to the other investors if you're gonna be adding in additional investors,
Neal (24m 24s): Let's, let's just say this and, and I think that people will beat me for saying this $100,000 or $200,000 is not, is such a small amount on a five or 10 million raise. Yeah, that it doesn't move the needle. You know, if you think that you projected 16 IRR and you are actually going to come in exactly at 60 irr, that's never happened. I've never had a single property that came in at projections. They either came in above or they came in below. So, you know, a projection is simply a projection and there are dozens of factors that'll control your actual IRS between now and the exit of your property.
And this is, this 200,000 of capital is just one of those many factors.
Jesse (25m 4s): Yeah, that's a good point. Neil, we talked a little bit before the show of, you know, the last podcast we did and you know, we talked about at that time a lot of the analytics that we look at when we're investing population growth, income growth, you know, jobs, pricing, and you commented that, you know, this is an environment where that stuff is, seems like it means less if you know, if anything at all. Could you kind of expand on, on what you were talking about there?
Neal (25m 30s): Sure. So I mean, so we internally use about 19 different factors, but I can tell you the highest weightage comes to five factors that are all publicly available that are part of that location magic course. That's, that's in, you know, on our website, multifamily u.com. So you can go, you know, find that information there. So there's, you know, five indicators that we use, you know, income growth, home price growth, job growth, prime reduction, and let me see what I missed.
Population growth. So those five factors should be able to point you to the right cities to purchase, right? But my point today is the reason you're not purchasing is because every major market in the United States is losing steam and all of them are for the moment overpriced. I don't think that their long term overly, there's a lot of people that believe that our market is in a bubble. I'm not one of those people. But in the short term, given what happened with the inflation reading a few weeks ago, the Fed is going to raise interest rates and we haven't factored those in to our underwriting yet.
If you factor them into your underwriting, you simply cannot buy anything because somebody else is going to outbid you by a million dollars or $2 million. So if you factor in the Fed, you're not buying anything. If you don't factor in the Fed, you're over overpaying even in a good market. And show me a good market that isn't reactive reacting negatively right now. Right. So I've, I've talked about over a hundred markets in the us that's what I'm known for. You can, you know, Google my name and you'll see how many hundreds of markets I've talked about, but I'm not aware of any market in the United States today, mid-September 2022 that is not seeing downward momentum.
I'm not aware of any, there's actually rust belt markets that didn't boom over the last two years that are okay. But every booming market in Texas, Florida, North Carolina, Arizona, everything seeing downward momentum and in a downward momentum market, overpaying is a crime
Jesse (27m 40s): In terms of getting to the end of whatever we're currently in right now. Are there, are there indicators that you prefer to use or you like to use that I will, you know, be just an indication that we are going to be moving in the right direction and and that might be after that we come potentially into a recession or, Yeah, you know, or if we do avoid one completely, which I think most economists are now, you know, thinking that that's not gonna happen. That we are gon we are going for recessions one way or the other.
Neal (28m 11s): I, I didn't ever think that there was a chance that we would avoid a recession. So you can avoid recessions when you rate raise rates slowly. So the Fed raised interest rates from 2015 to 20 18, 9 raises all quarter point each. Right now we're raising 0.75, so that's three times faster, but they took three years for nine raises, right? We, we've done that many in, in five months. When you do it this sharp, there's just no way to prevent a recession. And the Fed knows that. So, but the fed's job right now is to put the economy into a recession.
That's the only way they can achieve their goals of slowing inflation down. So it'll happen. So let's go back to the question because I think the question's a really good one, and my answer is very simple, but I think it's very powerful. The turn in the economy, and especially in the lending comes during a recession when the Fed starts talking about potential interest rate cuts to come into the future. Mortgage rates are not based on the Fed funds rate.
They are based on the market's future looking projection of what the Fed will do. Mortgage rates in the US are guesswork, the market guesses that the Fed is going to raise rates. So it, they raise their own and the market guesses that the Fed's gonna drop rates so they drop their own. It's guesswork. So where does that guesswork come from? Well, it's based on what the Fed is saying. So sometime during the recession, and I'm gonna currently guess that it will happen in May next year, the Fed will actually start talking about the potential of dropping interest rates that is that light at the end of the tunnel because then mortgage rates start to move downwards.
They don't move down all the way, but they start to move downwards because people are thinking, Oh, going forward, there's really no chance that the fed's gonna raise rates. They might drop them, and then you wait for the sec for the time when the Fed finally cuts interest rates and usually they start with a 0.25% or quarter point cut. That's a very strong indicator that you are now beginning the next cycle. And I expect that would happen at the end of next year or maybe a little bit before that.
Jesse (30m 19s): Okay. Well, you hear, heard it here. Neil, always appreciate you coming on the podcast. I know that we've done through the final questions with you in the past, so I will just ask you this for listeners. In terms of resources, books you're reading right now or courses you have, where can, where can people, where can you send people to or recommend to listeners?
Neal (30m 40s): Well, I think that right now is an incredibly important time to know what's happening in the macro market, right? The macro market has having enormous effects on multifamily. And so check out our website where we share this data. It's multifamily u.com and I think it's critical at this point to know all, all about what's happening in the marketplace. We did a webinar in May called the Impact of Inflation and Interest Rates on Real Estate. It's a very powerful webinar.
I suggest you go watch it and then next month we'll invite you to an update on it because it's already some parts of the webinar already outdated because inflation didn't drop. We estimated that by this time inflation would start to drop. We haven't seen that happen. So now we're gonna talk about, okay, well it didn't drop, so what does a fed do next? And how does that affect us? Because the, the small impact on real estate is what you've seen so far. The big impact on real estate is because the Fed is now forced to keep raising. So I think it's critical, absolutely critical for anyone that's a multi-family syndicator to really look at the macro environment today.
Normally it's not such a big deal.
Jesse (31m 50s): My guest today has been Neil Bawa. Neil, thanks for being part of Working Capital.
Neal (31m 55s): Thanks Jesse.
Jesse (32m 5s): Thank you so much for listening to Working Capital, the Real Estate podcast. I'm your host, Jesse for Galley. If you like the episode, head on to iTunes and leave us a five star review and share on social media. It really helps us out. If you have any questions, feel free to reach out to me on Instagram. Jesse for galley, F R A G A L E. Have a good one. Take care.
Richard Chilcott is a Principal with the Avison Young Capital Markets Group providing acquisition and disposition services of investment properties to financial institutions, REIT’s, private investors and pension funds. Richard began his career in 1991 with Hans House Group, a private investment and development company based in London, England. Since joining Avison Young’s Toronto Capital Markets Group in 2001 Richard has been involved with transactions totalling in excess of $5 billion. In over 25 years of commercial real estate practice Richard has completed a wide variety of real estate transactions ranging from smaller private client businesses to more complex portfolio transactions
In this episode we talked about:
- Richard’s Bio & Background
- The transition from the USA to Canada
- First Notable Transaction
- Corporate Real Estate
- The Impact on Richard’s Business over the last 2 years
- Comparison between Surburban and Downtown Office
- Interest Rates Environment
- Real Estate Industry Outlook
- Richard’s Advice to Beginners in Real Estate
- Mentorship, Resources and Lessons Learned
Useful links:
https://www.linkedin.com/in/richard-chilcott-946b5a3/?originalSubdomain=ca
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jessica galley, and you're listening to working capital the real estate podcast. My guest today is Richard Chicot. Richard is a principal with Avis and young capital markets group providing acquisition and disposition services of investment properties to financial institutions, res private investors and pension funds.
Richard began his career in 1991 with the Hans house group. We now know that there's over 25 years of commercial real estate experience. And Richard has completed a wide variety of real estate transactions ranging from smaller private client business to much more complex portfolio transactions, Richard, how's it going?
Richard (1m 2s): Great. Thanks Jess. It's good to be here. That's a great intro. And it, it, it does seem like I've been here a long time. If you say
Jesse (1m 8s): 19 91, 19 91. So you you've, you know that it's funny, a lot of the investors, you know, you won't work with certain sponsors of deals unless you've been through some version of oh eight or 90, you know, their early nineties or some sort of recession to, to kind of understand that the, that we, we live in a cyclical real estate environment.
Richard (1m 29s): Yeah, it totally is cyclical. What we're in right now, I think is, is different and a bit more challenging. And I don't have a longevity for that. So I've actually been trying to find some sort of the people who are senior to me and some of, some of the mentors I've had over the years, days, what happens during inflationary periods. That's an interesting,
Jesse (1m 49s): Yeah, you don't, you're saying you don't remember the panic of 1907.
Richard (1m 54s): No, no. Although someone the other day suggested I should know what was going on in the 1970s and eighties with inflation and strikes and I guess fuel shocks and things like that. So I can just don't remember that at all.
Jesse (2m 9s): I can just hear my dad double digit interest rates, but before we, we delve into some of the more topical stuff, maybe for, for listeners, you can give a little bit of a background of, of how you got started in real estate and kind of the path that you took to, to where you are today and have been for the last little while at Davison young.
Richard (2m 30s): Yeah. There's, there was sort of one major, major turn in my career when I, when I changed country and went from, from the principal side to agency brokerage. And that was 2001. But before that, it was pretty hard to get, I always wanted to be in real estate. Half of my family was in commercial real estate. The other side was engineering. And that was always the choice, I think. So I looked at other things, not wanting to make a choice, but in the end sort of real estate got me, but it was not easy finding a place to start in the early nineties.
So that was in London, London, England, and I got a job and I had a high following title of surveyor for car parks. That was my job. And I was responsible. I, I remember when was 16 or 18 car across, I think all in England, different parts of it. And they, none of them were automated and it was my job to look after everything, to everything, to do with those car as a young sort of 21 year old guy at the end of 91.
And I think the people that worked for me totally saw me coming. And, but eventually we sort of got to grips with it, but that was sort of a fun experience as you start off on a very limited understanding of anything, really, and then you sort of, you have responsibility and you grow it from there, but that was an interesting company. It was a development company that would turn its hand to almost anything, right? So they built a, it was a redevelopment company. So you look at being, being such a heavily, already built environment.
You could be incredibly creative. You could look at an office building and wonder if you could turn that into a hotel or you could. The one deal we did was a, a pumping station used to pump water in and out of a shipping base, right by tower bridge in London. And we managed to get an option on this building. And then we decide the best thing to do would be to let's make it a residential building. And so we sort of punch this glass funnel through the middle of there, which, which is where the apartments are gonna be.
That was in the mid nineties. And things just started taking off. So started off as car park and then sort of shifted out of that is more like an administrative role into other things. We built some pretty cool things. A lot of the times we would entitle sites come up with a concept and then sell 'em before construction. It was a small company. It was great fun. Hmm. And then in the end I moved to Canada. So that was 2001, everything, everything for me ended at one, I married a Canadian in London and that was the deal.
So we were shoot to three years in London and I'd do three years in Canada and we would end up where we ended up. So I don't think we ever look back, but Canada's an amazing, an amazing place. UK's an amazing place too. So I've just been back and it's, you, you, you remember all the wonderful things that I got up to there, and what's just an amazing vibrant environment, but Canada's got lots going for it when you're sort of starting a young family and other things like that. So,
Jesse (5m 46s): So that transition, that transition from the UK to Canada, the, did that, did that coincide with working over here for a, a UK based company? Or did you switch jobs with the
Richard (5m 60s): Move? No, it was a complete switch. I didn't actually have a job when I came. It was just, it was, it was a good sort of break in deals. And I knew I had to do my three years. And so it just a good time. And my wife had got a great job back in Toronto where she's from. And so it was just if it didn't work out, we'd go back. Right. So it was, we were pretty lucky. We were very lucky immigrants, right. We had a great job to go to and no language barriers and things like, so we were, we, we were pretty privileged in how we could go back boards if we wanted to.
Jesse (6m 32s): Yeah. Pretty good. When you're coming from, from the country that invented the language.
Richard (6m 38s): So it sort of invented itself if you think about it.
Jesse (6m 43s): The, so when you came over here, you kind of, as you got into the job market was Avison young. Did you start in 2001 at Avison young? Is, is that I
Richard (6m 53s): Did. I got a, I got a, I didn't know what I wanted to do, but obviously I had a real estate background. Yeah. And it was a pretty quiet time in Toronto at that time. I think the, the tech crash was in full swing and I don't think Toronto had actually recovered from its late eighties, early nineties crash. Whereas London already had, London's a bit of a hedge fund economy sort of boom and bust. And it rebounded super quick. I don't think Canada had, there was still the stump that, and, you know, SAU hadn't been built, but it was, it, there was still construction and development, but it was
Jesse (7m 30s): Sorry by, by the stump we're talking about bay Adelaide parking lot bay
Richard (7m 34s): Adelaide was. Yeah. I think I only saw the end of the stump. I think it was there from the early nineties. So
Jesse (7m 40s): For, for non sorry for non-Canadian listeners bay, Adelaide was probably the, the, the textbook example of something that was built and never finished until the economy recovered. But yeah, that's, it's, it's such a good meme or, you know, symbol of, of that time and
Richard (7m 57s): Error. I think it was the elevator shafts, the sensational office building yet to be built, which was still because of the recession. So it was, but the parking lot was built. Like all of the underground was done. It was a fascinating you're right. It was at the time you could just, you could, it was, you could see where the economy had stopped. Like you'd actually physically see, see it, which was interesting.
Jesse (8m 20s): Yeah.
Richard (8m 21s): But, but Canada was, there was a lot of, there was a lot of suburban development, but particularly in residential. So it was sort of Greenfield, you know, large housing estates and subdivisions, which I was, which is a complete to what I've been doing in, you know, the city was from, so I did, I went for a few interviews. I went for, I went and I got offered a couple of things. Someone actually famously said, you, you, I wanna offer you this job, but you'll stay for four months, which was sort of interesting.
So anyone's listening as I think a lot of people have had that where you, you sort of, you overqualified. Yeah. But you're not overqualified cuz you went for the job. So, you know, I would tell all the employers take these people. They, they could be pretty loyal and stay with you. And in the end it, it became, the realization came to me that I just don't think I could do development and I didn't really wanna do asset management or anything like that. And so I couldn't continue what I, what I'd been doing before.
And I had sold a whole bunch of investments for our, our company in London through some agents. And then they set me up with a large international brokerage and they actually offered me a job which was greater than, and I didn't take it. They sent me to see a whole bunch of expats. And is there a difference between agency brokerage, each side of the pond? Is there a difference in how people are and businesses are and things like that? I, it didn't cross my mind any, there were any differences, but they me to see all these expats and they said, look, you know what, when you, when you come over, you might want to, you might wanna start in a village, right?
And that village will make sure that you are meaningful and that you've got a contribution and you sort of find your feet and then you can go and join the big company. That was what they said. So at the time Aon was Aon was a very small company, but a number of these people, I think I went to see eight people. And I think four of them, many of whom is still the business said, no, you should go and see a guy called Robin Whiteson young. Who's Robin is an itself.
And so I came to Robin, this company full of Canadians and a couple of Brits in it. And it was just a great little company. And you could just, it wa because that time wasn't about the money, it was about just feeling, you know, making a new life somewhere new on my own. Right. So I certainly didn't wanna have my entire life wrapped up with my wife's life. Yeah. Might edit that out. I dunno. It's possible to leave it in, leave it in. But yeah. So the idea was to sort of create your own, your own life business and, and with the, and with the people in business that you wanna be with.
So, and then, so I stayed. So I actually went into, I worked for, for the investment department and I actually took a step back. So you learn a lot of humility when you, when you do things like that, you take a step back. And from being who I, I thought I was, you know, a pretty hot young developer with everything going for me. And then you come and work for a company and you've become, you become the assistant. So I was the investment department assistant. I went actually from having my own secretary in London to actually typing people's emails.
There were some people at Aon years ago who didn't want to convert to doing things like that themselves in 2001. And I actually typed their, they would, they would give me scraps of paper and I would type their emails for them and improve them in bigger. And I do the financial underwriting and analysis too. So, yeah, but that was, that was quite the experience. Just taking a step, you take a step back to go forwards.
Jesse (12m 12s): Yep. Absolutely. It's one of those things where, you know, even, well, we call them associates now, but the, you know, the assistant aspect, it's just the nature of real estate for anybody that's, especially on brokerage. They want to break in. I'm curious, the, I don't think we've ever talked about this in terms of the real estate or redevelopment, the, the UK version of real estate and, and the way people operate in this space. Did you know, were there some stark differences between Canadians and real estate, which I assume somewhat similar, maybe not as aggressive to our us counterparts, but did you notice a different way of working between the UK and Canada?
Richard (12m 51s): Yeah, I mean, in terms of market to market, Canada is a real interesting place because it has its its major connotations and is a major country in terms of population and GDP, but it's very spread out. So you don't actually see that same power as you would in, in a country of an equal size. Now I know the UK's bigger, but you don't see it because it's geographic sort of spread. If you know, Vancouver exists at one end of Ontario and Montreal, the other end of Ontario you'd have these sort of three powerhouses and put Calgary somewhere else.
It would be incredibly vibrant and very competitive place because of the geographic difference. You found that there, it wasn't an enormous marketplace. You found people operated in a marketplace and there was a certain amount of them. And so everyone had that sort of dis everything was dispersed. And I think the other thing which was great is that you could telephone and speak to anybody. And I think you still can in Toronto and it's, I don't think people in Toronto realize how amazing it is, how open people are in.
And maybe you found this with your show, Jessie, right? People are super happy to take a call and find out what you're doing and who you are. And it's not, not as if you needed to speak to a friend to get an intro, which is sort of how it was for the, if you wanted to speak to the big wigs of London, we had to just, you had to sort of almost go through to start with and made it, there were so many of them, but I actually think it's more sort of more about, so Canada was great from that perspective, everyone's open everyone's available, but there was, there was certainly less business.
It was a much smaller marketplace. And, and again, you know, half the population and I don't know, I dunno how much bigger it is. Is it 50 times the size? I dunno, it's that creates in itself just a thinner layer of clients and customers in business because it's spread. So, so thinly.
Jesse (14m 56s): Yeah. I've never actually thought about the, kind of the major Canadian cities, if you house them all in, you know, Ontario where, you know, our province, which you probably could fit, you know, Italy and, and another other decent sized countries in the actual, yeah. It it'd be a fairly crowded room.
Richard (15m 14s): Imagine what the sporting events would be
Jesse (15m 16s): Like. Oh yeah.
Richard (15m 18s): It would just be, it'd just be unbelievable.
Jesse (15m 20s): So Richard, your first notable, or kind of sizable transaction when you started working, I assume you started in the, in the investment side, on the cap markets team.
Richard (15m 31s): Yeah. I started started the cat markets and then we, we did with a number of interesting. So I think it was very much a midmarket firm when we started and very, very creative and we worked. So I, I ended up sort of teaming up with Robin white and John Gordon, Robin is still still practicing today and sits in the office next to me. And typically office is what we would do, but we did a really interesting portfolio, which was a, a breakup of a small portfolio for Woodington properties.
There were his historic Loblaws premises through a number. And I think it was 14 buildings across sort of the GTA and write it down as far as Windsor. And so that was quite a fun experience. There were a number of agents on the team and I sort of sat in the middle as the analyst, if you will, to sell these all different sort of shapes and sizes of assets, but some, some had become restaurants and some had become office buildings.
I wanna become a movie theater. And it was just an interest. That was a really interesting process, but that wasn't typically what we do. We typically sold, sold office buildings. I actually made a mistake on underwriting. One deal, which Robin laughs about to this day, because I didn't put a vacancy allowance in my numbers. And the guy said, wow, you're 10% higher and everybody else, but you won it. We won a pitch. And it told me that that was sort of POS. That was a positive mistake.
Jesse (17m 11s): That's a good lesson, both ways. It's almost that, that fine line of when you, when you win something, if you, you have it too high, you're like, okay, how am I gonna sell this now? But yeah, I think that's, yeah, this, this building, it doesn't have any vacancy. That's pretty standard.
Richard (17m 26s): Yeah. No. Well, as a, as a small company back then, you had to outperforming underwriting. You, you know, people were always wondering if you'd missed something we never did, but that was one occasion we did, but it had a positive outcome. We sold that building a great experience. We did a lot of, but it's it, it was it's, it's exactly the same business as it is today. There's many more players, many more buildings, oh, RAs makes this make me sound, just making me sound super old, but it is a much bigger city now, but we would for, you know, we would have to photocopy boxes or leases, literally deliver boxes.
Thank goodness we got rid of that pretty soon after it started. And we actually got into digital age and we used to deliver a CD. It's a, it's, it's bizarre to think about today, how much got done without that technology. And I, you know, my first, my first desk outta computer on it, and we had spreadsheets and we did analysis and desktop publishing. But before that people would do their analysis with a pen and paper and it was, I, I have no idea how they did it, but I think my assumption is that today we can run 3000 models to work out exactly what we think's gonna happen with an asset going forwards back then they did it three times, but they did it right.
So I just, it, you know, that's a discussion about efficiency. So
Jesse (18m 59s): What, so when you, when you got started on the cap market side, I think this is a common question. Whether it was back then or, or today we have listeners that invest in, in commercial real estate, in retail multi-family office. But in terms of where the place that you started in, I find that, you know, if you wanna do leasing the barrier to entry barrier to entry, once you get in with a company is fairly low, you can, you can basically have a, a rockstar first couple years, if you hit the right tenants or right clients, you know, the same thing I think goes for multi, multi res now in terms of office and more what I would call more corporate real estate.
It's, it's a matter of, you know, where do you even start? So when, when you got in the, in the game, you had Robin, so you had a, a senior person, is that still to this day, really what you need to break into the more
Richard (19m 54s): Side. I mean, you, even if you start, even if you start in the private business, even you start with private clients in the smaller end of the marketplace, you still, you have no track record and you are going market dispose and advise on someone's carefully purchased and nurtured real estate investment. And if you don't have a track record, it's super hard. So you don't, you don't borrow a track record, you have to bring someone who's got one. And then I think you, you know, you start off as a junior and then you come alongside them.
And then perhaps you can either break out on your own or go further ahead. But we did, we, we tell people to join our department. There, there is a very, very long incubation period. And if you, if you know, maybe I don't even wanna put a number on it, cuz I think it frightens people off, but it's, it's a long time. If you were gonna do something on your own before you, before you can get that sort of track record on your own. Yeah. So you need a team. So it's a very much a teaming environment always has been and there's, and there's also enormous amount to do in underwriting valuing marketing.
There's just a lot of it. And none of it, in my opinion is rocket science, but it does take a village to get everything done. So you sort of have to have that in you as a, as a human being, to be a share and a team player from day one. And I think you find that in cap markets, teams across Canada is that there are few people who are very individualistic.
Like everyone has a team around them or they're part of a team. Or, and I think you'll find those people are pretty much interchangeable as individuals in other people's teams or other people's companies perhaps. Right. So I think, and that's a great accolade to my peers in the, in the industry. They they're, they're good people who do, I mean, I think we can, it's rare. You can find something that someone else hasn't found in a way to evaluate or, or underwriter a transaction because there's a pretty close group of people out there.
Jesse (22m 11s): Yeah. Yeah. And I, you know, we look over at the capital market side and definitely there's similar similarities. I think for, you know, if anybody says two, three years in the industry, I, I don't think it's even close in terms of how much time you really, if you want to commit to this industry how much time you actually have to give it. But I always saw the cap market side, especially the institutional side as even a longer incubation period. Like you're saying as opposed to some of the other groups and it's, you know, you start selling to institutional and if you're just a new person in the industry, you can be the smartest person in the world, but there's no credibility there.
And unless you're bringing somebody to the table.
Richard (22m 47s): Yeah. And I think the, the other thing which I'm always conscious of is that our client, our clientele on, on the private, all the institutional side, they are there for your entire career. There's, there's, there's a finite amount of them. The city's the city's now much bigger. We all, you used to be able to know everyone now that's impossible, which is so of interesting dimension now. So that's a little bit more like how it started when it started career in London. There's, there's way more diversity of clients.
There's so many more of them. You don't know everyone and be all things to all people you can have, you can have favorites specialties. Yeah. But I think the, the people you will meet, if you're a start as an analyst, people you will meet as an analyst in your twenties will be the people you perhaps are working for on the institutional side in 30 years time. Right. And that's, that's sort, sort of cool, but it's also a bit daunting.
Yeah. Because you just can't make a mistake. And if you do, you gotta own up and be, you know, super. And that's sort of, not, not that it's easier in, in the other side of the business to say leasing, but there's just many more of the, the Cleon on the leasing side. Right. So cuz you have the tenant side too, so yeah. Yeah. It's an interesting, it's an, it's a very interesting marketplace and some very, very smart people work in that marketplace. When in Toronto, our clients are very, very talented people who spend a lot of time learning their craft and they know an awful lot about the marketplace.
So again, that's where sort of that little stretch where you have to learn some humility, it, it just sort of fits well, it, your clients know a lot more than you sometimes about the marketplace, which you are selling it to. Yeah. Which is quite interesting.
Jesse (24m 45s): Yeah, for sure. I think, yeah. Especially when you're, you're dealing with whether it's private or institutional, you're dealing with ownership. I find a lot on the private side too, because it's usually their baby or babies, you know, they're building or portfolio. So over the last, what is it now? Dare I say two years,
Richard (25m 3s): Don't say, don't say it. Don't say
Jesse (25m 5s): So we've gone through kind of a, you know, we'll be analyzing this in the same way that, you know, MBAs and, and real estate streams analyzed the nineties. Oh 1 0 8, the, the players that emerged on top of the market, you know, multi res industrials gone crazy over the last couple years. How has your side of your, your side of the business, how has that been impacted over the last year and a half? What are you doing differently or, yeah,
Richard (25m 34s): Super interesting. Look. Most things seem to be, like I said, broad statement, but most things seem to be cyclical. We didn't sell an awful lot of industrial as a company when I started cause we didn't have a lot of industrial work and we, it was just a very small company and subsequently that has burgeoned. And we have a very, very like top tier group in a number of offices around, around the world and certainly in Canada for industrial.
But when I started, it was a, it was a relatively quiet area of the business. A lot of the product had been built in the sixties, seventies and eighties and was already sort of tired and there was no income growth to speak of Europe. Five 50 rent was pretty good, whatever you did to the building, you get five 50 rent. So it was a very, it was, it was pretty black. And then to get those numbers up, you had to have something pretty sensational, but then the tenants may not have paid for it.
So, and then it all started moving. There were lots of changes and I think we're going from, you know, manufacturing to warehousing and distribution plus population growth, entities, cetera, and just gen the way that industries worked just in time and things across the world, we need more warehouse per person. And we had more people. So that was sort the main driver with industrial office.
At the same time when I started, it was a real flavor to move out of downtown. And I think maybe it was the end of that period, but people were building pretty cool office building for the suburbs and then moving whole apartments out to the suburbs where people who get a great house and they could community leader work and they could bark in the parking lot. And that was sort of, that was sort of new and fresh. And there was a major tax differential to downtown Toronto, just the, just the suburbs charge, way, way less of taxes.
And I think that that sort of ended as I, as I, as I arrived and came up with some great policies to, to build buildings and bring people back, not not least of which is transit, right transit. The one place everyone can get to the GTA is downtown by transit easily. It's the only place. So, I mean, they're the two sort of major things that have happened. And now we seem to roll further. Along from that there's discussions about the value of retail.
Retail is, is fabulous in segments of it, of its issues and are tired and old and may not come back. But the other components, it's something that everybody needs everyone to go shopping. You don't necessarily need to go to a store, but people like to go to stores, right? So we found that's a far more robust industry than people thought at the start of COVID office is really interesting and that we we've sold. I've sold a lot of office buildings in my career and they do tend to come in and out of favor, they're sort of high, a high or high capital high reward assets.
And I think what's happening right now is working out how much space people need, where they want it is the commuting gonna continue. If you've got work from, there's just a lot of questions about it, but I've no doubt that it is a fabulous asset class. And even though we've got the technology not to be in the office, the way humans work is it's great. If we get together as much as possible without ruining the other, the other part of people's lives or the efficiency of it, right? So office will come back, but it is definitely going through a softer period and the prices you can buy office that are significant discounter replacement cost.
And now, now in the GTA, you could, you know, you could throw a building away and say, great, we'll just, we'll build something next door on the Greenfield. You can't do that anymore. So there is value to all of this older product that into whatever you might wanna change it into. And then you get into a discussion about, well, what do you wanna change into and what creates jobs? And that's where perhaps you get the, the fight between the developers and municipalities. So, and that will go on forever.
That, that, that fight. So,
Jesse (30m 2s): So on the office piece we had, we, I think it was last week, I was speaking to the chief investment officer for, for crowd street. And we were talking about office space and kind of the bifurcation between downtown assets, well position or, you know, in theory, well position assets versus suburban office and with places like San Francisco, New York, Toronto, all these, a large majority of these north American cities still have not had the people come back into the office in terms of some of the cell phone data that we gather in the vitality index.
Do you see a, a positioning, a difference in positioning as, as it relates to the comparison between suburban and downtown office and maybe just as a follow up, you know, what, what are they gonna have to do downtown in these, in these office buildings or these investors that, that own these assets to entice companies to want to be in the office and want to be in space that I guess has more amenities.
Richard (31m 5s): Ah, now that's you could probably look, I definitely got an opinion and I, you know, my, my job is to value them and sell them and advise on them as opposed to fill them. But there's some, there's just some thinking that is me going on lately. If you, if you want people to come back to the office five days a week, it's gotta be easy and quick to get to for your staff. And it's gotta be a great place to be.
And that's sort of where we have problems, because if you've got a, a, let's go, let's got the suburban belt around Toronto, the 9 0 5 belt, it could take people an hour to get into the office and then there's a cost to it. And maybe there's more time than just the hour on the train. Maybe there's a bit longer. So you got one hour 20 each way, five days a week, that's look, this isn't, this isn't an official policy. It's just an open think Jesse. And the thinking is, if you're gonna make people do that five days a week, something's gotta give right.
You can provide them with amazing space, but that isn't really how they want their lives to live, particularly when they can pick up the computer and work from anywhere. Right. So you, so perhaps that is a positive suburban office. So perhaps a suburban office is where you have your, the people that you want all the time in the spoke, the hub and spoke discussions that you've, I had, you know, perhaps that's where the spoke is.
And then you have a sort of suburban location. And then the hub perhaps is work from home, telling everyone comes downtown every now and then. And that's where everybody in intermingles. So it's a complicated, it's a complicated theory, but because it's two things at the same time, and I think everyone's trying to avoid you two things at the same time, but they might have to do that. And I just have no doubt that like our younger staff learn so much, if they're in our offices and we have an open door policies, you know, and you just learn, you just learn and you don't have to like, press a button to call anyone and ask this Jupi question because there are no stupid questions, but it becomes a stupid question.
If you make a, if you make a deal out of
Jesse (33m 24s): It, right. Make, make a zoom call for, for the stupid
Richard (33m 26s): Question, that's right. A zoom call for a comma is stupid. But if you call through someone's doorway, if not stupid. So I think that sort of humanity is gonna have to start factoring in and I'm not quite sure that's that's happened yet. And I think the other thing is we've got this crazy well, it's crazy in a historical sense is the cost of refurbishing office space to the standards that one wants today is really a real problem. So maybe it's $200 a foot maybe, but you can't get those rents.
The rents that would support that unless you're in top accommodation downtown. So maybe that's a supply chain thing, identical, but it, it, if you do look at suburban office, look at the, you know, the average price per square foot suburban office is two to 300 a foot, but it's gonna cost you four to 500 of it to build it, let alone the land, which now competes with industrial lab, which maybe three, four, 5 million acre in those areas. It just something's, something's gotta give, and to me, it just looks as if those opportunities are very, very cheap, but I can't quite see, see the, the end of the tunnel on that yet.
Jesse (34m 41s): Yeah. Well, that's good to hear cuz those of us in the office world, we, we can't either right now it's you never really know you're in something until you're playing Monday morning quarterback When it, when it comes to the, so if you, our advising clients that are investors, asset managers, institutional clients that actually own this type of real estate that we've kind of come out of this, this world that was crazy for a while and the extra wrinkle just cuz we hadn't had enough, was the interest rate environment very different than it was a year.
Yeah. Even a year ago. How does that inform if it does, you know, to what extent does that inform your advising with clients? Is it them that's calling you, calling you to consult on that? Or is, is it something that's, that's a key piece of the, the decision making?
Richard (35m 33s): Yeah. Debt is a, is a, an invaluable part of the capital stack and it's become more and more and more so. And even to the extent was if you are a large institution of buyer and are forbidden or don't want to use debt, you will still underwrite as if you, as if you have a need for debt so that you actually make a market judgment. That seems to be what our clients do. So it's such an important part. I think it's a really integral part of modern life as well.
So if it's, it's sort of the interest rates sort, the one stick that the central banks have in terms of controlling sort of monetary supply. And if you just keep printing money in doing Q and having sort of QE to get us out of a hole, at some point you've gotta sort of constrain that supply. And the only tool we see or one the, the main tool I say we have for that is, is an increase in, in the I rates, which gets passed onto everything else.
That's gonna have an undoubted effect on the value of real estate because you still need a spread to risk adjust to non-risk returns. So if you've got real estate has some risk to it, different real estate, there's a lot more risk to it. You need to have those absolute, absolute spreads. And if you are return increasing with non-risk investments, then you're really gonna have to probably move your pricing out.
But what goes around comes it'll come back again. As you know, as your, your dad's comment, when, when you're a kid, I think I hear a lot of those scar stories. I would never have wanted 18 mortgage or even I've never even had an eight mortgage. It's all sounds a bit frightening, but you know, my grandfather was in development in the 1920s and he this, when I was real estate in nineties, he said that had interest rates in the 1920s.
And I said, well, that must, that must have been amazing. You know, that must have been just great. You could do so many deals. And he said, no, everything was expensive. So I guess it's all relative to me, the, the, the, the actual interest rate is relative, but the availability of that component of the all components of the capital stack, but it be equity or debt, the availability and the liquidity of those markets is far more important.
So if tomorrow, someone said you can't get any debt. It's not that it's changed from three, your or 5%. We don't lend that will cause huge problems.
Jesse (38m 25s): Yeah. And in terms of the, in the landscape that we're, that we're seeing with that I've heard just kind of anecdotally companies talking about more looking for properties that are, that are not free and clear and potentially having an assumption of, of current mortgage rates, because they are at, you know, what is now considered much lower than the current, say five or 10 year commercial loans. Are you seeing that is, or is that just, you know, is that just banter in our space?
Richard (38m 55s): It's what people used to do, Jess. I mean, we, people used to look when we've gone through these sort of periods before people, people used to look for those assets getting paid for it is another matter, right? It was you more than anything, a lot of these things don't necessarily change the value of the product, but it does. It may do indirectly, not as directly as well. I think, because what it does is improve on your buy a pool, improve. Lot of people who are looking. So a couple of people would look at it because it had that sort of low debt. Perhaps they get a larger spread on it. Does it improve the value?
I guess indirectly it does. Yeah, but I mean, Canada is such a, a, well, it's a very well structured environment that has pretty conservative debt in commercial lending to start with. So it's not a country where you see people setting up voucher funds and trying to take people outta trouble because they're really people aren't actually in trouble. They're just not as great as they were last month.
Jesse (39m 51s): Yeah. Fair enough. So we've got four final questions we ask every guest before we, we get to that just generally speaking, are there certain aspects of our industry and it can be asset class or just trends that you think are, you know, positive and, and you think are on the horizon, that, that you're bullish on
Richard (40m 14s): All of it. And I, and I don't mean that to be facetious. And I think that's the country we sit in. It's a very, very special place. We're very lucky to live where we do. And I think that goes to many parts of the world, but, but some, obviously it doesn't apply to. And what we've got is a, is a, a fair system and we've got, and we've got people who want to come to Canada. And in the long term, that's probably, you know, there are some, there are some finite things in the world there's real estate, but not that we have experienced it yet, but there's also population and population growth is tailing off.
Notwithstanding what the UN is. I think this week we hit 8 billion people around the world. The countries like Canada, it's very easy to grow the economy. If you have more people and if you attract great people, it's even easier. So there's probably gonna be some more competition people, but that's the long range view of Canada is fantastic because we haven't hit 40 billion people. And it's the second largest country in the world. And it's a wonderful, wonderful country. It is amazing place with amazing people. So that's why all aspects of real estate there'll be nuances about what the next flavor is and what the past and the future looks like in immediacy.
But speaking, it's very positive. So it sort of sounds flippant, but there's a, there's a reason.
Jesse (41m 37s): Oh, I like it. All right. So four questions, Richard, what would you say to somebody that's trying to break into our industry? Somebody that's just starting their career, whether it's in the stream that you took or, or just generally in investing or brokerage,
Richard (41m 54s): What would I say to them?
Jesse (41m 55s): Yeah. What
Richard (41m 56s): That's, open-ended in, where they would, where they should start, where they should go.
Jesse (42m 1s): Yeah. Yeah. It's somebody that's trying to break in. You know, what, what would you do kind of, you know, your, your 21,
Richard (42m 9s): I think people need to analyze what their personality is because there's so many components to it and you know, you and I can see that in, on our side of the business, on the brokerage side, let alone, let alone on the ownership side or the construction side of development. I mean, it's a fabulous business, but you do sort of need to know where you, where your mind fits. So if you are an instant overnight person, maybe you don't wanna go onto, maybe you don't wanna go to capital rockets, brokerage, because you have to build a, build a track record, learn the tree, and that goes for everything.
Right. So I think that's what I would say is that you do sort of need to know yourself a little bit. And if you dunno, go try but be open, ask as many questions as you can. And that's a, that's a wonderful thing about the industry. You can ask anyone anything, and they will give you a genuine answer. They will try and try and make the time to, to, to give you the time of day to, to give you, give you a functioning or thought out answer. And I don't know if you find that in every industry, but certainly real estate is great for that.
Jesse (43m 9s): Yeah. It's I mean, it's come up time and time again on this show, we've talked about how we're, we're lucky in an industry where a lot of the senior, the veterans really do want to give help to people that are curious and interested in, in our space. What's something that, that, you know, now in your career that you, you wish you learned when, when you're a younger lad.
Richard (43m 32s): Oh, well, when I first started work, I it's, one of the simplest of things is a lot of things got right when I started being an analyst at Avis and I start ma making lists. Whereas I did development work. It was sort of, I was less list conscious and I sort of tried to juggle things. You can just get so much done if you made lists. Yeah. It's, it's absolutely crazy. I wish someone had told me that when I was 17,
Jesse (44m 3s): I like it. I'm definitely in that boat, you know? And when you're younger, you're always like, ah, I'll remember that. I'll remember that now. You're just, you're like, you, you know who you're dealing with, you're dealing with the person that, that didn't remember it last time. And yeah, sometimes it just takes some time. Are there any resources that you would find useful for listeners for real estate, whether you know, a book on a book in our space, something you're reading a podcast you're listening to?
Richard (44m 32s): No, I think I, I think some of the industry groups are really good. Like NAOP is a fabulous industry group and you can find different, different parts of NAOP, which would be appealing. And they, they do a great job and they do a really good job, I think, events or thoughts about the junior members, more so than the senior members, which is great. So that's a good one to follow you. You, you do have to know your math. I, I can't remember the names. I, I can't remember the names of the books I had, but there was one, one book.
I don't even know if circulation, but it was by a guy called Jack Rose. It was square feet. It was a picture of a square foot on the front, obviously. So, but that was it. But you do, I think you do. I would just, I wouldn't, there's nothing I'd necessarily recommend other than you do have to work out. I do the math, right? The math is it's actually really, really straightforward math, but I come across so many people who do not understand the connection between a cap rate dropping and a price going up. And I'm just flabbergasted how people have not.
And they literally don't understand it. And I'm flabbergasted at that. And I would, in every one of them, I will take them to one side, get posted note and actually show how it works, because it is the simplest things. But so being inquisitive as you can, I think, because it, it, ain't hard.
Jesse (45m 56s): Yeah, for sure. No excuse not to know it. All right. Last question. Stole this from one of my favorite podcasts, Bloomberg masters in business, first car, or make and model.
Richard (46m 7s): Oh, seriously. Okay. That is an interesting question. I had a, I grew up on a phone oddly and in the, in east, in the deepest countryside. And I was given when I was 13, a 1964 land Rover, but it didn't work,
Jesse (46m 29s): But it didn't work.
Richard (46m 30s): It didn't work. And it was a summer project to get it working. And it took me most, most of the summer, but the end of it, I had this fantastic thing to drive around the field, which was great. So that was my first. That was my first love. Really?
Jesse (46m 43s): I thought I was gonna get an, an mg or an Opal or something.
Richard (46m 47s): No, I had some great cars in London. No, I had a, yeah. I had a Lotus and I had a TVR, which
Jesse (46m 52s): That's right. Lotus of.
Richard (46m 54s): Yeah. But do you, life changes, you pick up, you pick up, it's a rolling stone. Yeah.
Jesse (46m 60s): Not a lot of, not a lot of grocery. You can carry in the Lotus of spree.
Richard (47m 3s): That's right.
Jesse (47m 4s): Fair enough. Well, Richard, I appreciate you coming on the show for those that are interested in kind of the cat market side, is there anywhere they should kind of, aside from LinkedIn or a Google search, where, where can we send them to?
Richard (47m 19s): No, I think come find me or Jesse on LinkedIn or com you'll find us, I'm super happy to speak to anyone about the business, what we do, where it may be going. And I'm the first person to say, I can be wrong, but it's great to have a discussion because no, one's got a monopoly on wisdom. So I'd love to hear. Thanks very much. Jesse. Appreciate the time.
Jesse (47m 38s): My guest today has been Richard Chicot. Richard, thanks for being part of working capital.
Richard (47m 43s): Thanks, Jesse.
Jesse (47m 52s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you like the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Ian Formigle Ian is a real estate professional and serial entrepreneur with over 25 years of experience in real estate private equity, equity options trading and start-ups. Ian is Chief Investment Officer at CrowdStreet, overseeing its marketplace, an online commercial real estate investment platform that has completed over 650 offerings totalling over $25 billion of commercial real estate. Prior to joining CrowdStreet, Ian was VP of Business Development for ScanlanKemperBard Companies, where he managed the firm’s alternative investment platform and served as a senior acquisitions officer. Previously, Ian co-founded and served as CEO of Clarus Property Ventures, a regional real estate private equity firm that focused on multifamily acquisitions. Ian began his career as an equity options market maker and member of the Pacific Exchange
In this episode we talked about:
- Ian’s Bio & Background
- CrowdStreet Overview
- Asset Classes and Strategies Outlook in Real Estate
- De-risking Strategies for Real Estate Leverage
- Office Market Potential
- Best Places to Invest
- Ian’s Thoughts on Flow Company
Useful links:
Book - Rey Dalio “Principles: Your Guided Journal (Create Your Own Principles to Get the Work and Life You Want)”
Podcast - The Prof G Pod with Scott Galloway:
https://podcasts.apple.com/gb/podcast/the-prof-g-pod-with-scott-galloway/id1498802610
Contact Ian: https://www.crowdstreet.com/
https://www.linkedin.com/in/ianformigle/
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jesse Fraga. You're listening to working capital the real estate podcast. My special guest today is returning guest Ian for melee.
Ian is a real estate professional and C entrepreneur with over 25 years of experience in real estate, private equity, startups, and equity and options trading at crowd street in is the chief investment officer leading the office of the CIO division and is responsible for the overall strategy of the firm. Ian serves as a member of the crowd street, executive management team, and is responsible for the final review and approval of all deals that go live on the online marketplace. He's also chairman of the crowd street advisory investment committee, Ian, how you doing?
Ian (1m 3s): Doing pretty good, Jesse. Thanks for having me back on the podcast. It's a pleasure to be
Jesse (1m 6s): Here. Well, it's great to have you again, and we're just joking before the, before the podcast that not much has changed in the last 12 to 18 months. So this will probably just be kind of retread old, old hat.
Ian (1m 16s): Yeah, exactly. Nothing nothing's changed since February of last year.
Jesse (1m 21s): So for those that, that didn't catch the first episode, although it is, I think at this point close to a year, year and a half old, there's a lot of good information there on the company in general and the market and the outlook at that time. You're more than welcome to check that first episode out. But for those that didn't catch that one for listeners. Maybe you could give a little bit of a background on yourself and then kind of on the company itself.
Ian (1m 47s): Sure. Happy to do so. So my personal background is entirely so for the entirety of my career, it's in investing in one form or the other. I started my career outta college as an equity options market maker. I was actually an exchange floor trader I traded on the, the floor for a number of years. I made market and equity options did that for about six or seven years up into and through the.com bust of 2001 started to pivot into, to commercial real estate.
I should say, really at the beginning, residential real estate buying and managing it, renting it, fixing it and flipping it just like a lot of investors started in the single family space in the early two thousands in the state of California, built a little portfolio, ended up selling that, looking to transition into 10 31. That's what led me into my first four in into multi-family did that for a number of years, all the way up into the downturn build a mil multifamily syndication platform was doing class B and class C garden style apartment deals all over the United States did about 800 doors or so.
And in the downturn, you know, properties were doing okay, wasn't really syndicating new. There was a lot of new deals to be had in 2009, but class B and class C was still hanging in there. And, you know, we were, we were covering the debt, paying the rents and so forth, and then transitioned coming out of the downturn into commercial real estate at the larger, in, you know, institutional scale worked for, with a group for a number of years, doing what we would say is GPLP deals in the large institutional space doing total cap deals from 25 million to 150 million on a single transaction partnering with a lot of household names around the, around the country.
And then that totality of experience kind of positioned me to go join crowd street in 2014, the two co-founders had gotten the platform live and they were looking for somebody to basically serve as the chief investment officer. So somebody who had done a lot of different real estate deals knew how to raise capital, knew how to work with investors and could serve as the arbiter of all the deal flow that they would hopefully bring to the platform over the ensuing years. That was a pretty exciting pitch. I saw the opportunity in the space. I liked what the future of online real estate capital could look like.
And so from my vantage point seemed like a good, a good place to go. And so I joined those two co-founders in the summer of 2014 and joined another, a third kind of another executive. So kind of the original founding for, as we say, to go build crowd street and get it to, to where it is today. So now today, fast forward from those, you know, that first inception of those couple deals, crowd street started off as a couple deals trying to raise a million dollars here or there. Now we've done. I think at this point almost 680 deals, we've raised about 3.6 billion in equity.
We raised 1.2 billion in equity last year. And then we also actually have an advisory group, which you mentioned at the top of the show, which we manage a little over 400 million of discretionary capital on behalf of high net worth investors all over the us. So it's been a fun journey so far, but yeah, my background is always in investing in one shape or form.
Jesse (4m 56s): No, that's great. I appreciate that. Now for those that aren't familiar with crowd street, maybe you could take us into kind of the main business and how crowd street works and, you know, for those interested in more detail, you can always go to the website. There's a lot of great resources there, but yeah. And if you could give kind of a high level overview of crowd street and how it evolved to where it is today.
Ian (5m 16s): Sure. So the crowd street marketplace launched in April of 2014 with a vision to bring institutional type real estate deals, private equity deals directly to individual investors all over the country, you know, coming outta my institutional, you know, CRA background. You know, I saw that a lot of the, a lot of the checks, you know, the, the capital behind the deals that we were doing were coming from, you know, large groups all around the country. And they were assembling, you know, we were looking for equity checks of 30, 40, 50 million.
And so back then you really to get to that size of capital on a per transaction basis, you really had to go to those kind of household names. So the vision was that if you could assemble syndication at scale, that could be the catalyst for bringing the types of deals that would historically go to those institutions. Now you could potentially bring those to the individual investor, but individual investors historically had been capitalizing deals in what we would call the country club model, smaller deals, regionally based, somebody that you knew, or maybe that your friend knew who could introduce you to a small, you know, ground up, you know, development deal, or maybe an acquisition, but typically speaking, you know, in your backyard somewhere, if not in your Metro, definitely in your state.
And so our vision was that if we could build technology around a change in legislation that took place in the fall of 2013, which was that for the first time, since the, you know, basically the securities act of 1933. So the jobs act and title two of the jobs act, which was kicking in would enable the public dissemination of a private equity RegD deal, right? That is what we call that's five oh six rev reg D. And now what was changing was that 5 0 6 C was gonna be coming online and enabling that, that public dissemination or advertising really what it really boiled down to was advertising of a deal.
So advertising of a deal enabled the possibility of a platform to come along and say, well, if we could take a deal and we could now advertise it, we could put it on a website. We could talk about it publicly. That's what really, what you needed to break into online syndication. And then if you could build technology around that, and you could create a mechanism by which hundreds, and then perhaps thousands of investors could come into a single transaction. Now we have a scale that would allow for individuals to come together in large numbers and actually syndicate at record levels numbers that have never been, you know, kind of conceivable before.
So now we fast forward today. And so we, you know, we're still on that journey, but what the crowd street marketplace is doing is it is syndicating at scale in a 5 0 6 C or public dissemination format. The individuals on that platform are on average investing at about $50,000 per individual investment. So it it's more approachable. It's not, we're, we're not, you know, all the way down the road. So, you know, we think that there's gonna be better, you know, accessibility in the years to come. It is today, mostly for accredited investors, right?
So those are investors who have individual incomes that equal $200,000 per year joint incomes that equal $300,000 per year or a household that has a net worth of 1 million exclusive of their personal residents. So if you check one of those boxes, you are by definition accredited investor, that's an S E C definition. That's not a crowd street definition or an industry definition. That's what enables investors to participate on the crowd crowd street marketplace, which today has I think about 17,000 in counting, you know, active investors that are writing checks every day.
And that number grows, you know, there's over a hundred thousand investors that are actively looking at the website on a, on a monthly basis. And as, as I alluded to do earlier, that's, that's the, you know, the vehicle for what is really providing the, the impetus behind that 1.2 billion of equity that was funded last year. And we're growing again this year. So, you know, investors continue to join the marketplace and continue to invest and when they do so they invest on a repeated basis. We're almost up to, I think about seven investments for the average investor.
And we're almost, I think we're in the high 60% range for repeat investors on the platform. So it's a, it's a massive Indi, you know, syndication at scale type platform that powers, you know, deal by deal. So my job is the chief investment officer is to oversee all the deal flow that we bring to the platform. We've looked at, you know, thousands of deals over the last few years. I think our, our advisors went back to 2019 just to say, look, what have we done since then? And that translated into, you know, 5,500 deals and counting, which at this, point's probably over 6,000 that we've actually looked at for contemplation for bringing to the marketplace.
Jesse (10m 12s): So last time we spoke, we talked a about the kind of four major food groups, retail, industrial office, and multi res on the CRE commercial real estate side of things, believe it was February, 2021, where we had that conversation from even just, you know, from then to now, in terms of the, your outlook or your thoughts on these asset classes, how have those changed if at all, and how has that been informed by, you know, what's gone on in the last year?
Ian (10m 42s): Yeah. Well, from February 21 to now, I think there's almost kind of like two periods that we should discuss because there was the February to call it about February of this year period. And then there's been February of 22 to, to now, you know, the beginning of September. So over the course of that 20, 21 period, I mean, when we, when we talked last time, you know, as a platform, we were pretty bullish about, you know, what we saw as momentum coming out of the depths of the pandemic. There was, you know, green shoots kind of all over the place in terms of, Hey, I think we're seeing, you know, demand come back for real estate.
We were seeing capital velocity come back. And that made us optimistic over what that, that ensuing year was gonna look like. And in retrospect, I guess we weren't bullish enough because that the market absolutely ripped as we all saw last year. And if we think about it from like a, each of those food groups, you know, we saw industrial pricing up 41%, you know, on, on a year, over year basis in 2021, we saw multi-family up, you know, over 42, 40 2%. According to RCA, you even saw retail start to bounce back, you saw, you know, hospitality markets start to show some signs of life.
I think the only major food group that was, you know, kind of continuing to languish a little bit was the was office for kind of all the obvious reasons, you know, post pandemic coming back to office kind of keeps kicking the can. And when people are really gonna get back into the office, but you know, really it was, it was a record year when you blended it all together, you know, it was, it was just, you know, it's just a, Sensable up 88% year over year in 2020, over 2020 in terms of volume by RCA. So, you know, I think what, what we saw was we were, we were really optimistic in the multifamily industrial sectors and we were, had some cautious optimism when it came to retail and office.
I think retail kind of came in a little bit, I'd say maybe in line or a little bit better than we thought. I think office was probably the one where it just continued to trade somewhat sideways, but you know, way more demand and way more asset appreciation for industrial multi-family than we had thought going in. So that kind of brings us up to, you know, up into 2022 and then from 2022 of say February or so until now. Well, now what we've seen in the market is kind of the, I'd say it's kind of a two part, you know, adjustment to everything that's going on.
And what I mean by that is, well, the, in the earlier part of this year, what we saw, you know, come through and have to get processed by the market, was everything changing in terms of pricing based upon, you know, inflation, leading to increases in interest rates, leading to decreases in what lenders were willing to do in terms of a loan cost percentage. Also, you know, obviously we're saying we had to have the debt kind of get refactored in through all those deals and when you factor in debt and when debt prices change, there's really kind of two things that need to account for one is the spot price.
So if the rate goes up 50 or 60 basis points, you have to factor that in right now. But what you also have to do is you have to think about on a forward going basis and a lot of deals that we do have variable debt. So when you change the price today, well, really what you have to really think through from a real estate business model perspective is what is that going forward interest rate? And if it, if it come, if it increases today and the expectation's gonna increase a little bit more tomorrow, well then that has downstream ramifications. We had to factor all of those in. So what you were seeing in the early part of this year was, you know, that getting processed through slowed some deal velocity down, it did start to create what I would say is the peel off of some of the, the peak pricing that started to look, you know, more, I would say single digit percentage ranges is based upon our experience and what we were seeing transacting out there.
And then I think as we transition more into the summer period, and now where we sit today kind of coming at the end of the summer is now a little bit more to that that go forward. What do we, you know, what does the future look like? You know, I think from a macro perspective, there was a lot of people earlier this year who were wondering and thinking, are we already in a recession or is a recession happening? Is it about to happen? And then, then some, you know, jobs, data came out to continue to suggest that maybe we weren't in a recession yet, but, and I think that big, but is now going forward, Q4 leading into Q1.
Now there's more credible groups starting to think about, are we about to head into a mild recession conference board, for example, which is a pretty conservative group, they're expecting mild recession by the end of this year or early part of early next year. And so I think what we're seeing now in the marketplace and on a transaction, you know, by transaction basis is that now those expectations of maybe we really are about to go into recession if we aren't yet. And what will that do to demand leading into a little bit of cap rate expansion, as we've seen this year, we've already seen, I'd say call it 25 to 50 basis points on certain deals, 50 basis points being maybe in some of the most, the hottest markets that are cooling off.
And so now what we're seeing is that, that, you know, what was, and a low to single digit, you know, three to 5% kind of price reductions are now starting to look more like five to 10, even 10 to 15, even up to 20% on a, on a kind of one off basis. But again, I think if we see that 10 plus percent price reduction, it's in a market that was probably bid overly bid coming into this year. So I think it's just more of overall kind of a correction, you know, into, you know, into a, a more normalized market.
And I think when we roll it all up, that's kind of what we're seeing is that I think there was too much momentum coming into this year. I think that momentum has now been kind of stopped, you know, kind of cold in its tracks, you know, green, Street's a good, pretty good place for, you know, kind of like when you roll it all up, they have their C P P I, which is their commercial property price index. That's now down, you know, just under 5% of the year from its peak. And I think that's probably relatively where it should sit. And so now on a go forward basis, I think we have more normalized assumptions.
Yes. We can still have rent growth. Yes. There's things are still looking pretty good overall, but we have to get back to much more kind of a sober approach to real estate when coming into this year, the demand was just pretty insatiable.
Jesse (17m 4s): Yeah. And then especially those really high or more expensive markets, you just had this, I, this for the last, I don't know, five, five years where it was just kind of, the pricing started to get a little crazy and you didn't have the, or you didn't even need the, the diligence and the back to principles that underwriting takes. So if, if we go into this trend of, you know, more realistic pricing so that we actually see cap rates expand, which in most markets definitely in this market have compressed for years now, what does that look like from a leverage standpoint?
You mentioned that a lot of what you do is variable debt, but do you find that de-risking in the sense of loan to value? Is, is that something that you consider how much equity is being brought in and then obviously that has, you know, know downward impacts on levered returns. So how do you look at that in terms of lowering or de-risking in the event that we're preparing for, you know, even, even a mild recession by the end of the year?
Ian (18m 2s): Yeah. So I'd say from our standpoint, how we look at it is, you know, it's, it's pretty simple to us that I think that if the market is not gonna grow as quickly as it has been growing, you know, lower leverage ratios overall make, make sense, it's prudent. And so, you know, we look at it from a debt coverage percentage, you know, ratio, right? Like what was our debt coverage on this deal going in and what what's, what do we think we can get to? And how do we make sure that we maintain debt coverage, you know, over the early to mid part of the holding period.
So anything there was, there was this telltale sign. I, from my, my perspective that earlier this year, something was gonna change pretty quickly. And what I mean by that is we, we were seeing these deals show up at the beginning of this year with negative leverage, right? And so for people who are super familiar with what, what we're really talking about is when the going in cap rate is markedly below the cost of the debt, then you're, you're paying more for the debt than what you're getting in unaged yield in the asset.
And what that tells you, if you're gonna, if you're willing to pay, for example, a three cap, but bar with at 4% interest, what, what you're basically betting on and saying is, I think the growth of this asset is so strong, but by the time I get to year two or year three of this asset, I'm gonna have not only just a 4% unaged yield, which by the way, I was buying a 3% unleveraged deal right now, I'm gonna be at a five, five and a half. I'm gonna be in the positive zone.
And, and it's going to take me paying the 3% unleveraged deal today to get this asset so that I can get to that growth. That's that's the negative leverage bet. And so when you, if you were to perpetuate what was happening in 2021, then sure. If you could, if you could do that for two or three more years, I guess that, that would've made sense. Now, my perspective coming into this year is that if we had actually perpetuated what had happened in 2021, even another one and a half years to two years, we were probably in a market condition that would crash because you would just get to simple, you know, levels of unaffordability.
That would be so egregious that every, that you would have this capitulation in the market, that was my personal thesis. So when these deals were showing up, when we were already starting to see signs of deceleration rate, decelerating rates of growth, I should say, you know, but understanding that we were still in a, you multifamily sector, for example, solidly, we were gonna be in the mid to high single digit percentage year, over year growth rates. We felt, but over the ensuing years, we expected rent growth to come down more towards, you know, inflationary, you know, year over year kind of inflationary normalization level is of call it 3% or so it just simply didn't make sense.
Some of the, you know, the, the, when, when capric were starting to trend in a market like Phoenix, for example, below 3% on a, on a going in basis, I just couldn't make heads or tails of that deal. And so I think that's what I, when I thought is like, look, now, now when we were getting into March, April of this year, we were starting to see interest rates really increase when that negative leverage fed was starting to, you know, bump out. And when you get, ultimately my, my opinion is that when you're negative leverage, something's gotta give, you're either gonna have growth in the assets.
That's gonna get you there, or you're gonna have, you know, asset pricing come down and cap rates expand. And so, you know, and, or you're gonna have you're, you're either gonna get to also debt. That's gonna come down in price to meet that cap rate to kind of even things out. So knowing that interest rates weren't gonna come down and knowing that the growth really wasn't gonna be there as we thought, you know, at a level that would really justify it. Well, then the thing that's gonna have to give is that cap rates are gonna have to expand to get back to a more normalized market.
And I think when you bowl it all up, what we felt was, if we're gonna go back to interest rate environment, that's gonna feel more like 2018, then we're gonna have to go back to cap rate's assumptions and pricing, and some other things that are gonna look more normal, look more 2018, like, and that was kind of how we navigated, you know, the early to middle part of this year and, and how we still look at it today. The deal has to make sense in a, in a very normal looking go forward period, even with what might be now, 12 to 18 months of, you know, lackluster rate of growth in front of it.
Jesse (22m 29s): Yeah. And it's a good way for someone to do an initial analysis, just seeing that negative leverage on a deal, or you see some exit cap that, you know, is, or lower than the, you know, the entry cap cap rate. There's a number of different ways that as you know, we can manipulate these models and it's, it's important to make sure that, you know, when you do look at these things, you see the assumptions and if they are, if they make sense, I wanna talk a bit about the, the report, best places to invest. But before we get there, we, we touched on these asset classes and obviously, you know, I'm biased working predominantly in office commercial real estate, but I think it's topical.
The office is one of those, one of the four that is still in this kind of odd place, depending on the market, obviously, but I'd like your thoughts just generally on the, the office market in general, if you think that a lot of us who've worked in this industry saw that the moving to digital or, or more conferencing was more of a secular trend that was kind of going in that direction, that kind of got shoved into that direction. But now with companies like apple and Comcast mandating, some sort of hybrid model and other companies following suit, what's, what's your general thoughts on the office sector?
Ian (23m 42s): Yeah, so my, my, my general macro thesis on office is that it, it's not dead. I do think people are gonna work in offices going forward, but I do think that it will look somewhat different than it has looked pre pandemic. And so to me, office is in this period of transition. And when we, when we roll it up, I do think that if you, if we fast forward to 2025, I think we're back into a more normalized, you know, 20, 20 decade, you know, office market.
And what I mean by that is, is that, you know, do I think that certain types of office are gonna struggle and will continue to struggle? Yes. I think the part of the market that struggles indefinitely is what I would call the class B commoditized office space. The reason I think that there's this transition going on is that, you know, what we've had the benefit of during the pandemic period is the flexibility that we get by being able to work from home and, and, and what that's done for us. Okay. So now when we think about going to an office, when we go back to that office, I do think we, people are gonna wanna go back because working at home while it's very flexible, it's not very exciting.
It is you are relatively in isolation. And so, but if you're gonna go back now, what we got during the pandemic was that time back, if we're not commuting anymore, you know, depends upon where you live and how far your commute is, but the estimates are that on an annualized basis that could translate in anywhere from kind of like two to three weeks to even four, five weeks of time back. So four weeks over the period of a year is a lot of time. So if we're gonna give that time back, I think there has to be something that you're gonna get in, in exchange for going back in.
And I think what you would want to expect. And I think what employers will ultimately need to contemplate giving those employees is a more compelling office environment we're in, and also a more in a hybrid office environment, which is gonna translate into a more hotel type of environment. So when, when I think about how office will change, I do think that it will look like it'll look somewhat different. Like I think, you know, the number of dedicated desks, I think go down, I think the number of flex desks go up, I think that the amount of collaborative space needs to probably increase if we retrace back to 2018 or 2019, and we were jamming a lot of people into offices.
I think my company was an example of that and say, when you ha, when you get down to 110, 120 square feet per employee, and what that office environment looked like, and when we come back outta the pandemic, are you really gonna have that number of employees per square feet? I think the answer is no. I think, you know, we are already seeing the signs of the highly impacted collaborative open office, trying to show signs of weakness in terms of, it was hard to think it was hard to get space, to actually meet with somebody. It, it was challenged in a lot of ways.
So I think that's that to me, that goes away to some degree. So I think there's there's space that will need to be repurposed to a degree, but that space will, so maybe we don't need as much physical space than we thought we used to need, but then maybe there's gonna be like this flex in between maybe if instead, if it was 10,000 square feet of space that we needed before, maybe it will be eight or nine, but that eight, or nine's gonna be very well built out. It's gonna, it's gonna contemplate that 60% of my workforce is gonna attend on a daily basis, but they're gonna filter in filter out, but it's gonna be really nice.
It's gonna, it's gonna allow for the clients to come into the office. It still needs the conference space. It still needs really good collaborative breakout space, and it needs some hotel space. So to me, that's kind of where that, like, I think that is a part of the future of office. I also think that coworking gets blended into this because while there may be these hubs, now, maybe there'll be, you know, there's a little bit more spreading out of the workforce too, but maybe for the people that are in, in the outer stretches, maybe they've moved out of the HQ market and they're working remotely because they could, but they want to go back into an office environment.
And you're now you're two states over from the HQ. Well, maybe you're gonna go into a co-working space with a few of your other colleagues that are in that Metro as well. I think those are all the types of things that come back. So I do think that we get there and why I think that there is this bifurcation that continues to occur in the office sector is if you think about that really nice hotel type environment, great breakout collaborative space, you know, we're, we're now. And we're now thinking about where are we going back into work? Well, we also want adjacencies of good restaurants, you know, good cafes, you know, things that are available, you outside that office building.
I think these are all the things that go into like what the future of office will look like and to get those people back in the office and feeling good about it. It's like, you know, think about the amenity set. So the thing that can fail a little bit is if that office space was that class be commoditized. It wasn't very exciting. It, it had bad light had bad window lines. It was the kind of place that people were, you know, going into just for the price of it. That to me is the thing that will probably continue to languish to some degree, maybe some of that actually gets repurposed.
But when we think about class, a newer property, good window lines, well located and with a host of amenities around it, to me, that's the type of office place that comes back and, or the, you know, and then I think the, the next layer of that is that if you have, you could still have some older office buildings, but they're gonna have to be kind of revitalized to, to be more vibrant, look more newer in class a and if they're in good locations and they can kind of go a little bit more, you know, toe to toe with the class, a space, but at a bit of a discount now, I think you've got that next layer of, of what can be viable in the future.
So that's what I, that we generally look at it. So when we look at deals today, right now in the marketplace, I think we think about it, it, through those lens, who, you know, who are the tenants in place, what is, what is their need on a go forward basis? How, you know, where does this thing sit within a, within a submarket, how vibrant and, and, you know, will that sub, is that submarket today and will it be in the future? And we can get to a, you know, a general thesis that, Hey, this is one of a, an asset in a good location that I think would actually survive in the new office environment.
Then I think we're reasonably bullish, but I do think it, it may take us a couple years to get there.
Jesse (30m 13s): Yeah, no, that's a, that's a great insight. And I think it, you know, we've done over the years, all these utilization studies with different companies and how often we have these large board, excuse me, large private offices that never get used. And how I think as a positive going forward thing, I think for the market would just be healthier, having more efficient space use. And whether that as a total has companies taking on less rentable square F square feet, cuz you know, there's both sides of it spread out more but more efficient and what that actually shakes down to, I think either way, whatever it does, it'll promote a more efficient layout if in fact the workforce goes in that direction.
So in, in terms of the geographies that, that you look at or that you invest in, maybe you could talk a little bit about this annual report, best places to invest that you came up with and yeah. What, what are your thoughts on that? And you know, what was the, the thesis of the report?
Ian (31m 7s): Yeah. So we do publish this report on an annual basis. We've done it for, you know, we're just two years in running. So we'll come up with our third annual publication here at the beginning of the, of this next year. And what we try to do at the beginning of the year is communicate to the crowd street investor community, how we assess the geography of the United States, because as we all know, not all markets are created equal. There are certain markets that are absorbing, there are certain markets that are, that are, you know, vibrant and growing, but then they also have a lot of supply that's coming at the same time.
So what we try to do is we, we first we take a global macro approach. I mean, I think in essence as a, as a platform and as you know, the investments group within crowd street, I think we're we're first and foremost, a little bit of a macro thesis driven platform. Generally speaking, we wanna be in the types of markets where we see job growth and population growth consistently, we see kind of a, a burgeoning and further creation of a there, there, we would say, you know, like, why live here? Why move here? What is the compelling aspects of this location?
Because ultimately like we're tracking, you know, population flows and we're also tracking where do companies want to reside and where companies want to reside increasingly and where those people wanna live to work with those companies. Then you have what we think is basically the underlying fundamental thesis behind why you would want commercial real estate, because we're either looking for something to build, whether that's multi-family and office or strip center, whatever it is, right. We wanna think about where do people wanna be? Where are they gonna live? Where are they gonna work?
Where are they gonna play? And ultimately when there are more people wanting to do that in one in the same location and there's upward momentum in what those people are earning that's when rents grow, that's when properties absorb, that's generally speaking when commercial real estate values increase. So with that said, now we have to break that down to markets. Now for years at crowd street, we have had a, what we call a growing secondary markets thesis. When we think about around the places around the country, and we kind of found our way to this thesis probably around 2017 or so, you know, we were looking at markets like Denver and Charlotte, you know, we were even starting to look at Nashville back then in Austin.
And what we were seeing is these are markets that are attracting people. They're becoming, you know, more mature and more compelling, you know, metros in, in and of themselves, right? They're getting more sports teams, their airports are growing. You know, people are moving, the people are moving, are educated. Companies are coming. Those are all the things that swell around to us create a vibrant Metro. So, and when we were thinking about where do we wanna invest? And again, taking that macro thesis into, into account, we really wanna be in those locations because a lot of what we do is multi-family driven.
We also do some industrial. Those really are driven on like on where people are moving to where, you know, and if we're building a new multi-family building in a given location, for example, we wanna make sure that, that we feel like there's people who are gonna show up, they're gonna lease it. They have the incomes and there's, there's the reason for them being there. So that is translated into, you know, we have, we're also a fan of a market like Orlando. Orlando was a really good example of a market that we thought had a lot of momentum coming into it before the pandemic, we saw that momentum go relatively sideways during the pandemic, but we saw the population growth that was coming there year over year.
My recollection is, you know, was hitting like 2% per year. So we were bullish on Orlando coming out, the pandemic we leaned in last year, we did some multi-family deals. Those are now, you know, those are now leased up at well in excess of what we thought going in. So those are the types of markets. So, you know, for this last year, a Austin was our number one market, right? We were also really bullish and we have been bullish on Raleigh Durham, Raleigh Durham is a market that still stands out to us. Our team actually spent, we had probably 30 people that we spent time in Raleigh Durham just earlier this year in April.
My takeaway from spending a week in Raleigh Durham was that that was a market that you could invest in for the next decade. It's a great place. It obviously has, you know, it's always had research triangle, you've got universities. That's another thing that, that when we think about things are checking boxes for like where we wanna invest, look at that diversity of demand drivers. If you have certain industries that gravitate towards there, if you have research, if you have, you know, and again, if you have top tier research universities, so you've got those in Raleigh Durham in the form of duke and, and, and chapel hill, you know, in other places, we also think about like the, the anchor that you get when you are the state capital.
It's one of the reasons Austin has been a perennial favorite for us is because not only do you have all the tech growth, but you've also got the, the state capital there you've got UT Austin there. There's just the, what we would say is these unfair number of advantages relative to some other cities. Now, again, we, we do have to think about this on a year, over year basis, because what can happen in a year or two is that you can overshoot, we've all seen markets overshoot in terms of supply. We can see overshooting in terms of pricing, right? If, if the market gets so, you know, over zealously bought that, when you start to really think about it from a rational perspective, you say, well, I think this asset in this location is what we would say is price to perfection.
Well then that's when even an asset in a location like Austin can maybe be a bad buy because it's just too expensive for yo the next year or two, six or seven years from now. It probably looks okay, but that can dilute returns. So now when we think about, you know, as we're starting to think about our markets for next year, you know, some things that have stood out to us this year that were a little bit different than last year were that we're seeing some resurgence into some cities that are, that are a little bit larger, you know, one market that also stood out that we spent some time in this year is that, you know, while we were doing an east coast tour a little bit, so to speak, we spent some time in Philadelphia and Philadelphia to us was a market.
You know, we're a little bit focused in an area on the north end of downtown called Fishtown. And then there's another market adjacent to it. And, you know, the vibrance of what's happening in Philly like Philly is, is, you know, it's got a lot of momentum behind it. There's a lot of redevelopment that's occurring. There's a lot of investment that's coming to that city. And I think there's also this, like, you know, resurgence of some of the cities, you know, another market that is, you know, kind of almost, you know, if there's one market out there that I would say that has a bit of a difference from the headlines versus just the data and what it looks like to actually look at the deals is Chicago.
You know, Chicago's got a really bad kind of national rep right now. It's had it, had it had its, you know, share of dislocation during the pandemic. It had some bad news associated with it in terms of the riots and the, and you know, and so forth. But then this year, Chicago office market absorbed 2.4 million square feet in Q2 of this year. That's according to Moody's. And so I think there's this underlying data rents are growing in Chicago, multifamily is absorbing. And like I said, offices absorbing.
So I do think there's a little bit of, of, of resurgence of some of the cities. We're also, we've been looking at deals in New York recently, you know, from, you know, multi-family rents in New York are already back at the highest in the country. And from our perspective, if we can find not only multi-family deals that make sense, I think there's, there's a reason to, to be bullish on the future of multi-family in and around, you know, one, one of the boroughs we're starting to look at office in Manhattan, you know? Yes, the, the, the utilization rate is still low today, but as I always like to point out last time I checked New York is still a world class city.
Every time somebody is called the end of New York and people love to kind of, you know, they, they see weakness and they're like, is this the end of New York fast forward two to three years, everything's back to like record levels of demand pricing and so forth. I think this is the next go around. You know, if we can find, you know, you know, aggressively priced office in Manhattan, we're looking at some deals in the pipeline right now that look very compelling from that standpoint. I do think that again, if we fast forward to 20, 25 and 26, we've got a better office market in New York than we have today.
I think that there's a little bit of a resurgence of some of the big cities.
Jesse (39m 26s): Yeah. I think that's true. And we, we track a lot of this, a lot of the utilization from city to city. And I think a lot of this is going in the right direction. But like I was saying before, it really comes down to getting back to basics and having principled investments and making sure that the thesis aligns with the actual acquisition and, and falling through of it. I wanna be mindful the time here, Ian, but before we, before we wrap up, I would love to get your thoughts on for listeners, unless you've been under a rock for the last few years, you've heard WeWork before you've heard Adam Newman.
He started a founded a new company called flow. So some of you might not have heard of that, but basically I think at this point there was 6,000 or some odd or 3000 some odd apartments that were acquired would love to get your thoughts on the idea of this, because there's been a lot of these venture capitalists that have invested into this company. And for listeners, maybe you could give just kind of a, a brief overview of, of what flow is and yeah. Then would love to get your thoughts on it.
Ian (40m 32s): Yeah. So what was interesting about flow was that, you know, you don't hear a lot about it, there's this one announcement, you know, kind of coming out of, and, and they, and then you hear about the 350 million investment from Inre Horowitz. And, and then when the, the, the press release on flow was somewhat cryptic, but then from a commercial real estate, you know, operator developer perspective, when you you've been around the markets for all, you kind of understand what they're gonna do. And so my perspective on what flow will be is it will be essentially taking a multi-family asset and taking a little bit of like a, taking some of the WeWork philosophy and kind of bringing that sense of community, infusing it with multiple uses, more types of uses probably in, in a flow property than in a standard multifamily.
And if you think you, you just take your kind of normal kind of bread and butter podium deal, right. It's got retail on the ground floor and it's got apartment stacked above and has kind of a rooftop deck, right. And it's got some other amenities on site. So if I think about what flow will do, I think, think flow's gonna do some things first. It, it will bring branding to multifamily and by creating branding, they're gonna create, you know, we've already seen, you know, Adam's been buying properties in Miami and Nashville and, you know, and, and other markets, right? So they're going to now take and brand flow.
I think in multiple cities, they're gonna create this sense of, Hey, you might move from city to city, but stay at a flow property when you move to that next city and how they could incent stickiness in that residential tenant is this idea that they've started to talk about. They're, they're giving clues towards, I think the ability of equity share, right? Cuz they talk about how housing is unaffordable, hard to buy a house house. Now, I mean, we've already seen this, you know, affordability of a house is, you know, up 50 to 60%, you know, in terms of what it's gonna cost you on a mortgage payment from last year.
So if you're not buying the home, but you wanna live in an apartment, but rents keep going up. I think how they could ultimately get to giving some of their renters a piece of the equity pie is from the standpoint that what WeWork already proved they could do is take your normal rent and you can get a little higher rent on a, on a, you know, month, over month basis. And so if you, now, if you equate that to a multifamily property, let's just say, for example, a unit should rent for $2,500, but maybe it rents for 27 50 because now it's flow and they're gonna put some other amenities in the property so forth.
If you can you take that additional $250 a month, which would be $3,000 a year. And even in a five cap, that's $60,000 of additional value in that residential unit that you're getting through that excess rent. So I think the, the part of the thesis here is that you get more rent than you would otherwise. So I think flow in my opinion will be based on over market rents, which then could create additional value at the property level.
And if that pie grows by that $60,000, in my example, that's what you could give to some, to, to the resident in some share. Now the share part, I think will be interesting because my, again, my personal thought and I have no other reason to then my personal opinion to think this will be the case is that if I was gonna create a, an equity share program, I would make it vest over time. Just like you would do stock options. Yeah. So whether it's four years or five years, my, my model, if I'm Adam and I'm creating flow right now, I'd say we're gonna charge above market rents.
We're gonna fully monetize these properties though. And we're gonna bring more sense of community to them. We're gonna put, you know, communal gardens up on top. And remember Adam grew up on a kubutz. And so I think the idea of bringing that, like kubutz type living to a modern class, a multi-family building in, in a Nashville or, or a Miami, there could be a possibility there, but then I would, I would make that resident stay at the property for four or five years, or if they moved, moved to one of my other flow properties to continue to have that registered, you know that, or I should say that meter run.
And then if you live there for five years, then now you're creating towards equity share. And if you think about it, if you did that, now you have better occupancy probably than market standard. If that market is a 94% occupied submarket, you could probably occupy your, you know, operate your building at 96 or 97% occupancy because you have this really sticky tendency. That's either living there to keep a creating towards equity share, or if they move, they're moving into one of your properties relative to the property down the street.
Because if I've lived in a flow property for two years or three years, I have that like equity share light at the end of the, you know, the tunnel. And, and if I'm gonna go move to Nashville from Miami, I'm more likely to go move to flow. Because if I live in flow for two years in Nashville, I'm in the money. And maybe that additional $60,000 of, of, of, you know, equity value in that property. That, in my example, well maybe now I get 20,000 of that or 30,000 of that, like you could actually give own, you know, the renters, some ability to participate in some of that app side and the how and the so forth.
I mean, this is probably where they they're, they're gonna have to get a little bit more nuance because you know, now if we're really gonna monetize that and give it to the resident, theoretically speaking, you're typically selling the asset or so forth, my thought is, there's gonna be maybe now, now you're basically earning some, you know, you could, you could theoretically be earning some, like rebates back on that. There could be point systems. There could be a lot of stuff that you could do there. But I think that there's these subscription laws, cuz if you roll it all up, if you think about communal living, what kubutz has been, how you would, you would create like, you know, rewards point systems look at airlines and other things, right.
We could create stickiness in multi-family that hasn't quite happened in the way it has before. And if you could brand that, which that's what Adam's really good at. I mean, whether WeWork was a success or failure in your mind, what he, what he created was brand. So I think if you, if you take flow, you create brand, you create, you know, a, a populace of residents who are gonna be excited about what that's gonna become. There's some sort of idea behind that you could create something that would have value on a per unit basis, more than what's been created before.
Jesse (46m 59s): Yeah. It'll be fascinating to see how it rolls out and you know what or not, perhaps they go tokenized, if you know, crypto has a, has a piece of that action yeah. Remains to be seen, but no, that's great. So Ian, I think last time we already ran through the fi the final four. So maybe just to wrap up here, you could give listeners just a little bit of, you know, what are you kind of resources in terms that you're, you're finding useful right now, whether that's online podcasts, books that you're reading, maybe you could leave listeners with something and then we can, we can tell them where, where they can connect with yourself or crowd treat.
Ian (47m 38s): Sure. Let's see. Book I'm reading right now is Ray Dalio's latest book. I will, I, I think Ray Dalio's is a, you know, hugely insightful investor. So I'm always gonna pay attention to what he's saying. I'm going when it becomes available. I am definitely going to read David Rubenstein's new book coming out about, he's actually interviewed some other people about investing on podcasts. I love the insight. I'm a, I'm a regular listener of Scott Galloway in his prog series.
He's also got prop G markets, which I think has been hugely helpful to somebody like me, right. Who's always, always thinking about, I've been listening to the prop G podcast because, you know, Scott Galloway's insights into how he looks at, you know, entrepreneurship and markets and so forth. But now it's really, there is a, there is a segment on a weekly basis that is focused on markets that I think actually speaks a little bit more directly to what I'm trying to equate to in the commercial real estate market. So I think that that stands out. I'm also, I'm a fan of Lee Walker. I'm Al always gonna listen to his podcasts.
He's got great guests on a weekly basis. Those are some that stand out to me. I'm I'm, but I'm, I'm consuming stuff on a daily basis. And I'm just trying to look for, you know, intelligent people out there who have, you know, thoughtful insights and are trying to stitch together, all this kind of data out there. Because I mean, as we all know right now, what's hap we continue to proven to be in this, you know, unproven kind of uncharted territory, short term on what, what we're doing and what's happening. Obviously what the perception coming into this year is so different than where it sits now is the fact that nobody's figured it out.
And so I think the, the more that different data sources, we can all gain insight from the better chance we have at making reasonably informed decisions. And to me, that's just what it's about.
Jesse (49m 27s): No, that's great. And in terms of the aside from crowd street.com, is that the best place to, for listeners to check out or are there other locations that, you know yeah. Aside from a simple Google search
Ian (49m 39s): Yeah. Crowd street.com is, is a great place to just begin anybody who's interested. There's a lot of information on that website. There's a lot of education you can go to. You know, we're always posting on our LinkedIn site and on different forms of social media, you can go to our, our Twitter feed. I think there's just a lot, there's a many different ways that you can engage with the crowd straight newsfeed. And also, if anybody wants to reach out to me, you can always find me on LinkedIn. I'm the only Ian for Meley on that platform. Happy to chat with investors, as you can tell, I always love talking about deals.
Jesse (50m 12s): My guest today has been the only Ian for Meley Ian. Thanks for being part of working capital.
Ian (50m 17s): Thanks, Jesse. Pleasure to be here again. Look forward to the next one.
Jesse (50m 24s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you like the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E. Have a good one. Take care.
Sheila Botting is Principal and President, Americas Professional Services at Avison Young that is an Umbrella for the Different Groups of Consulting, Valuation and Project Management.
In this episode we talked about:
- Changes in the Commercial Real Estate Market
- Office from the Investor’s Perspective
- Avison Young’s Vitality Index
- Reducing Space
- Occupiers Liabilities
- Tenant Inducement Complex
- Sheila’s Returning to Office Forecast
- Hybrid Model
- Workplace Strategy
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jesse Regal, and you're listening to working capital the real estate podcast. My special returning guest today is Sheila botting. Sheila is the principal and president America's professional services at Avis and young.
That is the umbrella for the different groups of consulting valuation and project management. Sheila has a, has had a number of different roles in the commercial real estate space spanning from her roles in executive management at Deloitte Kushman and Wakefield and Royal LaPage. Sheila, how you doing today?
Sheila (54s): I'm great. Jessie, how are you doing?
Jesse (57s): Doing fantastic. So the conversation today, I thought it was topical because I think the last time we spoke was the beginning of 2021. And so much has changed in the office and commercial real estate market in general. And I thought it would be great to have you back on to discuss those aspects and have the, and how they have changed. And I know that you have, you know, made these type of discussions and, and presentations with various outlets, wall street, journal, Harvard business review. So I thought you could do the same for us here.
Sheila (1m 29s): Oh, terrific. Thanks so much. So it's all about return to office. You can tell my back background. I have returned to the office today and, you know, two to three days a week, along with everybody else across north America around the globe. And I think that for, for all of us, it's sorting through how do we deal with return to office? What does it look like? What are the key pieces? How do we make it work for our businesses for us personally? How do we embrace this so that it's, you know, dynamic for people and way forward, what we've learned from all of this is it's all changed.
It's not going back, whatever back was, we're not in the nine to five work environment that we once were. Now, it's all about flexibility. It's about building our ecosystem. It's about navigating what it is that we need to do and how we do it. It's understanding, you know, different roles that people have and making sure that they've got the right tools, technology and physical spaces in order to deliver. I thought what I would do today in talking is, is I know you know about this, but to share with all of your audience, something called the vitality index that Avis and young uses across north America.
In fact, the globe, what we do is we measure cell phone data usage in downtown for 26 north American city. So what I thought I'd do is first level set on where are we today? You know, in September, 2022, where have we come from from March, 2020? And what does that return office look like? So I'm gonna share my screen with you. So Jesse Avis and young has something called the vitality index. And what we do is we measure the return to downtown.
So I'm showing this on the screen, really what we're doing from March 2nd, 2020 through to this most recent examples, August 29th, 2022, we measure return to downtown. So we've got mobility data from, you know, various locations, typically eight to 12 locations downtown in the major north American cities, in fact, 26 north American cities. And we see where it is relative to before the pandemic. So you can see on the list, we've got the greens, our Canada, the blues are the United States.
So at the top of our list in Canada, Edmonton, which is in Northern Alberta is down 43.8% from before the pandemic started in March 2nd, 2020. That means that the foot traffic in downtown Edmonton is still down 44% on one end of the spectrum. And that's the best city in north America going all the way to the other extreme. Again, another Canadian city, Ottawa is down 80% from when the pandemic started.
So you think about some of the larger us cities, you know, Boston is down 43.8%. New York is still down 50% Austin down, 52% Chicago down almost 56% east bay, Oakland down 56, San Francisco down 57 and half percent Calgary down 58, Montreal down 59. And, and so on across the board, you know, Washington down almost 63%.
So when you start looking at the data, you realize that as much as people talk about return to office, we have not returned to office, you know, knock your socks off. If somebody says, things are going back to normal. What this is largely saying is that our entire world is not returned. The chart on the right here really shows what that looks like across the board. And it shows that in fact, we have not returned to normal and it looks like in my opinion, it's not returning to whatever we define as normal, anytime soon, at the same time, we can also look at various industry sectors.
So across this bit, if you were to look at say the technology industry, perhaps, you know, faring worse off than finance or some of the other sectors, so absolutely fascinating when you start peeling away the layers of the onion. So I wanted to start with this whole perspective in terms of what does return look like, who is returning, how does it all play out? And the message across the board is right across north America. The 26 cities that we're looking at at best were down, you know, over 43% from before the pandemic.
Yep. So then next natural question is what does that mean for employees and occupiers? The people that, you know, lease space in various markets, that's one whole bundle. Another whole bundle would be the investors and asset managers. What do we do to get people to come downtown? And a third part would be all of the businesses and the governments that are looking at, you know, the downtown business association that thrive on return.
And so, because of course the vibrancy of our downtowns are very core to the fabric of our north American economy. What does that look like? So we can, you know, dive into each one of those segments to understand how to unpack it and what are the various components so that we can think about the future and think about how do we manage our businesses? How do we manage our assets and how do we manage our downtowns
Jesse (6m 59s): When it comes to the vitality index, Sheila, in terms of the, the actual use of the, the cell phone data. I know that, you know, working with Avis and young, we talk about this a lot, but for those that, that kind of wanna understand the cellphone data in a downtown area, it's kind of used as a, as a proxy for a full office building. Is that, do I have that right in terms of how that, how that data is used or, or what it's used to represent?
Sheila (7m 26s): Yeah. So what we'll do is we'll, we'll tag, you know, geo spaces in downtown's various cities, eight to 12 different locations, and we'll, we'll measure the pings on the cell phone data in those locations. So pick a, you know, a downtown financial core office building or a downtown transit hub. In some cases, our clients have us look at hotels and, or even life sciences buildings out in the suburbs. So we can really geofence any type of location for this particular application.
It's been the downtowns of these north American cities that we update, you know, once every two weeks at the beginning, we were doing it every week saying everybody thought, year one, Hey, we're going back. We're going back. Well, it's not happening anytime soon. And so what the data shows us, is it not yet returned to downtown? Yeah. So what does that mean? So from the occupy perspective, you know, the company or the government organization or the business, that's thinking about their space, they think how much space do I need if it's sitting there empty, pick your north American city, because even before the pandemic space was 50% of the time.
So before the pandemic, when we did utilization studies, you know, bums and seats analysis across north American cities, the average seat was 50% of the time. And so that didn't, if you were in some remote location in the middle of the nowhere or downtown New York or Toronto, the same thing would be held true. And that's because the way we work has changed, we're no longer processing paper from the left to the right of our desk. Rather we're engaging, collaborating, doing things in many different ways. And so, because of that, even before the pandemic, people were rethinking how they would devise their workspace.
The pandemic has simply accelerated that overall trend and is forcing us to consider what is the role of the office? What is it we want to be? Are we going create row and farms? Are we going to create a downtown campus for a downtown lab or in a downtown engagement experience, a hospitality experience for our people. And that's really what the pivot is toward is creating these immersive experiences for our people, so that when they do get together, it's easy for them to collaborate, to engage and to solve problems together.
It's not about processing paper off to the right of your desk. Although you could say it's about being on zoom teams, but nonetheless, it's not about, you know, the old ways of working. And so the value proposition that companies are making for their people is where the pivot is. So on one side of the spectrum, we're saying we can get rid of a chunk of our individual workspaces because it becomes about collaboration and teaming. People like me. I can, you know, do most of my heads down work when I'm sitting quietly on my own, away from everybody, as opposed out, you know, bullpen kind of environment.
So you recalibrate how you work. You still get people choice. So, you know, if you, if you need to go to a bullpen or you need to go to the officer, so places to go, but the rotation is toward collaborative spaces. And so with that pivot on space, suddenly you need less space. So first generation in these types of evolutions typically involve anywhere from a 20 to 30% reduction space. Assuming you've got the same employee population, second generation could be as much as 50% reduction in space.
We've had clients reducing their space by 50% through this whole pandemic. And they're saying, you know, we're, we're quite fine. Having people work from home 1, 2, 3 days a week, that's, that's quite fine for us. And so the question comes, how do you entice your people come back to the office because in the war for talent, it's all about providing people flexibility to make choices with how and where they want work, but equally create an incredible environment that they want come back downtown. And they engage with their colleagues and employees to, you know, get their projects and work completed.
So that's literally what the entire market is looking for today. At least the folks that we're dealing with cross all sectors.
Jesse (11m 43s): Jill, I, I have a question on the, so on the work that you were doing, you, you mentioned the utilization studies you've done in the past. And as we know, this predated the pandemic, a lot of companies, they, they operate at, you know, 50, 60, 70% depending on their, on the industry, the company and location, but the, the, excuse me, the studies that you did, where you had companies actually go and reduce space, is that type of reduction, the same, the philosophy, the same as it would be now for reducing space based on low utilization, as opposed to reducing space based on, you know, what we've learned of how we can work differently in the last 12 months, or they are, they separate kind of exercises.
Sheila (12m 27s): I would say all of the above, literally it's a bit of everything. So I think before the pandemic, there were those early adopters, you know, I would suggest that it started originally out of Australia with many of the banks there that went to hot desking, unassigned sitting models. And then, you know, the accounting, big consulting firms went to that model. As many of their people were out in clients, offices. And now it's moved on to financial institutions and public sector organizations, GSA out of Washington embraced government of Canada has embraced this city of Toronto province of Ontario.
So this is literally wide swept across the markets. And that started before the pandemic, all of that was before the pandemic. And now what I see happening is that simply accelerating across all sectors. Now the real question is how much, or how little and what is the right fit. So what might be the right fit for example, law firm, which is very paper intensive to a consulting firm or a financial institution, very different solutions, depending on the industry sector.
And more importantly, the, the type of work that the individual employee and our teams would do. So that's really what we're navigating right now, making sure that the specific solutions for that client group and that industry sector, you know, absolutely apply.
Jesse (13m 48s): Got it. So that was the, so with the workplace workplace, we've talked about the occupy piece here and there a couple other components.
Sheila (13m 58s): So you know, the other components on the occupy, it's about the war for talent. It's about making the right kind of space for your people and, and what resonates across the different generations. And so it's not one size fits all by any, by any stretch of the imagination. You know, you, you really have to think about the different populations, whether it's the veterans, the boomers, millennials, gen X, gen Z, what, what does that entire group need?
So that's a generational distinction. Then you have the whole style of working. So if I'm, for example, if I'm a loud boisterous person, I need to be around. A lot of people I'll have one way that I like to work. Versus if I'm a quiet individual that needs to have walls around me to work, that's a completely different style. And so there's a whole neuroscience attached to understanding those different work styles and then designing appropriate workspaces. And so I think that particular topic has been hyper influenced through the, if I'm working office like that, right?
I like that. Versus if I'm a Garys, outgoing person, you stick me in a quiet place at home, I'm going outta my mind. And so trying to understand those differences become everything. So that's one whole science that's evolving relative to different work stuff. So in some organizations picking engineering firm or law firm where you have many different types of personnel that has one evolution versus our firm, which is brokerage where everybody's a lot more gregarious. So again, very different fits in the marketplace, understanding that, and then quantifying the other big question in the design lies around assigned seating versus unassigned seating.
So if you have population that's hybrid and you're saying, oh, we should have them into work two, three, maybe four days a week. And oh, by the way, while they're in, they're collaborating with others, they're going out to Starbucks, they're meeting in different sessions, then you don't necessarily need to sign seating for those people, right. They can move around based on their schedules for the day. So if I come in in the morning, I need to do some emails versus collaborate with colleagues on projects versus, you know, go to meetings to talk about various topics.
I don't need my assigned seat through the entire day. And that's where the 50% vacancy occurred before the pandemic. So again, that's whole other iteration about the unassigned seating in order to be successful, you need tremendous change management programs. So you could argue the entire world is going through the largest change management program right now, because think about you, you're sitting in your remote office right now, and you're saying quite happy here. You know, I do this and, and give up assigned, sitting downtown and only come downtown.
When I need to, like any day of the week, I have flexibility. I can go my vacation property to work on Fridays if whatever the may be. So that flexibility becomes really crucial in the work for other key components come, you know, I've talked about design, very flexible design, flexible use of space, hot desking, and assigned seating amenities are huge, both within the physical space, over rotation, on hospitality, food, coffee, the quality of coffee in your space becomes everything.
Putting apples out for wellness for the property owners, making sure that you've got an abundance of services and amenities for the employees. So, so that it helps their occupy and the work for talent. And then of course, ESG environmental, social, and governance considerations, making sure that those are all addressed, whether it's well certified or least certified, those become other key anchors for the space.
Jesse (17m 51s): So, so when you talk, when you move on to the, that piece there, where you have investors or asset managers, I mean, it's the, the other side of the, of the same coin. How are you, you know, what is the recommendation or what do you see changing in that side of, of our world and, and what they're thinking about that might be different than the, the occupy side.
Sheila (18m 13s): So it's about taking a sterile office building, right? Think about the old prestigious, even think of, you know, suits the, the great TV show, right? And you think about these wonderful, beautiful marble, you know, marble sterile office buildings. So then you say, how do you take that and inject a hospitality or a hotel like personality, that space, of course, we can do that in the day of the week, throw a coffee shop in the lobby, animate with retail, create events, pizza days, and suddenly you take your lobbies and your big open spaces and you activate them.
So that they're really intriguing for people to be in whether they're inside the lobby walls or outside in the green spaces around the office building. So that's one massive opportunity. So you're managing the asset, but you're also activating the asset at the same time. Some other opportunities lie around, you know, bicycle storage in the base, in the basement, putting incredible retail in whether it's a coffee store, whether it's a fitness center, whether it's a daycare and many other retail amenities in this space, also thinking about, you know, common stairwells right now based building stairwells that are concrete, you know, not terribly nice in many buildings.
Well, what would happen if you painted them, animated them and did some exercise kinda routine running up and down staircases. So it's about taking core asset and doing really cool things with it to make people, you know, want to be there. It's about surprise and delight. And again, so it's, it's turning your asset on its heels to, to operate more like a hotel or, or a hospitality opportunity.
Jesse (19m 52s): Now this, this plays into other roles in real estate transit being one of them. What we've seen with tenants that we've worked with is that really good inviting office space that's well located, has fared not surprisingly much better than, than other asset class on different transit roads that might not be in the path of progression or just connectivity. What are you seeing on the transit front? Is, is that a theme that's, that's persisting through, through the pandemic and, and to now?
Sheila (20m 22s): Oh, absolutely. So it's funny Northwestern university asked me to be involved in workplace because everybody's, so it's specifically on the transportation front, because everybody is so excited about how workplace is influencing the return to downtown transit. Are we using subways and commuter trains? What does that look like? You know, before the pandemic, there were gazillions of, of dollars put into infrastructure investment. Now, suddenly if people aren't using them to the same extent, so you could probably take the vitality index and apply that to a trans situation.
So there's a, a very real example. One of the interesting trends that we found through the vitality index in New York, we actually monitored it on hour by hour basis. And we found that it was less busy during the office Workday, more busy on nights and weekends. So everybody was using transit to go to the theater, to go to restaurants, downtown or weekend events. So the tourism component is alive and well is what we're learning.
It's the office part that is really the challenge. And so on the transit front, I think that's just a sense of, of time and return and population growth. And I think it will take a while for it to return. If you're looking at the vitality index is one of the indicators.
Jesse (21m 46s): So on the, on the office, and, you know, we were talking a little bit before the show here and in industrial multi-res, you know, real estate, you always say is a very local thing, but you could almost make some pretty sweeping claims of how well multi-family industrial has done over the last two years. Office has been that question, mark. And I was speaking to the CIO of, of crowd street, Ian for Mely last week. And we were talking about this. He called it the tenant inducement complex in that we've gotten so large in the amounts of tenant allowance, tenants, inducements for build outs.
And it seems like we're ripping down stuff that we just put in five years ago, where there's this discussion of somehow commoditizing office space in the way that we haven't seen it in the office sector. So that it's more of a plug and play. It's not, you know, every three years or five years that you're ripping out hundreds of thousands of dollars worth of, of build out. What's, what's your take on that? I'd love to get your thoughts.
Sheila (22m 47s): So, yes, of course, because before the pandemic, people were creating cube farms or creating rows and rows and rows of, or warehouses of workers, and that's not what we need, we didn't need it, then we certainly don't need it now. And so now, you know, if you were to, you know, if you watch any of the, the, you know, shows on WeWork and that whole story, but that's the animated environment that everybody wants. So yes, you can create that. And so we have course have a whole flu office practice that thinks about that space, where as a tenant, I can go lease that kind of space.
And I don't have to worry about the leasehold improvements. I can just move into it. Right? And so if you're a, you know, a mid-sized tenant that becomes a really viable solution for you, because you can scale up or scale down based on whatever your requirements are, and you don't need to worry about building space out and all the rest of it. If you're a larger, whether it's a bank or a law firm or a consulting firm, that is your brand, right? Your brand is your space. And so you wanna put your colors and image and reputation around all of that. So again, it depends on what you need, but the movement toward engaged creative spaces absolutely is here to stay.
Jesse (24m 2s): So
Sheila (24m 2s): Gone are the cubes.
Jesse (24m 4s): It's funny, you mentioned WeWork, cuz it was in that discussion. Speaking about Adam, Adam, Newman's new venture with flow. And I think it was 350 million raise for that. And trying to take that to a multi-family, you know, do that the same thing close to the same thing that was done for rework, but for, for residential or multi residential. So for this whole, you know, aspect of workplace strategy coming back to work is, you know, when are we going back to quotations normal? It seems like those, those are just, you know, terms that people have thrown around that when we're really looking at office and the future of, of workplace, it it's that it's not gonna be an either or it sounds like it's going to be a hybrid pun, pun, no pun intended there, but we would love to get your thoughts if you had your crystal ball out here.
And we talk about these timeframes, cuz you made a great point where we're checking the vitality index every week because okay, next week the pandemic's over next week gets over. But if looking kind of soberly at what you're seeing in the marketplace, in terms of workplace environment, return to office, you know, what, what do you tell people or clients when they're asking you, you know, what is your forecast for the next year, two years or or longer if it's, if that is what you think it's going to take.
Sheila (25m 20s): So if today two and half years into the pandemic, we're down 50 to 55 on average, across north America. And oh, by the way, that's up from the 70 to 75% average has taken two and half years in another two and half years, we'll be at the 30 to 40% range on average. It will take a while for people to fully acclimatize, to returning to downtown. I've learned that I can actually get more work done in my home office.
You and I can have this call very effective at it. And so when I come downtown, it's a whole other way of working. And so for the individual, it's about balancing all of those things up. And so when you have millions of individuals making those choices, I think it's gonna take a while to, to return. So then the next question becomes well, is the office dead? You know that, that's the obvious question everybody's asking. And the answer to that is absolutely not. We're social people.
We want to be with our colleagues. Jesse, I love seeing you in the office. Like that's a really important thing. We need to have that connection. So the office is not dead, but it does have to be redefined. And so these giant towers that we have to have to be reimagined for the future so that they become relevant for the next wave of working because that relevance and the value proposition of the office is incredibly powerful. So you can't throw the baby hope with the bath water, you know, think about it 10 years ago or something like that.
Industrial. Wasn't very exciting now, suddenly it's very exciting. And so this two shall pass and the office assets two shall become very relevant all over again because the downtowns in our north American cities are vibrant centers of creativity and innovation and we need to, you know, preserve and protect that.
Jesse (27m 12s): And when it comes to that, that search for talent, you know, there's been different studies of, you know, whether it's two or three weeks of, of commute time, what that equates to in actual time of the year, in the year in terms of what employers will have to trade or what, what needs to happen between employers and employees, if they do go with a hybrid model. So if you know, like Comcast and apple just announced that I don't know if it was mandated, but that they're gonna go with a three day work week. As of now, what do you see that as the, you know, obviously it's dependent on the employer, the, the specific employers, but how do you see that negotiation taking place where some companies do wanna mandate some form of, of presence in the office, maybe not at a full-time basis, but they want to have something there.
How do, how do you see these discussions or how have you seen these discussions play out?
Sheila (28m 2s): So I think, again, it goes back, it depends on the company. Depends on the culture. Depends, depends, depends. So hybrid is here to stay. So then the questions for each company, how do navigate that hybrid? And so saying you've gotta come back five days a week are never going work. That's never going be in my view viable. I think the, the, the opportunity, same flex work schedules, flexible opportunities. I think that will be the theme overall, not thou shall do this because it's been proven that employees, 85% of employees returning to the workplace want flexible work hours.
And if you don't offer that as an employer, they're voting with their feet and going somewhere else. So that becomes table stakes. So then you say, okay, got hybrid. How am I going manage that? How am I gonna mitigate that? Typically what happens is you'll make some kind of a corporate statement, says we'd love to have people to come back two to four days a week, whatever that is. And then each manager, each team then, you know, provides governance for that team based on the type of work that do and based on theirs and that's plays.
That all means for the real estate.
Jesse (29m 24s): It's, it's always a, a wealth of knowledge. Every time we have a discussion, if there isn't anything else that, that you want to add here, I think we kind of, we could talk for another hour here on this stuff. If there's nothing else I thought we would kind of leave it here with where individuals, whether in the commercial real estate space or just, you know, investors, people that are interested in these topics when it comes to workplace strategy, where do you know what typical resources do you point people to? You know, when we're having this discussion aside from obviously going, going out to and young, we have a number of reports that you can get there.
Sheila (30m 1s): So what I I'm addicted to all of the reports. So I think starting with management consulting firms who deal with human resources, human capital, and look at those broad trends, because what we're speaking about are those are those management consulting, human resources trends that we then try to articulate in transition into the real estate world. So why we start there? So whether it's McKenzie, Deloitte, PWC, BCG, or whoever, they all have really highly valuable commentary regarding those big trends.
The other part of this is looking at the large enterprises, understanding what their policy statements are. We're starting to track all that across north America. So we could share what various financial institutions, you know, life sciences company, professional services firms are doing within their space. So understanding that I think is really important and then making your own decisions. And that's really for unoccupied piece for the investors, never before have you had to be so creative, I'm a huge proponent of workshops.
And by workshops engaging your key stakeholders, whether they're occupiers employees or whoever I'm reimagining the office building, what could it look like? Everybody loves to play monopoly. So let's play monopoly with the office building and figure out what the right fit is for your, for your building. Overall,
Jesse (31m 25s): My returning guest today has been Sheila botting Sheila. Thanks for being part of working capital.
Sheila (31m 31s): Thanks Jesse for the opportunity really love again.
Jesse (31m 44s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you like the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.
*Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time.
Hello, Jesse, could you describe return on equity as it relates to real estate investments? I've heard this term used before, but I'm a little confused about how it compares to IRR internal rate of return he's referring to there and cap rates. So, yeah, return on equity. I think it's a, a metric that's for some reason, not in Vogue or not used as much in real estate, but I think it's a useful metric. I think any metric you use, whether it's IRR cap rates, a return on equity return on assets for anything re re investment related, whether that's real estate stocks, it doesn't really matter.
I think that you typically have to use these in conjunction with each other because cap rates, for instance, can be useful. But if a building is half vacant and you only have half of the rental income, all of a sudden your cap rate is extremely skewed. So just for people to understand return on equity is a little different than cash on cash. Return cash on cash return is you put a hundred thousand dollars of your own cash in a deal. And in the first year, if you make $10,000, that would be a 10% cash on cash.
Now cash and cash is typically only used as a one-year metric. That's the way it's, it's traditionally taught return on equity is a little different in the sense that your equity in a property. So in that same example, the return on equity in the first year might be the same as the cash on cash return, but as with any amortizing mortgage. So let's assume leverage that a hundred thousand dollars or your equity, excuse me, in the deal will slowly go down as you pay off your mortgage.
So for instance, if you have a hundred thousand dollars of equity in a deal and you make $10,000 a year, that first year will be 10%. Now let's fast forward to say five years later, and your equity you've built it up to $200,000. That same $10,000 is now a 5% return. So it is a metric to keep in mind that over time, I like how it illustrates the fact that putting equity into a property is kind of a double-edged sword.
As you know, most of us were raised when it comes to your own principal residence, it's pay off your mortgage, but with investments, if you completely pay off your mortgage, you pretty much are going to zero with your return from this standpoint, the return on equity. So I think it's a good tool to illustrate how the asset performs over time, but I think it still needs to be done in conjunction with the IRR and cap rates, you know, as a first pass when you're looking at properties. But I think the theme of this idea of the right amount of equity in a deal, I think is a powerful one.
And this came up in our office this week, actually, where we talked about, especially in Toronto, this market, just like, you know, San Francisco, New York, Boston, very, very expensive markets where most of the investment properties that you buy, or a lot of them, if you don't put over 15, 20, 25, 30% or more in some areas, you're not going to cashflow. Now the IRR, if it's a levered IRR, that's going to be, you could have a, an amazing percentage.
You might have a 25% IRR, a lot of property. That's not cash flowing. So is that a good investment? Well, I think most traditional investors want their properties to cashflow. So if you have a cash flowing property in this circumstance, now that IRR will probably drop because you have to put a lot more equity in the deal. And then you can do an analysis of comparing return on equity and IRR. I think it's, it's a metric that, like I said, it should be used in conjunction with other metrics, but it is something that you don't hear talked about very often.
And I think it's a good one to have in the, in the tool belt when you're looking at real estate. So hopefully that answers the question. Like I said, if you guys ever have any questions, you can feel free to reach out to me, jesse@workingcapitalpodcast.com. Hope everybody has a great long weekend and we'll see on the next episode, take care.
Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.*
In this episode we talked about:
- Covid Effect
- Listing work
- US Investing
- Rent Control
- Real Estate Market Outlook
Useful links:
Book “How the world works from the economic perspective”
https://www.instagram.com/jessefragale/
https://workingcapitalpodcast.com/
Andrew Joyner is the Managing Director at Tricon Residential and head of their Canadian apartment platform, tasked with trying to create thousands of brand-new apartment units in the Greater Toronto Area. Andrew is responsible for all aspects of day-to-day platform activities, including setting strategic direction and sourcing investment opportunities, as well as overseeing dedicated teams responsible for business plan execution: development and construction, asset management and operations. In addition, Mr. Joyner manages senior relationships with joint-venture partners.
In this episode we talked about:
* Andrew’s Bio & Background
* View on Multifamily Housing Market
* GP vs LP Structure
* Rent Stabilization Policy
- Interest Rates Impact on Andrew’s Investment Decisions
- View on Zoning
- Mentorship, Resources and Lessons Learned
Useful links:
Book “The New Kings of New York” by Adam Piore
https://www.linkedin.com/in/andrew-joyner-cfa-149ba124/?originalSubdomain=ca
https://triconresidential.com/
https://www.instagram.com/triconresidential.home/?hl=en
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, my name's Jess Fraga, you're listening to working capital the real estate podcast. My special guest today is Andrew joiner. Andrew is the managing director at Tricon residential and head of their Canadian apartment platform tasked with creating thousands of brand new apartment units in the greater Toronto area.
We were just chatting before the show and correct me if I'm wrong. Andrew, you guys are now over 6,000 apartment units spanning over 12 different projects. Do I have that right?
Andrew (49s): Yeah. Yeah. Jesse, thanks for having me. And yeah, no, that, that is right. You know, Tricon residential was, was one of the first groups back in 2016 to, to push into the purpose built rental apartment here in Toronto with scale and yeah, we've, we've now, you know, we're executing on the most active development pipeline in the city and, and continue to add projects.
Jesse (1m 11s): No, that's great to hear. Well, first of all, thank you for coming on. I'm glad that we've got a chance to sit down here, cuz there's a lot going on right now, as you know, and, and listeners know in the real estate space in general, I think whether, you know, you're in San Francisco, Toronto or Vancouver, there's, there's a lot going on economically and just from a policy standpoint with Canada in the us. So maybe for, for listeners that don't know your background, Andrew, maybe you could give us a little bit of a kind of primer on, you know, how you got into real estate at the beginning of your career and you know, how you've gone through the different permutations to get where you're at right now at trigon.
Andrew (1m 53s): Sure. Yeah. So I, you know, I grew up in Toronto, you know, my, you know, unlike a lot of people in real estate, I, I don't have a, a family business in, in real estate per se, but I, I always thought it, it, you know, represented this intersection of, you know, business and, you know, design and urbanization and, you know, people that, that I thought was profound and interesting. And so, you know, my, my summer jobs and undergrad were, were working at CBR E and then I, I was lucky enough to be hired from undergrad by Oxford properties.
I was the first hire they had as like, I forget the name. Now it's been several years, but you know, their first university intake hire. So, you know, spent the better part of a year there. And, you know, it was an amazing opportunity. You know, they have obviously got a very significant portfolio in Canada across, you know, different, different sectors as, as well as internationally. And, you know, had the opportunity to, to get, you know, Oxford was an investor with a company called Hines, very large Texas based developer owner operator of real estate and got to know the team at Hines through that channel.
And, you know, I was part of a, you know, asset management based rotational program when I, when I started at Oxford and, you know, knew I wanted to focus on, you know, acquisitions and, and doing deals and sort of the, the tip of the sphere of the business. So, you know, the market was hot back in 2006. Hines was raising a new fund over in Europe and was, was lucky enough to, to get hired, you know, and, and I moved over there in 2007. So I spent the better part of my twenties working over in Europe and, you know, that's something I'd highly recommend to, to anybody.
You know, I, I loved it, you know, professionally, it was, you know, the opportunity to see the world, you know, see different perspectives, you know, travel, et cetera. And on, on the personal side, you know, travel and seeing some pretty amazing places. So, you know, ultimately when I came back from Europe, you know, I, I realized that I, I knew probably more about European real estate and, and global real estate than I did, excuse me, C P I B Canada pension plan and, and Brookfield, when I was kind trying to come back to Toronto, just given their, their global remit.
And Brookfield's increasingly run outta New York and, you know, CPP, you know, was a great platform. So I spent several years there and, you know, I loved working there. I think it's got, you know, you see every large transaction on planet earth, incredibly high caliber group of people, but candidly, I missed, you know, being on the GP side, you know, the proximity to, to the real estate, you know, doing deals as opposed to, you know, more of the capital. And so I moved over to Tricon in 2016 and, and been here about six years now.
And yeah, no, it's, it's been great. I, I, you know, when I joined Tricon, we had three multi-family projects and, you know, grown it to, to 12 over the last few years. And, you know, we continue to execute, you know, on our growth ambitions, but also, you know, our development pipeline and ultimately creating, you know, a, a best in market brand focused on delivering, you know, exceptional resident experiences. And, you know, look, I think my time away really helped me bring a different perspective to what we do here at, at Tricon ultimately, you know, new class, a purpose-built rental is something that doesn't exist in Toronto people hadn't built it.
And I wouldn't say it, they hadn't built apartments generally since the 1970s. And, you know, there's an example here and there, but, you know, broadly speaking, it's a new product type. And so I think, you know, my experience in other markets has allowed me to bring things back and, and different ideas and whether it's, you know, our approach to amenities, our approach to leveraging, you know, mobile apps and technology, whether it's our approach to programming and, and just trying to borrow concepts that I think are, are elevate are done at a, you know, high level and in other places around the world, I think, you know, been able to import some of those perspectives back home.
Jesse (6m 3s): Yeah. I know that's a great summary for those that, you know, we, we have listeners probably 50 50 between Canadian and us listeners and every time I speak with multi-family, you know, whether they're general partners, LPs people investing in multifamily in the states, you, you know, you have that conversation with them about the fact that we have a very old apartment stock condos take up a lot of what we, you know, whether you call it the kind of shadow market for apartments or rentals, maybe you could give listeners a bit of an idea of, I, I guess your perspective on why that is, why, you know, we, you know, whether it's cultural, economic that we seem to not build departments or historically haven't built them at scale in general and, and what you think if you think that that is gonna change in the future.
Andrew (6m 50s): Perfect. Yeah. Look in many ways, that's, that's the, the big question, you know, where do you start on that one? I, I think that, you know, historically, you know, Canada has had, you know, a lot of foreign interest in, in owning real estate and capital flows. And I think that has allowed, you know, the market to build and develop spec condos, you know, so there's the capital for it. I think there's also a capital structure for it, you know, in Canada, developers can use condo deposits as, as equity.
And so, you know, when you compare condo versus, you know, rental business plans, it requires a lower upfront capital outlay by developers. You know, thirdly, I think, you know, candidly historically over time, just the revenue model has, has been there. I think it really only started to avail itself in, you know, roughly 2016 when you had this confluence of, you know, rental growth that, you know, started to, to put us, you know, above $3 a foot, you know, it was, you know, increasingly stretched for sale housing, you know, economics so more and more people became, you know, renters for, for longer, you know, very strong job growth in particular in the tech sector, you know, Toronto added the third most tech jobs in north America after Silicon valley and, and New York in 2016 through, you know, 2021.
So, you know, again, I think it's, it's rents, it's demand it's for sale housing and, and also low interest rates. I mean, I think, you know, rental is generally viewed as a yield investment. It's an income focused, you know, strategy that gets compared against, you know, government bonds and, and other types of income producing real estate. And I think, you know, just the spread to financing costs, you know, again, sort of 2016 aligned with some of those, you know, operating fundamentals really started to, to, you know, it, you know, create more institutional interest in the space.
Jesse (8m 55s): So for the, on the financing side, when it comes to the source of funds that, that Tricon uses to, you know, do these development projects, you mentioned being back on the GP side, is the structure that you typically use as a GPLP structure for most of the investments, or do you have, you know, contributed cap capital that's ready to go or asset specific? What does that look like for you guys?
Andrew (9m 20s): Yeah, yeah. Our, our growth primary growth vehicle today is indeed, you know, a GPLP structure. We've got some great partnerships with, you know, some fantastic and, and very well known, you know, large Canadian pension funds that, you know, are, are great partners of ours. So that's, you know, our primary growth vehicle, but we also have some strategic partners that we, you know, pursue opportunities with. And so, you know, ultimately, you know, you need to be flexible in, in rental in order to compete against some of the, you know, the condo developers.
So I think it's, you know, having vision on, on locations on the move, it's having long term permanent capital, and it's having, you know, a low cost of capital and all those things are important.
Jesse (10m 4s): So when you guys end up looking for, you know, you're trying to determine on different areas that you're invest in what's, you know what, what's at the top of the list, what's that process look like, you know, at the outset.
Andrew (10m 16s): Yeah. You know, look, it's, we obviously, you know, when we think about location, we have to be, you know, quite thoughtful, you know, our perspective is we have, you know, a buy box in, in, in Toronto that has, you know, different, different, you know, north, south, east, west bounds, and then sort of some special, you know, one off, you know, locations we'll take a rifle shot at based on, you know, a handful of, of supportive fundamentals.
But for us, you know, what we find is, you know, construction costs don't change a whole lot regardless of the location. And so, you know, for us, you know, it's really a function of being able to deliver the rents that we need to make our performers work. And so, you know, not withstanding that land flexes in order for us to hit our year to yield requirements, you know, we're quite focused on locations where we can, you know, earn the required rents. We need to hit our business plans.
You know, it's also site specific, you know, we've gotta look at things like, you know, proximity to transit. We've gotta look at proximity to, you know, major employment hubs, but it's also things like constructability, you know, is there heritage, how efficient is the parking garage? You know, how tight is the site, just from a, you know, construction schedule perspective. And we really have to feed all those things tripped through because, you know, there's not a, there's not a big margin for error in rental. And being able to execute quickly is extraordinarily important.
And, you know, I think beyond, you know, that sort of how we look at our sort of regular way market rate strategy, you know, one of the things we're incredibly proud of is, you know, continuing to be a partner of choice with, you know, various, various levels of government in, in creating mixed income communities that include, you know, significant amount of affordable housing. And so, you know, we will look outside our, our buy box at times where, you know, there's locations that I think because of, you know, the various dynamics in, in these, you know, public private partnerships, we're, we're able to, you know, get excited about, but it's, yeah, it's, it's a bit of, you know, there's, there's a lot of factors that go into site identification.
Jesse (12m 35s): So one thing that, you know, you're intimately familiar with just, just on the Canadian side and having global perspective, we had Richard Epstein from NYU. We had like a 45 minute interview talking about the history of rent, stabilized, rent, stabilization, and control in New York city. And I'd like to get your, just your perspective on if and how the policy, maybe the policy decisions, or some of the framework that we deal with say specifically in Ontario and Canada in general, how that affects, if it does the, the decisions that you make in terms of investment.
And, you know, when a, when a politician announces that they're gonna, you know, have any building built after this period, you know, is not gonna be subject to rent controller, rent stabilization, you know, you talk to some developers. And I think one of the concern is just the fact that, you know, different politicians come in, different politicians come in and, you know, some policy gets changed and there's an implication for developers. Is, is that just noise? You know, for you guys, you stick to the fundamentals or are these things that, you know, you actively are looking at and, and, and making sure that you're aware of
Andrew (13m 44s): No, that's great question. Look, I think political uncertainty is, is certainly a risk in, in, you know, I think purpose-built rental and, and rental housing broadly focused on the residential sector. It can become politicized. And I think, you know, this is a complicated question, getting housing built and affordable housing in particular and creating housing stability is incredibly important, but it's complicated.
And the feedback loops are, are real. And, you know, at the end of the day, all three levels of government, whether it's the federal governments, you know, national housing strategy, or it's the provincial, you know, more homes, more choice program, or the city of Toronto's 20, 20 to 2030 action plan, all of them state that increasing the supply of purpose built rental is a very important outcome and goal.
So how do we do that right now? One of the challenges with the higher construction cost environment, the higher interest rate environment is there are headwinds facing it. And, you know, you don't need me to tell you that there's a huge number of projects that are, you know, under strategic review right now, you know, pick up a newspaper that's anywhere from 10 to 20,000 units, depending on, you know, what you're reading and that's real. And I'm, you know, ultimately housing stability, you know, you're talking about rent control, like housing stability is incredibly important.
And I think what, you know, coming back to some of the previous discussions, almost every investor and capital partner and developer of purpose-built rental is a long-term owner and city builder. If they're just trying to make the quickest buck and, you know, flip projects like they would, they'd be building, they wouldn't be building rental. And so there's a level of stewardship that generally, I think comes with this business. Nobody everybody's focused on housing stability. Everybody is generally focused on trying to do the right thing. And I think, you know, rent control at historic levels, as a, for instance, when, you know, property taxes, insurance costs, staffing costs, you know, you have a huge number of expenses at the property level growing, you know, at or above, you know, current inflation levels, you know, creates creates pressure.
So you need to look at this confluence of factors, which is if purpose-built rental economics day one are super tight because of costs and interest rates. If, if you make the numerator on that yield calculation, you know, governed by, you know, a very tight rent control level, it makes a tough situation worse. And I think that is going to, you know, arrest any sort of these green shoots of new supply that we started to see, I'm not sitting here saying housing stability is an incredibly important, you know, I, I tell you that, you know, Tricon as an operator, we do, you know, we do not operate, we have no assets in markets with rent control, as of, for instance, like in Canada or the us, in every instance, we, as a steward of our properties, we self-govern renewal rates.
And we do that because we wanna promote housing stability. And I think, you know, all you need to, like, I think most rental owners act that way. In fact, it typically tends to be the one off, you know, condo owner who's renting out a unit that, you know, is, is the one who tends to get in the newspaper for increasing rents, meaningful amounts. And so, you know, I think about balance discussion on this with, with levels of government is, is super important. You know, taking these drastic measures is it, it does create uncertainty.
And so, you know, I think balance is important. And I think there's examples in the us and I'll point to California as, as a place that I think has, has struck a balance of a, you know, rent, rent control approach that I think all sides can be comfortable with. I think this hot potato of extremes in, in Canada's, you know, those big swings aren't good for anybody.
Jesse (17m 52s): Yeah, no, I couldn't agree more on that when it comes to the actual loans or financing. So maybe specifically on the debt structure, I mean, you might as well talk about it here. The, you know, a lot has changed over the last even six months, USA and Canada, when it comes to the policy interest rates and the overnight rate, this, you know, you, you mentioned getting into the industry, oh, 6 0 7. I remember first starting with, you know, investment real estate in oh 8 0 9. And it was definitely even at that time, 5%, five year fixed was historically low.
And then we started just going further and further down to zero. Now that interest rates are up and inflation, you know, the big question of it being transitory, not transitory, regardless of the, the view of that, it it's here. And interest rates have come up as a result of whatever reactions that, you know, policymakers are trying to, you know, trying to do to ameliorate some of this inflation that being said when it comes to your outlook and, you know, whether it's de-risking portfolios or being more prudent or careful when you're looking at, at new acquisitions, how, how has that, how's that impacted the way that you look at investments and, you know, from, you know, the proforma to, to just even more high level on a deal, you know, how does, how has that affected the decisions that, that your team makes?
Andrew (19m 18s): Yeah, look, you know, as I said earlier, I think, you know, development, or, you know, even investing in, in cash flowing assets tends to be, you know, a spread business. So if you're a pension fund and you can go buy, you know, a 10 year, you know, government of Canada bond with zero risk at, you know, 3% today, you know, historically, you know, I think real estate cap rates have been, you know, well, the way people really talk about is the spread to income producing real estate for development yield.
And when I started in, in, in this business, people were talking about, you know, 150 basis point spread is the right development spread to existing cap rates. And I think, you know, that's come down to clearly a hundred over the last, you know, about 10 years. I think the great question right now is with that base rate, shifting out will cap rates shift out and therefore should development yields shift out. And I think ultimately that's, that's sort of a global repricing exercise taking place right now across all hard assets.
That's not unique to real estate. You know, what I really like about purpose built rental is, you know, the low duration, you know, annual sort of inflation protection. I think, you know, office and retail are, are clearly having a hard time right now for a variety of reasons we don't need to get into, you know, I think the other historic, you know, darling, you know, people always talked about beds and sheds the last five, 10 years, and I think what's not withstanding the great fundamentals for, for industrial. Those tend to be, you know, longer term leases without, you know, annual inflation reset.
So those also behave much like bonds. I think you're not withstanding that, you know, what I'm hearing is in, you know, yields are, are holding pretty tight for, for purpose built rental in particular new purpose, built rental compared to bond yields. I think the reason for that is indeed, you know, the ability to get an annual inflation, you know, reset there's, you know, not many other real estate sectors. Can you, you know, reset other than hotels and apartments, can you, you know, reset your, your lease rates annually?
And so I think, you know, in a period of, of higher inflation, that level of protection or that growth, if you will, you know, is gonna hold, hopefully hold, hold yields in our, our sector pretty tight.
Jesse (21m 37s): Yeah. Yeah. And I think even that subcategory of, I'm starting to hear a lot more talk about student rentals, where it was pretty quiet for a while. And now, you know, that ability, I guess, to that point of being able to mark to market and, you know, I guess the other benefit with that is you, you avoid the, the existing existing built purpose-built that, you know, that would be captured by rent control. So in, in terms of your outlook right now on the, you know, one thing that we're carrying constantly, it doesn't matter if it's industrial office multi res is construction and supply chain issues.
Just the challenge of getting people to, to be able to do the work, getting it done in a timely fashion. I mean, I'm sure it has to, to some extent, but in terms of your business, how has that impacted, you know, what, what the team has done and, and, you know, are there strategies that you're using to, you know, to basically deal with those risks going forward?
Andrew (22m 37s): Yeah, look, everything is harder. Like everything is harder on execution. It's turnaround times on permits, it's zoning, it's, you know, the city of Toronto's and they got, you know, 20 open spots right now in their planning department. You know, that, that is illustrative of, you know, just the need for, for, you know, more expediency, you know, we've had some labor unrest this year, we've had a drywall strike. We've had, you know, several, you know, forming strike.
We've had several strikes in the market. We've had, you know, COVID impacting productivity. We've got obviously, you know, an, you know, a labor base that's getting older and older, you know, projects are getting, you know, more and more complicated. They're taller, they're on tighter sites. You know, the supply chain is, is disrupted. You know, one, you know, the fact that Toronto has 200 cranes and Seattle has the next most cranes in north America with 49.
That's an illustration of, of how stretched many of our trades are. And so as I'll say it again, like everything's harder, everything is hands on, very hands on. And so, you know, what are we doing differently? You know, on the, you know, tendering an award side, it's, you know, really focusing on, on trades, we've done business with in the past, you know, people we know who can perform, who can perform people. We have a, you know, accountability based relationship with, you know, it's thinking about incentives and ways to, to make sure that, you know, people actually hit hit dates, but it's just a hyper level of vigilance.
You know, I think for the last 30 years, the, you know, you could generally trust, you know, the level of production. And I think in the last two years, it's everything is trust, but verify now, unfortunately,
Jesse (24m 35s): Yeah. Trust, but verify, I like that the, in terms of the, you know, when you do acquisitions for land and development right now, what does that, what does that, you know, for somebody that might not know the Toronto area in terms of competition for these type of sites and what is that, you know, world looking like right now. And then, I guess maybe just as a, as a caveat, if you could add a little to, you know, your view right now on zoning and, and you know, how that, how zoning and future zoning plays into the decisions you make or, or how you go about purchasing, you know, purchasing land or development sites.
Andrew (25m 11s): Yeah. It's funny on a no names basis. We, we had one of the top investment sales brokers and their team come into our office two weeks ago, cuz we'd asked for a land. We asked for a market update on what's going on in the land market. And they sat down, got comfortable, looked at me and said, if you're thinking I'm gonna pull a presentation outta my, my briefcase, you're wrong. Cuz there is there isn't one cuz nothing's happening. And you know, look, I think in any period of uncertainty, like the one we're in right now, just based on, you know, stock market, you know, global turbulence in the political environment and you know, higher interest rates, the bit ask spread between, you know, what buyers and sellers expect widens.
And so, you know, there's very few land deals in the market right now. And those that are in the market, you know, gen generally tend to be like quietly marketed. Cause you know, folks on this, you know, it's just not a great time to be exiting and people are trying to do things more quietly. So it's hard to, to you asked about right now, I think that's a reality. I think sellers think, you know, it's sort of November of last year interest rate environment in stock market.
Whereas sellers all are pointing to the stock market down 20, 30% and doubling interest rates and you know, construction costs going up a point a month and saying, no, this is the price and sellers are hopeful that it's last year. So that is this a, you know, for freezing, if you will look, I think, you know, Canada tends to be a market that is defined by, you know, long term, permanent capital. You don't have as many closed-ended funds that have these required exits. So I think things will move slowly here.
We'll see. I think there's no shortage of capital in the system and you know, interest in, you know, big successful and, and you know, sophisticated groups who wanna do more. So I think, you know, if there, when there's some movement on price, deals will deals will happen, but it's a bit of a stare down right now.
Jesse (27m 23s): Yeah. I, I mean, I think that's across the board, we're seeing it a definitely, you know, industrial office there's there's this disconnect and you know, whether it takes a year for people to, to kind of for the dust to settle and, and those spreads to, to get a little bit more narrow, I guess, remains to be seen. Awesome. Well, Andrea, I wanna be mindful of the time we have three. Well, we have four layup questions. We ask every guest at the end of the show, but before we do, before we go there, if people are interested in, you know, what Tricon is doing any information as to the projects or just in general with the company, what's the, what's the best place to send them.
Andrew (28m 1s): Yeah. I mean go to our website, Tricon residential.com and click on the Canadian multifamily links. You can follow us on Instagram, Tricon residential to living or, or on LinkedIn, Tricon residential as well.
Jesse (28m 18s): Awesome. All right. So four easy questions for you here, Andrew, somebody coming into our industry, your on mentorship and you know, where, you know, whether it's on the, in this case, the development side or acquisition side, you know, what, what would you, what advice would you give them at at kind of the early stage in the career?
Andrew (28m 38s): Oh boy, I think, you know, it's funny on our desktops at work, we have these three, three lines that say, ask questions, apply common sense and have fun. And I, I always think those are, you know, perfect in, in some ways for no matter what age of your, your career you're at. I think asking questions is, is a virtue. I think, you know, real estate tends to be kind of a learned industry. It's I don't wanna say more opaque, but it's, you know, it's, it's, you know, a little more niche and I think just getting exposure, listening, asking questions, you know, I think a lot of young people, actually people of any age, they don't, people are at times hesitant to asking questions.
And I, I always think that that demonstrates engagement. So I didn't, you know, ask lots of questions, be curious and, and read lots.
Jesse (29m 31s): I like that we have an, a new associate that started and we, we mandated, which I hate using that word when it comes to top down. But basically say, you know, a few times a week, we need you to ask these questions, cuz so many times in our industry, you have somebody that a few months go by, they nod their head and then you find out they, they didn't know the answer to something where it, you know, whether it was too embarrassed to ask or if you kind of force 'em like, listen, there's no bad questions. Just ask them. It goes a long way, something right now, whether it's at Tricon or your, your kind of your personal career, what's been something, one of the bigger or biggest challenges that you have seen, you know, whether that's project specific, you know, moving from, you know, one aspect of your career to, to the other, what would you know, what would that be for you?
Andrew (30m 19s): Biggest challenges. Interesting. Two, come to mind. I'll I'll I'll give you the first one cuz the second one's a longer answer. I think knowing when to ask for help, I think in our industry, like in particular, on the development side, I think a lot of, you know, folks on the construction side and project execution side, you know, it tends to be a manly Brawny. I can run through a wall, yell and scream.
I can fix it. Well, like at the end of the day building skyscrapers, you know, you've got two, 300 men on site every day, you've got, you know, a site, super, you know, a project manager. Like if, if that system isn't working in terms of coordination meetings and you know, having a plan and accountability and transparency and, and you know, it's just not gonna work. And I, I think in particular with, you know, people on site and in our industry getting like younger and younger and more and more inexperienced it's in, you know, this notion of like, or this concept of like act active inertia of just like, oh, we're just gonna, like, it's just, it's gonna keep going this way.
Cause you know, we're just gonna yell and scream and you know, it'll change cuz I'm yelling and screaming. Like I don't find that's working. And I, I think that, you know, there's a lot of projects out there that are delayed and I think, you know, what, what, what we need as an industry to do is, you know, need to find a way to partner, you know, folks who, you know, have been doing this for 30 years with, with guys, you know, driving outcomes on site versus kind of colliding with them and partnering better and just trying to do things differently and, and asking for help and people being open about that.
Cause you know, I think the, the old way of, you know, yelling and screaming to try to get things done is, is not work. And I think, you know, a lot of projects need, need help these days.
Jesse (32m 25s): Yeah. That makes sense. A resource podcast or book that you're reading right now, you could recommend to listeners,
Andrew (32m 32s): Okay, this is a curve ball answer. My favorite. I, I, you know, there's lots of good real estate books. I just read the new Kings of New York by the real deal, which, which is pretty good if you, if you're interested in, you know, these sorta, you know, big rise and fall type stories in New York, but my favorite book. So I have a colleague who used to be an, a Boeing aircraft engineer and he told me to read this book called skunkworks, which is all about Lockheed Martin, who is who as many people would know have, have created some of the most prolific advanced fighter jets and aircraft in the world.
And when I read this book, all I could think about was real estate because it's, how does this, you know, smaller scrappy company in Burbank, California with like one 30th, the budgets much smaller teams than, you know, Boeing, Airbus and all these other, you know, global aeronautics companies, how do they continue to create like steal fighters and F 20 twos and how, how, how does this company keep doing it? And it's, it's all about like project teams and focus and, and accountability.
And so I, I read this book skunkworks, which is the name of Lockheed Martin's, you know, super secretive aircraft development area. Cuz I happen to be a bit of a military junkie. But to me this was like the best book you can read about real estate development. Cuz it tells the story of how this underdog is knocked the cover off the ball.
Jesse (33m 59s): I like it right on. All right. Last question. From our Bloomberg friends, masters in business, first car make and model
Andrew (34m 7s): One more time.
Jesse (34m 8s): First car make and model.
Andrew (34m 10s): Oh boy. I'm so boring. I, so I got a Volvo XC 60. Oh my gosh. Like 2015. I, I had a Bernie's mountain dog, so I needed a big car. It's not very exciting. Practical,
Jesse (34m 29s): Practical. I like it. We've we've had, we've had quite a, a medley of different cars on here, right on. Okay. Sweet. Well, Andrew, I really appreciate you coming on. You mentioned the website Trilon I'm sure Google search as well and, and anybody interested can, can find you that way. Yeah, I, again, thank you for coming on. My guest today has been Andrew joiner, Andrew. Thanks for being part of working capital.
Andrew (34m 55s): Thanks Jesse. Appreciate the discussion.
Jesse (35m 4s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you like the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Tamar is a full-time real estate investor. She’s a coach author and the founder of wealth building concierge. As the CEO of wealth building concierge. She empowers women to become financially free by teaching them how to invest in real estate. She is also a contributing writer for entrepreneur and her first book, The Millionairess Mentality, a professional woman’s guide to growing wealth through real estate was released just recently a month or two ago. And as a three times Amazon number one best-selling book.
In this episode we talked about:
- Tamar’s Bio & Background
- Duplex Investment
- Real Estate Investment Geography
- Partnership
- Deal Structure
- Tamar’s Role in Closing Deals
- A book “The Millionairess Mentality”
- Mentorship, Resources and Lessons Learned
Useful links:
Book: The Power of One More: The Ultimate Guide to Happiness and Success by Ed Myllet
https://www.themillionairessmentality.com/
https://quiz.tryinteract.com/#/60bd0792decf1d00177af595
Discover your Investing Personality
https://wealthbuildingconcierge.com/
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, my name's Jess Fraga and you're listening to working capital real estate podcast. My guest today is Tamar Hermas. She is a full-time real estate investor, coach, author, and founder of wealth building concierge, guiding women to become financially free through real estate investing.
She's also a contributing writer for entrepreneur and bigger pockets and has been featured in Buzzfeed fem founder, and the bigger pockets podcasts. Her first book, the millionaires mentality, a professional women's guide to growing well through real estate was released last month and is three times Amazon. Number one, best seller. Well congrats number one and tomorrow. How are you doing?
Tamar (57s): Thank you. I'm awesome. It's an awesome day to be recording an episode with you.
Jesse (1m 4s): Yeah. Well thank you again for coming on the show. You're joining us from Austin today.
Tamar (1m 9s): That's correct. The great, the great city of Austin, where we have booming real estate and lots of people moving here and lost of opportunity.
Jesse (1m 19s): Yeah. Despite your government's best efforts.
Tamar (1m 22s): Yes. We won't talk about politics today.
Jesse (1m 26s): Well, being north of the 45th, we won't get into us politics, but again, thanks for coming on the show. I thought it'd be great to talk real estate with yourself, from your perspective and some of the, the unique aspects and adventures that you've taken in your career to kick us off. What we like to do with guests is number one, talk a little bit about how you got into this crazy world that we call real estate.
Tamar (1m 51s): Yes. So I was 28 years old, an executive in the entertainment industry and realized that while I had a great job, I was in the trap of trading time for money and I didn't like it. And I noticed that the guy that was my landlord collected rent checks every month. And I thought, well, that's pretty cool. I wonder if I could do that. And I wonder if I could stop paying rent. So even back over 20 years ago, people were thinking this way before we learned about house hacking and all of the terms that we have coined today.
And I went ahead, I bought a duplex and the rest is history. It didn't turn out a hundred percent the way I had planned, it was a great deal, but I could have done different things. Now, knowing what I know today, I probably would've been a little more strategic, so it's still appreciated. Great. And it actually is a property that I hung onto sentimentally. It's not, it would make a lot more money if I sold it, but I just don't have the heart to,
Jesse (2m 58s): We just talked before the show about these unique properties that we kind of collect over the years. And that seems like one that's. Is that still with you?
Tamar (3m 6s): It is. It is still with me. And it's, I, I I'm really of the belief that people that build assets, people that build portfolios and have properties or in a lot of deals and partnerships. Those are people that build real wealth, flippers and people that do other strategic moves, where they don't hold the property. That's also a great strategy, but it's more of a job, right? Because as soon as I'm done with the flip, I have to find another flip.
Jesse (3m 36s): Yeah. It's one of the things I always say, the, especially with flipping or if that, you know, your business is birth strategy, anything like that, you really are, you know, a job might be too, you know, condemn them too hard, but it's definitely a business that's an operating business. And as soon as you stop working, the money typically stops coming in.
Tamar (3m 54s): Right. And that's why it's always great. If you have that strategy in place, which is a great strategy, especially if you don't have a ton of money, it's a great way to start because you can make a really good margin on a flip, and then you can use that money to buy and hold something or figure out how to strategically refinance it and get all your money out of the deal. So there are opportunities there, but I definitely believe that holding assets longterm is safe and a great way to have passive income regularly, regardless of what the market does.
Jesse (4m 26s): Yeah. That's a really good point. I think it's similar to, you know, when somebody sells a company and they take that seed money and invest it, one thing with real estate, you know, what other area are you able to take a large chunk of, of capital from the sale of say, you know, fix and flip and utilize that, you know, even if your salary's great Parkinson's law usually tells us that, you know, if we, if we make enough, we will spend probably the same amount, regardless of what percent or what amount we make. So it's a good point. So this, that was your first foray into real estate.
And you, you said 20 years, was that in the early two thousands? That duplex?
Tamar (5m 3s): Yeah, I bought that. I bought that in the early two thousands and, and really my journey. Wasn't very bold. I didn't go and start buying up a lot of properties. I was very tentative because I was, did not know anything about wealth or real estate investing. And I was very afraid. There are big investments. There, there are a lot of money and, and I didn't wanna make a mistake and I didn't want to buy something that, that didn't work out and be underwater.
And really, I was listening to the people that didn't know real estate, or that had a bad experience in real estate. And when you, when you get into the trap of listening to those people, you'll, you'll only hear negative stories. So it's always a good idea to listen to the people that are successful. And that when I started doing that, I really started to steamroll. And the truth is you gotta bet on yourself. And at the end of the day, all of us know more than we think we know we've been so beaten down, just everybody in life is their stories of trauma or hurt.
Even if you had a great childhood where maybe, you know, one day your mom turned around and said no to you. And then, you know, we're, we're we go into the adult world feeling paralyzed with that word? No. So I just think that, that it was, it was definitely the mindset and stepping into the person that I wanted to become and the, and the life that I wanted to create that helped me propel myself into an, into wealth.
Jesse (6m 40s): Yeah. I don't think there's an investor out there that had, has not had that experience of, you know, people at the beginning of your career saying, you know, I've tried it before tenants are gonna put holes in the wall. You know, you shouldn't do it, the real estate markets fickle it's really, until you do it, that you kind of quiet those voices, but a hundred percent when you're at the beginning of your investing career, those are pretty loud voices. And even though sometimes they can mean the be for the best. A lot of times, those voices are very close to home. So you, you take them to heart.
Tamar (7m 10s): Absolutely. And having income. And especially when you haven't grown up with any money, you get very attached to the security and to the comfort of feeling like, you know, your bills are paid, you know, you can go certain places and travel and do the things that we all really enjoy doing. And that attachment creates a lot of fear when we wanna make moves to grow wealth, because there's no way to do it unless you're willing to, unless you're willing to take a little bit of a leap.
Yeah. And the thing that I like though about real estate, more than any other asset is that, or any other, you know, stock market or business venture, is that I can really understand it. And like you said, once you understand it, you can, you can kind of bet on it in a way where you've really mitigated a lot of the risk. So it's almost like not really a bet. Like the stock market is a lot more of a bet business is certainly, I mean, huge rewards, but big bet. And then real estate is like small margins of bet and big rewards.
Jesse (8m 16s): Yeah. I, I can't remember. I always mix the, the three up, but there's the, you know, you can mitigate risk, you can reduce risk, you can eliminate. And I think you, you can bear the risk. So I think, you know, depending on what area in real estate, you invest, you can be super, super conservative where you can be cowboy gun slinging, you know, developer speculating. So I think there's a, there's a wide variety of aspects that you can tackle it. This one thing I, I like to ask investors is this idea that you said you kind of alluded to being tentative at the beginning.
And I'm always curious to know when people switch, if they do from their full-time job to a full-time investor, if they keep both of them at the same time, like what, what did that look like for you when you started ramping up on the investing side?
Tamar (9m 3s): Again, it took me a while to, to let go of a, a very steady stream of income. So the, my corporate, my corporate job, I actually left. And because I was starting the journey of motherhood and realized that I didn't wanna work in the entertainment industry where they absolutely don't, don't give you a lot of time off just because you had a kid it's not, I mean, there are certain companies, but the kind of work that I did, it wasn't like that.
And, and, you know, there's, the entertainment industry is well known for having long hours. It's just the nature of creating TV and movies. And so when I had left that I actually had started in another company and it was, it was very easy to just keep going with that. And even as I was making the income through real estate, I still was holding onto that because I still wanted that were so conditioned. It was like, in my mind, I still thought, well, something can happen in real estate.
And it takes a really long time. But what I did was I created certain posts, certain number posts, where it was like, okay, once I have 10,000 a month, then I'll be comfortable. And I think that's really important because otherwise you just keep racing and racing. Yeah. I have friends that have eight figures and they're still, they still have one of the, one of the partners in the relationship working in a corporate job, because they're just thinking, well, just a few more years, cuz we remember in 2008 and we didn't have money and we never want that to happen again.
So he's just gonna work in the job a few more years that he really doesn't like, because we have, you know, 9 million in the bank, but we're just, we just need another 30, 30,000 a year in cash flow.
Jesse (10m 52s): Yeah. I mean, that makes a lot of sense. Like I have the benefit, you know, my day to day job is in commercial real estate as a broker. So it's kind of like, you know, we, we, we let go of this idea of having guaranteed income a long time ago. So that's why I feel that in my world of the, of the people that do invest, they, they aren't, you know, even, even in their sixties and seventies, sometimes they always have one foot still into, in the, in the brokerage world just because it's, it's that kind of world where you can, you can somewhat manage both, but 100%, I think for everybody having that job, like you said, completely conditioned to have that income, regardless of what it, what it is because of those unknowns, the 2000 eights, the 1992 threes.
But so the, the duplex from there, what did the, the journey look like from there to where you are now and, and specifically in terms of the type of properties or assets that you invest in.
Tamar (11m 48s): Yeah. So I'm still a huge fan of duplexes and single family homes. I think that it's a great way to invest, talk about a conservative investment that can yield a lot of return and tax advantages. So I, I absolutely love that model. It's not the sexiest. It's not like, oh, you know, it's not like saying I own a 150 unit multifamily at the same time. Who cares because the truth is if you need to exit 150 multifamily, it's a lot harder than getting rid of 10 single family homes.
So you have to look at your comfort level. And for me, I still have those sprinkled into my portfolio. And over time, what I've done with my portfolio is I have gone more into a balancing act of having, having a lot of partnership deals. I'm in a lot of syndications and I'm in a lot of Airbnbs where I put the capital in, but I don't do anything, but I own equity and I own, and I, I get paid passive income every month.
So there's all kinds of ways you can structure deals. That's sort of become a, a more fun way for me because I am a people person. And I also have, have a really good radar for identifying talent and identifying really great partners that I can trust. And so at a certain point, I feel like when you're, when I'm in the grind and I have these properties, it's a little lonely, you're kind of on your own, but when you have the partnerships, it starts to get playful.
And at this, and the reason why I keep the single families and some of the other pieces that I still manage is for the real estate professional status, which is a very good benefit. I'm not sure how you have that structured in Canada, but in the states, the, the real estate professional status is allows you to take both active and passive income as a tax deduction, which is really an extraordinary opportunity to offset income.
Jesse (13m 56s): Yeah, my understanding last time I looked into this and we've had cross border accountants and lawyers on the show before my understanding is we don't have it. If I remember correctly, there's a certain amount of hours per week that need to be dedicated to real estate for, to, to classify as that status. Is that, is that correct?
Tamar (14m 12s): Yeah. It's not only that you're working in real estate. So one of the, I'm not a CPA, so please don't take my advice, talk to your CPA. But, but, but the fact of the matter is is that if you are a real estate agent, you're not a real estate professional. Yeah. It really is actively participating in the properties for a certain amount of hours and it actually gets it. The rules are actually quite strict and, and it, and if there is an audit, which is, you know, you never really know happens statistically, we're not, you know, audits.
There was a rumor that audits were on the decline, but we, we know we have a lot of, of fish to fry right now. So, you know, there's a, there's a lot of things happening probably before maybe they get to your tax return to audit it. But that said, I would, you know, do my best to follow the rules. And at the same time, know that the likelihood of you being audited is probably not wildly great. And anyway, the truth is, is that, you know, you stay in line, you have to keep a log and do the real estate professional status in the states.
And if you do and you do it correctly, then you do have an opportunity to, to get a big tax deduction, which is why I do it.
Jesse (15m 29s): Yeah. It makes sense. I mean, I think we've had, I think Laura Lauren Cohen on the show before she's a cross border lawyer and Florida to Toronto is kind of the, the pipeline. And I think part of the status for visa, for Canadians in the states, or one of the, the angles she uses is that, is that status there of real estate professional as part of building a, I guess, an argument for the visa. So in terms of the, the geography you're in Austin, Texas, your proper's, Texas out-of-state instate, what do you like to what you like to buy?
Tamar (16m 2s): Yes, well, I came from California, so definitely exited a lot of that for obvious reasons, beautifully appreciating market, but very difficult for landlords and the, and the tenant laws, which I know that that's something that you contend with too in Canada. And so Texas is for the landlord, which doesn't mean that you want to treat your tenants any less respectfully. However, if a tenant is not respecting you, then you have the right to, to have them have them vacate your premises, which seems reasonable to me.
And, and so, yes, I am investing in Texas. I really have investments across the country. There are so many great markets right now. We've seen so much growth in so many different states. And I try not to manage a lot in, in other states because one, because I'm, I'm, I like my real estate professional status and two, because I, I just don't need to because I'm in Texas and it's a great market to invest in.
Jesse (17m 10s): Yeah, my friends and family in, in California and New York state, they can feel our pain in Toronto and Ontario. I think our laws are more similar to those two states than they are to say, Florida or Texas, for instance. And it's 100% I've, I've probably, I've said it a number of times on the program before where it's, it has nothing to do with trying to do anything nefarious with your tenants. It's just having a level playing field that, you know, both sides are accountable to each other and not one is taken advantage of the other.
And unfortunately, I think the way that stabilization and rent control is developed in, in New York and California, it, it unfortunately goes that way. And it's very difficult to get tenants out when they are violating the terms that you agreed to.
Tamar (17m 54s): Right. And I do have a lot of sympathy for, for creating rules around that, because unfortunately there are people where they'll come in and they'll just take people out and they are displacing people that cannot afford homes. And we obviously have a, a lack of housing. And so that is something that is a consideration from a humanitarian standpoint, although then we have the other side. So yeah, it is, it's difficult to invest in, in, in California. I still do have investments there.
And, but it's, you know, anything that falls under the rent control is, is very difficult to work with.
Jesse (18m 34s): And are they still using the system of there's annual guidelines for increases of rent? Is, is that something they do in California as well?
Tamar (18m 41s): Yes. There are annual guidelines unless someone moves out. Yeah. Then you can, then you can raise the rent, a market rent to market, and I actually have paid, and this is crazy, cuz this, you can buy properties for this. I paid one 10 at $70,000 once. Wow. To vacate. Yeah. And that was, that was my mistake. And part of it is that when you're, when you're in the process, it was a property that I had bought early on that was under rent control. You don't know all the nuances.
And so what hap it's really important when you buy a property to start investigating right away. Okay. What can be done? These are things that I could see could be issues. So I had a tenant that was in there and I probably could have just offered them $10,000 when they moved in. But instead I, I thought, well, that's fine. We'll just let them ride. Well, 10 years later, the property had escalated in value and they were very well situated in the property and just didn't wanna move. And they were smart. They knew their rights.
And so I was really in it stuck between a rock and a hard place. So I think that it's a good lesson for whenever you get any kind of property like multifamily, whatever it is, storage, whatever it is always start right away and look at, okay, these are the potential issues that I see that could happen and figure out how to mitigate them sooner than later. Don't really think hard before you decide, I'll just kick the can on this. Because if you see that it could be an issue later, if you kick the can on it, ultimately you won't be in as strategic of a position to negotiate some sort of a, an exit around it.
Jesse (20m 20s): So that sounds to me that you wanted to get vacant possession for a sale.
Tamar (20m 24s): Well, I wanted, well, there was two, it was twofold. I either wanted vacant possession to, to double the rent from 1500 to 3000, which is a huge difference. Or I wanted possession for the sale. But once you have someone that is occupying the property, if they don't wanna leave and you can't, you know, readily force them, there are certain guidelines, but I, I try to stay within the, the legal parameters because I wanna be a good citizen. And, and so what, what happened is that if you wanna sell the property, if you sell the property with it's the same, it's the same principle also for any kind of real estate that you're doing.
If you sell the property and it's not performing as well as it could, because it has an, it has an issue. Someone else can solve that problem, but they're gonna pay less for the property. Yeah. But if you solve the problem, then you can charge more for the property. So that was my strategy I wanted to, at the time I either wanted, I wanted possession of the property. I wanted possession of that unit. Yeah. So that was kind of how it went.
Jesse (21m 27s): Yeah. It's pretty much standard practice now that in, in Toronto and a couple other cities up here that it's, it is a agreement that you come to, whether it's 20,000, 25, 30,000 in an apartment scenario per tenant to, to leave, I'm amazed that the government is still allowing us to have that adult conversation and contract and say that you agreed to leave if, if this amount is paid, cuz you know, if you just Google that, you'll start seeing a number of news articles that I probably are not dissimilar to your experience in California.
Now, in terms of the, the structure that you typically like to use, you mentioned partners now, is this something where you're doing a JV, a more formal structure, like a syndication what's what do you typically like to do? And I understand that, you know, could depend on the, on the property itself,
Tamar (22m 17s): Right? So it's true. It does depend on the property itself. And what I really work towards is identifying the best partner. So if I'm going to be a limited partner in LP, then I will look for the best sponsors and the Le best terms and the best deals. What did they buy the property for all the questions you wanna ask kind of as an outsider before you give someone your money and you also wanna look at the track record of the operator to make sure, you know, have they exited before, do do they know how to deal with this asset class, all of those things.
So that's what I look for there. A lot of the determination there has to do with, you know, do I, you know, do I like the terms? Do I like the model? Do I do? I think the sponsor can handle, you know, can, can execute on their plan. So with that, I will just put, put money into there. Also, one of the things I look at is what kind of depreciation they offer because depreciation allows us to, with, if you're not a real estate professional, you can do passive, passive income, passive income against passive losses so that depreciation can help you offset some, some, some other passive income, which is really comes in handy.
And you know, it return, it expands your bottom line, right? If they're offering you 17%, but then you get a depreciation, you can think it's like a 22%, which is quite a, quite an attractive return. So on the LPs, that's how I do that. Now, when I GP a project, I'm still looking for the same things, but I'm probably even more strict. And the reason is, is because when, as a general partner, I'm part of that deal and I really need to make 150% sure because I'm the one that's coming to you and saying, Hey, I've got a deal for you and bringing people into the deal.
And I'm also involved in, in the trenches. So with that, I'm looking even with a stronger magnifying glass and, and other deals, it just, you know, partnerships come to me, like I said, I'm in a couple of Airbnbs and the smokes, I own one on my own. And then I have a couple with partners. I do nothing and it's great. We just refied out. I just got all my money out of the deal and it's appreciated hundreds of thousands of dollars. I own equity and I do nothing. And, and so it's a fantastic opportunity.
And for that, I really look at what are the ideas that a partner approaches me with and, or what are the ideas that I'm bringing to a partner? So if I don't, you know, you either have to have the time, the sweat or the, or the deal. So, so I have to look at with me a lot of times, it's I happen to have the capital. So, you know, I'm looking at it from a place of where do I wanna give my capital, but if you have the deal, then you have options of, you know, what kind of partner would be someone that will be reasonable and create, create terms that, that are amenable to both.
So it's a win-win.
Jesse (25m 16s): So once the sale is closed, you always hear that of, you know, the different individuals I, you know, was saying, we just hired a, a new kid at work. And I was basically saying that real estate you're gonna, you're gonna have every different type of individual. And, and some client is going to be the right fit for them. And, and that may be the complete opposite to you. There's always kind of a fit because it's a people business and every person and every client's gonna be slightly different. And one thing I, we were talking about was after the deal is done in terms of closing, if you're the, the operator.
So you're the general partner in this case, you know, one thing you learned really quickly is if you have partners, you know, some people are better at making sure that the bank statement looks okay, others are better at investor relations. Others are better with construction. You said you're kind of a people person, you know, what hat do you typically or feel the most comfortable wearing when you're in that general partner role? And then how do you delegate, you know, those other, those other areas.
Tamar (26m 15s): So I'm very much a friend of the house person. And, and I definitely am a lot involved in, in putting pieces together in consumer relations in, in finding part, the right partners to also partner with us. That is more my wheelhouse, like the underwriting. I can look at it, but I don't wanna sit at a desk and underwrite a deal for, you know, 10 hours a day. And that's what it takes, cuz you're looking at deal after deal, after deal. And some people love that. They, they love the numbers, they love the strategy and that's great, but that's just not, that's not my thing.
So pretty much that's, that's the role that I play. So I might bring in other people to do different things. I usually have other, there's usually several GPS on a deal. So I'm usually not left by myself to kind of delegate everything. I usually have various partners that are very skilled at other things. And, and so that's kind of how it, how it works. And I think it is. I think one of the things that, that I do in my coaching is I talk to clients a lot about what is it that you like, right?
Because we forget as we're in the grind, we're just thinking I wanna make money in real estate and I wanna grow wealth, but there are certain things, there are certain jobs like you're pointing out that, that you may be more inclined towards, you know, you may be the other day working on some prefabs right now in Austin. And the, the general contractor on the job was talking to me about how he just loves to work with his hands. And he likes the, you know, the, the strategies of, of the buildings and he really enjoys that aspect.
Right. For me, that's a little bit of a headache I just wanna look at, okay, does this look right? Does that look right? Is this in line? So, so it's good to get to know yourself and know what you're really good at because it, especially if you, if you are someone that's really handy in construction, flipping might be a great thing for you because if you can take care of that on your own, and you don't need to hire third parties, then you don't need to rely on a huge team. You can oversee it pretty easily and you can probably get it done at a much lower price, which will give you a better profit.
Jesse (28m 24s): Yeah, it makes sense. I mean, if the alternative is your working construction for somebody else and you could be buying the assets, doing the job and coming, coming home with a larger paycheck. That definitely makes sense. I wanna, I wanna get into the book a little bit and coaching before I do, though. I'm just curious. Did your former career, was that an asset in, in how you manage your real estate business? Cuz I, I just imagine your industry, your prior industry, it's fairly chaotic long hours, lots going on was curious how that parlayed or helped or hurt, you know, your world in real estate.
Tamar (28m 57s): Oh, that's a really, that's a really interesting question. No one's ever asked me that, but I would say that someone that can work in a fast paced environment will generally thrive in real estate. If you like a lot of things moving around and fires coming up and you put the fire out and then you gotta walk over here and put another fire out. That's perfect for real estate because we, people like us thrive in that sort of environment. We like things changing. We like things moving and we like solving problems. So I definitely think so.
I also, just from my humble roots of not growing up with a lot of money, I was someone who was very hungry and I not physically hungry. Luckily I always had food, but I was, I was hungry in terms of my drive in terms of creating a kind of life that I wanted for myself. And so I was willing to work hard. I was willing to go to, to a million meetups to meet people I was willing to, to do whatever it took. And it's interesting right now I have a relative that wants to get into real estate.
I, I gave him rich dad, poor dad. And of course now the rest is history, right? Yeah. You can't not read rich dad, poor dad. And think I gotta get some real estate today. What am I doing with my life? And so, and so that happened and he is a super smart guy and he is starting to go to meetups. And I told him, I said, listen. I said, when you go to meetups, I said, do not ask anyone to pick your brain, to pick their brain and do not ask anyone if you can have some of their time so that you can learn, ask them about them, ask them what you can do for them, ask them how they, how you can be of service to them.
Because people love to talk about themselves. And they like people that aren't all about. Like, give me me, me, me, me, because it doesn't show that you're a hard worker, hard worker, someone that is like, Hey, what can I do for you? I'm I'm really willing to, to learn this. Can I, you know, can I just follow you around? And like, you know, help pick up the pieces that maybe fall apart during the day, maybe I'll go get a toilet seat for you and bring it back to the property, you know, be, be of use to people. And that's where you really establish opportunities and friendships. Yeah. I didn't bring toilets to anybody though.
I did other things though.
Jesse (31m 12s): I can't remember which guest, but somebody recently was saying, most people have an eye problem. I did this, I did that. I'm gonna do this. So if you can tap into that ego, that's definitely definitely the route to take. Okay. Let's talk a little bit about the book maybe for, for listeners. You, can you give us kind of a bit of a, what the thesis is and, and how, how it came about to, to writing it? Cause I know it's, it's not a small feat.
Tamar (31m 37s): Yeah, no, it's not. So yes. The book is called the millionaires mentality, a professional women's guide to building wealth through real estate. And I wrote it for a couple reasons. One is that I like to do hard things. Now how many people would not want to write a book and leave a mark on the world? Do book lives well beyond you? It's a really cool thing. Yeah. And statistically it's 81% of people have a book in them or wanna write a book and 3% actually do it.
It's not easy to put all your thoughts together and the editing and the work. And even when you hire people there's work involved. So, so I wanted to do it for that reason because it's one, because it's a challenge. And I wanted to feel like I, the more that I challenge myself, the more I feel confident in myself and the more I'm excited about what I can achieve. And so it was next level for me. And also because it lives beyond me, my daughter, my 20 year old read my book and how much knowledge did she get out of that?
Seeing the journey of where I came from and my thoughts about there's a chapter of it's okay to want money. That's a big thing. That's a big thing for a lot of us that grow up without money. And especially for women, I mean, I don't know what it is and why money became a dirty thing when money is, is a blessing. And it really, it, it supports everything in our, in, in every way. And we can think of it in a great way, or we can think of it as a, as a hindrance. And so as soon as you open up and are excited about it, then you can start to open the floodgates and see what's possible.
And then I just wanted chapters to really outline, okay, how do you do this? How do you get into real estate? All the things that I kind of had to figure out on my own, I just wanted to put it in a book and kind of a in, in terms that I, that I understood in a very personable way. And so that's why I, I created the book.
Jesse (33m 34s): So the, the book and I apologize millionaire, okay. Now the book itself, like I, I, I assume it's, it's something that is for the general population guy or gal, but can you talk a little bit about the, the female experience as an investor? Because we, you know, we've had women on the show before and, and like I said, you know, prior to the show, when we were talking, everybody has a unique experience, but I find that there's some, some commonalities when it comes from women going up into real estate, whether that's in brokerage development investment.
So yeah. Could maybe give a, your thoughts on that.
Tamar (34m 13s): Absolutely. So I'm a super positive person and I love people. I'm not like, oh, men are like, this women are like this. I think just, you know, if you're a good person, then you're a good person. You could be male, female. I can love you the same. And I've had that experience in real estate. We have, 90% of millionaires are made through real estate. 30% are women. So we are a minority. And part of it just has to do with the fact that we haven't not too long ago, we couldn't vote not too long ago. We couldn't even buy a house.
So, I mean, we're just, you know, we're a little bit behind because we haven't had as much time to ramp up, but I feel like women in investing actually have an advantage in that we're very personable, we're nurtures, we're relationship oriented. And if we can just get past the idea that that money is something we need to clinging to, or that there's not enough, then all of a sudden we're able to make decisions that, that give us the opportunity to really grow wealth and own, own a lot of assets and, and have the life that we, that we
Jesse (35m 21s): Want. Yeah. I think, you know, whether it's entrepreneurship business in general or real estate, I feel that having unique experiences it's, I almost see it always as a positive to the team, whether that's unique experience geographically, the way you, you grew up, you know, color creed, you know, whether whether you're male or female, I find that just uniqueness, we'll see a problem that maybe some other person didn't solve. I think the worst thing is when you have a monolith, you know, people that were all grew up the same way and they're all in the business, because then those creative solutions might not be there in your, and your blinders will be the same.
So that's a great point. I wanna be mindful of the time tomorrow. This has been great. We have four questions. We ask every guest that comes on the show, and then we'll kind of wrap up with where people can get ahold of you. So if that works for you, they're easy, easy layup. So don't be, don't be nervous. But if that works, I'll kick those off.
Tamar (36m 18s): Sounds great.
Jesse (36m 19s): Okay. One thing we ask for every guest is your view on mentorship, basically, what would you say to somebody that say female in this case, the, a younger woman that wants to get into real estate investment? You know, what would you say to that person?
Tamar (36m 34s): Well, I, it's interesting cuz I just shared about this relative and he's kind of in the same boat and I would say the same thing to a male as I would a female, I would say if you really want it and you're determined start walking toward it. And how do you do that? You have to get knowledge. So you, if you don't have resources, you have to go to meetups, you have to show up, you have to listen to people, you have to learn. And if you are, if you have resource, definitely invest in a mentorships have been fantastic for me, they've connected me with a lot of higher level people that ha and given me access to a lot of knowledge and opportunities.
So I think that the more you invest in yourself and that means your time and resources, the better. And I think that you can't, I wouldn't, I, you could certainly figure out this by yourself. It is not brain surgery, but it is a lot faster and a lot more fun and easier if you have mentors to support you along the way.
Jesse (37m 36s): Yeah. That makes sense. The beginning of your career, we all have these hard lessons we learned in the first couple years of investing. What was one of those hard lessons that, you know, you know, now you wish you knew, then
Tamar (37m 48s): I'm gonna say the story that I shared about the duplex, where I had to pay someone to get out for $70,000, that kind of hurt. That's a lot of money. Yeah. And, and there's actually two stories we're on the same property. Funny enough. So I would say, you know, get ahead of it and always, just really look at what you're buying and try to understand, you know, it's fine. It's not the end of the world. Like even though I had to pay a certain amount, I still made a ton of money on that property. It's so, you know, it wasn't the worst case scenario really wasn't that bad.
It sounds like, oh my God, you had to pay this woman. But at the same time, I also feel like, you know, I probably put her son through college. I mean, I did, you know, I did a good thing cuz that's a lot of money to someone. So, so that was, that was really great. And the other thing was that on the same property, I had an issue with, with the property where I actually had to Sue the, the owners, they didn't disclose something and I had a plumbing issue. And so the one thing I would say also is try to have as many knowledgeable people as you can look over the contracts.
Yeah. And you know, don't just assume that everything's done right. Just because no offense to realtors or anything, but you know, we're all human, we miss things. So we, we, I would say really just look at what you're signing, pay attention. I mean, really it worked out in my, my favor. Ultimately I actually ended up going to small claims court and I won and I was up against an attorney. And the reason was, was because the, the sellers had signed certain documents, not disclosing some of the work they had done. So, you know, you wanna be careful on both ends, whether you're buying or selling and really pay attention to, to documents.
Jesse (39m 30s): What is aside from your great book, which we'll put a link to. What's something that you are either reading now, just finish that you could recommend to listeners.
Tamar (39m 41s): I'm always reading a couple books at a time. Yeah. The one that came to me is the ed Mylet book on one more. I think it's called or the power, the power of one more.
Jesse (39m 53s): Is it a fairly short book?
Tamar (39m 54s): No.
Jesse (39m 55s): Cause I know he, I know he has like a really like teaser book, but that like jacked me up. I was like, you know, for that whole month I was just like on, I love ed Mylet all of his stuff is, is fantastic. If you, if you haven't listened to him, just, just Google it pretty intense guy. But sorry. So that book, that, that was so
Tamar (40m 14s): Yeah, that book, I mean, honestly, there's nothing really that he's saying that isn't something I've already heard. If you haven't done a lot of mindset work, then it's an extraordinary book. You should get it today because there's a lot of jewels in it. And the one thing that ed does, and I think this is partly part of the reason why you're saying that you like him so much is he really has a great way of sharing an idea and having it land in a way where you really wanna get into action and make a change about it. Hmm. And he puts together a lot of concepts that are, that are really valuable about, you know, how to make it and, and he's very motivating.
So I just, I had heard him on a podcast and I just thought, oh, I'm gonna, I've never really had a book of his. So I, I just started listening to it. And it's, it's really very good.
Jesse (40m 60s): Yeah. That's very cool. I think, I think it was in Vegas. I I've heard him at an event speaking and this one is max max out your life. So very, very head my let sounding. Okay. So the last question I like to ask every guest on the show, first car, make and model.
Tamar (41m 17s): Oh yes. This is great. A Ford escort stick shift and it was light blue. And it I'm very proud of that car because I bought it. I was 14 and a half. I saved all my money until I had $5,000. And then when I was, was 16, I got that car.
Jesse (41m 35s): I was about to say Ford Bronco. And then I realized you were from California, originally not Texas then moved to, okay. So we were gonna put, we'll put everything in the show notes where people can reach out to you, but any place aside from a Google search that you, that we can send them.
Tamar (41m 51s): Yeah. So the easiest way to get the book is just go to Tamar book.com. There's also a quiz to discover your real estate investing personality. And that is@tamarquiz.com. So that is just, those are two really great ways. And they'll take, you you'll get into my, into my wheelhouse. Of course it's in my website is wealth building concierge.com. But both of those will get you closer to me. Especially tomorrow.
Book will get you to my website and my book. My,
Jesse (42m 24s): My guest today has been tomorrow, the millionaires, her maze tomorrow. Thanks for being part of working capital.
Tamar (42m 30s): Thank you so much for having me.
Jesse (42m 39s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you like the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Jay Conner is a Real Estate Investor from North Carolina. He started his first Real Estate Investment way back in 2003. He rehabbed over 450 houses. Even better, he also developed the ‘golden touch’ in creating unlimited potentials in private money.
Completed over 52 million in Real Estate Transactions and consulted 1:1 with over 2000 Real Estate investors and is a leading expert in private lending
In this episode we talked about:
- Jay’s Bio & Background
- Private Lenders Search
- Why Private Lending
- Access Strategy
- Resources
Useful links:
https://www.jayconner.com/
https://www.jayconner.com/7-reasons-report/ - Money Guide
Dave Dubeau is a Real Estate Entrepreneur, Best-Selling Author, Speaker and Investor Attraction Expert based in Beautiful British Columbia, Canada. He began his real estate investing career in 2003 doing 18 deals in 18 months. He later switched his focus to client-first rent to own deals, and nowadays he invests in multi-family (apartment building) properties.
For the last several years Dave has been a leading authority on helping mom and pop real estate investors to find money partners and raise capital. Using his proprietary 5 Step Money Partner Formula™, Dave helps his real estate entrepreneur clients to grow their portfolios significantly and in record time by attracting investors (instead of chasing after them).
In this episode we talked about:
- Dave’s Bio & Background
- Real Estate Business Evolution
- Legal Aspect of Raising Capital
- Three Biggest Mistakes Real Investors Make when Raising Capital
- Lineup
- Resources
Useful links:
How to raise capital 101 show
https://www.raisecapital101show.com/
https://www.linkedin.com/in/davedubeau/?originalSubdomain=ca
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jessica gala, and you're listening to working capital the real estate podcast. I'm happy to introduce a returning guest to the show. Dave, Dubo a fellow Canadian and Dave was on the, a working capital podcast episode 1 0 3.
If you want to see the older episode we did about raising capital. Dave is a podcast host and creator of the money partner formula. He and his team work with mom and pop real estate investors providing done for you marketing services to help them raise capital. He's a best-selling author and speaker based in British Columbia, Canada. He began his real estate investing career in 2003, doing 18 deals in 18 months. We talked about that last time and he invest passively in multifamily properties. Dave, welcome back,
Dave (1m 6s): Jesse. Great to be here. Thanks for having me, bud.
Jesse (1m 8s): Yeah, it was a pleasure to have you back, you know, nothing's changed in the last two years, so we won't have much to talk about, but yeah, I mean, I, I thought it would be, it'd be good to, you know, we're doing another, I guess, multi or a podcast swap here and always, always great to speak with you. So I guess first how's everything going out in Western Canada? How have you been, have you been fairing over the last a year, year and a half?
Dave (1m 38s): Well, you tell, I tell you what, if people are watching this video, they can see it's been hair back for me a way back too far back. No, it's good. Good life is good. Can't complain Jesse. It's it's always good in beautiful British Columbia.
Jesse (1m 52s): Absolutely. Well, I mean, it's, it's also nice to speak to a fellow Canadian. We can talk about, you know, Canadian real estate, but it does, you know, pretty much pairs up with most north American real estate. A lot of the similarities, even when raising capital and even some of the legal nuances, but we're not giving accounting or legal advice, but I felt
Dave (2m 12s): No.
Jesse (2m 14s): So maybe a good place to start would be for listeners that haven't listened to the prior episode, which I believe I mentioned one episode 1 0 3, for those interested, you could give listeners a little bit of a background and you know, how you got started in real estate and where you're at today.
Dave (2m 32s): Sure. Well, thanks Jesse. So actually kind of grew up around real estate. My family home was one unit in a sixplex that my grandfather and father built a then when my parents split up, I was living with my mom. She was a real estate investor as well. She was a full-time school administrator and she still managed to build up a portfolio of about 50 rental units while doing that and taking care of her snot-nosed kid. Here's truly, and, but you know, like a typical teenager, I didn't pay much attention to it.
I didn't really get involved. And then I went to school, went to university, started traveling around and lived overseas for 13, almost 14 years. And actually my first little dabble into real estate investing was in San Jose, Costa Rica of all places. And what I did there, I guess we would call kind of like a couple of little pre-foreclosure deals. I was kind of a passive partner there. Just kind of put the money up for those deals that worked out pretty well. And then I, I moved my Costa Rican family to Canada, back to Canada, to BC and had to start all over again from scratch.
Hadn't been able to sell my business or I didn't have much money had been gone for so long. I had zero credit had been self-employed for so long. I was pretty much unemployable. So there I was in a brand new city wondering what the heck am I going to do? And you're too young to remember these things, Jesse, but there used to be these things called late night infomercials. And it'd be like this, you'd be up with insomnia late at night. Wondering how the hell are you going to make a living? And then you'd see this guy, come on TV and go. You too can get rich in real estate with little or no money down.
I said, perfect. That's what I got little or no money. So I said away from the course, it was some American guru and a, I got a whole bunch of at that time, binders and CDs, maybe a VHS cassette or two, I don't know, but a bunch of stuff and put this all all to work. And that's when I started doing creative real estate investing deals around 2003 in the smallest city of Kamloops. Did those 18 deals in 18 months? Sounds impressive. But they aren't where they were. They weren't all impressive deals, Jesse, by any stretch. Some of them were crappy, little mobile homes and mobile home parks and stuff like that, but they were all creative type deals.
So that's, that's how I got started.
Jesse (4m 50s): I can just see the infomercial. Aren't you tired of not making money and your job
Dave (4m 55s): There. Might've been bikini's and Lambo. I
Jesse (4m 57s): Was going to say
Dave (4m 58s): A red
Jesse (4m 58s): Furrion and five blondes on the arms. You can be rich like me.
Dave (5m 2s): Yeah. Something like that. Yeah. But it did. It did the stuff did work.
Jesse (5m 6s): Yeah. So we talked a little bit about this last time kind of starting, starting out the 18 deals that you did and you know, you'd be in the you're in this industry long enough, you know, that 18 deals can be amazing. 18 deals can be an absolute nightmare. It could be a reason to stay in or to leave the industry. Yeah.
Dave (5m 23s): Well, I left for a while. So that might tell you this.
Jesse (5m 27s): Yeah, maybe, maybe it was those 18, but I, I guess the, the background and we touched a little bit on this last time, the background was, was somewhat related to real estate. You had individuals, you know, obviously close to you that were, that showed that it's a, it's a viable place to, to build a career. And today, you know, a lot of the focus that you do have is raising capital for real estate. And yeah, I think what would be great for our listeners is to talk a little bit about how business has evolved or your investing has evolved from way back then to kind of having a niche.
I love talking to a Canadian, I can say niche instead of niche. I taught, you know, how it evolved and how you've kind of carved out a niche where your focus now has been on the multi-family side and raising capital. What did that evolution look like?
Dave (6m 18s): Yeah, good question. So I did those creative deals took a few years off, jumped back in around oh nine, 10 give or take. And I'm focused on single family homes at that point. And I was doing a different strategy. So I actually bought them. So I had to come up with down payments and all that kind of stuff after doing a couple hundred, my own steam ran out of cash, run out of credit. That's when I started trying to figure out this whole OPM other people's money idea failed miserably at the beginning.
Absolutely. Was it painful? Just even think back on that, but that's how I got started with the whole thing and, you know, talk about making almost every mistake in the book. I, I definitely did that. So yeah, I've learned, I learned a lot of things that you shouldn't be doing when you're, when you're starting to raise capital. And then that kind of transition did that for a couple of years. And then I realized it kind of came to the realization Jesse, that I don't really enjoy dealing with tenants or toilets. I'm about as handy as a foot. You know, I don't like hearing people whine about the problem.
So I decided maybe it'd be better for me to be more of a passive partner and invest passively in other people's multi-family deals. I had a good friend that was involved in multi-family. So that's how I got started there.
Jesse (7m 35s): And on the multifamily side, we're the first properties that you started to invest? Was it a more formalized thing where it was kind of roles and responsibilities were clear? Was it, or was it something that was, you know, shooting from the hip?
Dave (7m 50s): No, it was quite a formalized situation. So there, how many of us were there seven of us involved in that deal? Myself and my business partner and five investor partners in, in that particular deal. And that was a 54 unit building actually in Ontario.
Jesse (8m 9s): So on the raising capital side. And, and again, we'll, we'll speak fairly broadly here because the, the actual intricacies of, of the legal aspect of raising money are very similar, you know, whether it's the, the OSC, Ontario securities and exchange, whether you're out in BC or whether you're in the states. So, you know, you don't just go into real estate and then kind of figure out how to create these structures. So when you first moved to that, was there somebody in this group of seven that introduced you to this idea of, of raising in a structure that what we see today in Canada, a lot of times it's limited partnerships with an LP, with a number of LPs and a general partner or sponsor very similar in the states with the exception of them having LLCs limited liability companies, which we don't have up here.
Yeah. Can you talk a little bit about, you know, where, where you got that knowledge and, and how that, you know, transitioned?
Dave (9m 7s): Yeah, for sure. So the, fortunately for me, the gentlemen that I was working with, my partner on that deal had a lot of experience in multifamily. Also had a lot of experience working with other investors and he had a very good legal team. So we had everything structured properly, right from the get-go. I didn't really have to figure much of that stuff out. So I got to focus on my strengths, which were the, you know, the marketing side of things and the investor relations side of things.
Jesse (9m 35s): So we talked a little bit before the show, you've got three of the biggest mistakes that you see real estate investors re make when they're raising capital. Maybe you could speak to, to a few of those, a few of those mistakes for our listeners benefit.
Dave (9m 52s): All right, Jesse, well, these are all big mistakes that I made. This is why I'm generalizing, I think a lot. And I see a lot of people making these mistakes. The biggest one is this, this guru talk that I hear all the time, even today, which is, Hey, just find a good deal. If you find a good deal, the money will find you don't worry about. Right. So I bought into that hogwash early on, and that's how I lost a really good deal, but, you know, laziness as well for, and my philosophy has completely changed.
So now my philosophy is if you do anything, get your investor ducks in a row first and then go looking for deals, or at least do both at the same time. Right? You don't want to have one or the other. So in a perfect world for me, I would have my investors lined up and then I'd go make offers on properties. Cause then you've got so much of our confidence. You've got your mojo, you're ready to rock and roll, right? And, and you can go in, you can negotiate harder. You can have better positioning.
You can close faster because you've got the money to back you up. So chicken and the egg, which comes first, the money or the deal, I'd say the money comes first.
Jesse (11m 5s): So you're, you're cooking with oil at that point when you got the investors. So I, I can hear listeners saying, you know, lined up, what is lined up mean to you? And maybe just as a, just a caveat there, oftentimes we hear of getting a partial commitments, full commitments. Are you having people sign things? W w w what does that look like to you?
Dave (11m 27s): For me that looks like getting people to sign off, at least on an expression of interest indicating how much they're willing to invest and within what timeframe. Right? So it's not a legally binding agreement. However, anytime you get somebody to sign off on something, but they're John Hancock on a document it's so much more powerful than just a verbal commitment, right? Like, like the joke says verbal agreements worth the papers written on kind of thing. So if you get them to mark it down, that goes a long way.
And then the other thing I had to learn the hard way, I don't know if you've ever found this, Jessie not everybody's ready to pull the trigger when the rubber hits the road. So lineup more capital, more investors than you think you need. And I'd say at least a 50% margin there at least a hundred percent would be the better, because that way, when the smoke clears, then you're, you're going to be safe.
Jesse (12m 22s): If you're in a situation where you are, you're pushing money away from the deal. I think you're in a good spot. So
Dave (12m 28s): Beautiful spot. Yeah.
Jesse (12m 30s): And, and we were, you know, on our last raise, we, we did have a situation where we, we needed to make room and, and it's because we followed a bad ideology that it it's listen at the end of the day. Things happen, even if it's completely in good faith. And, you know, somebody, something happens in there with their family. Something happens with their career. You know, when I said, I was going to give you $150,000, four months ago, what that looks like today, a hundred
Dave (12m 57s): Percent. That was before I lost my job. Right?
Jesse (12m 60s): Yeah. Well, you know, it's like, you know, if it happened two years ago, a year later, you know, that was before there was a global pandemic, right? Like you can't, you can't control those things, but it's a good rule of thumb. So one of the challenges I find with people that are raised in capitals, there's this question, especially if they start once, you know, you've raised for your first dealer, second deal is this idea that you're raising for asset specific raises. So for instance, you have a property, you identify the property route there, then kind of a rolling fund.
So the challenge I find with that is you kind of, you really have to make sure everything's set up and then once a deal is there and you kind of, we're all running to get everything put together. So on that end, I think that's probably why you have this commitment that even though it's non-binding for you, is it something that it at least psychologically gets them connected to the deal?
Dave (13m 53s): Oh, a hundred percent. Get some connected, not necessarily to the ideal, but to ideal with me. Right? So there, at the end of the day, Jesse, when your investors are investing with you, a huge part of what they're investing in is, is Jessie. It's not just the deal, it's the team that's putting the deal together, right? So it's, it's that trust that's coming to the table. So that's my goal for, for our clients is to get them a number of investors waiting in the wings, so to speak kind of their investor ducks in a row, people, people that have signed off, not on necessarily on any specific deal, but on the idea of what the kind of deals are that they're doing.
Right. Because, you know, in your case, you're focusing on multi-family properties, are our clients have different, different focuses. Some of them do, multi-family some of the new burrs, single family flips, whatever it is, but their investors are signing on to that kind of deal.
Jesse (14m 51s): Yeah. I think it was had Brian Burke on the show a bout a year ago. And he called it the partnership structure. It's a trust vehicle, right. You're Dave Jibo or Jesse for golly, you know, there's, there's no investors that come in, if there's a lack of trust for the sponsor of the dealer or the team.
Dave (15m 7s): No. Like, and trust man got out of those three and in place for sure.
Jesse (15m 11s): No, like, and trust. Okay. So Dave, what was that? That was number one or the,
Dave (15m 15s): Yeah, we're having so fun. It's hard to keep track of what's going on here. So yeah, that's one of the big mistakes. The other one, again, that I made, it kind of goes in tied hand in hand with that, you know, you got to deal now, you got to raise the money for it. And that is just rushing in cold, hitting people up for cash. And, and this just brings back a nightmare for me, that that's exactly where I was at. I had this deal, it was a single family home, but you know, I need to raise whatever 85 grand, something like that for the deal.
But I only had like 14 days to remove the subject. So I had to get my you-know-what and gear pretty quickly. And that just brings a whole new sense of urgency, but also desperation. Right. And I don't come from a strong sales background. Most people don't, it's very, very few people that come from a sales background and can do the old Wolf of wall street thing and pick up the phone and start dialing for dollars. Not very many regular human beings can do that. Well. Okay. DiCaprio made it look like a lot of fun on the movie, but in real life, it's these by experiences, nowhere, nothing like that.
Yeah. So I tried that, I made picking up the phone dialing for dollars, doing those creepy networky type things, like turning every conversation into a real estate conversation, 32nd elevator pitches or commercials or whatever you want to call them. Right. All of that kind of stuff. In my opinion, just kind of smacks of desperation. Right. And it, and it's back to that whole thing. So I've tried all of this stuff and I had a deal on the go, but the challenge is you're coming from a position of weakness, right?
You need the money quickly and no matter how good that deal is, unless you're amazingly gifted actor, that desperation is going to ooze out of you. It's going to, it's just going to, they're going to smell it on you. I think in sales, they call that commission breadth, right? You just, you desperately need that sale. And no matter how good the deal is, the other person is going to be turned off by it. So that's, that's a big challenge. I see, you know, people are trying to raise money for a deal.
They're calling up folks they haven't seen or heard of for years. And the first thing, you know, they're pitching them on a deal. It almost, I don't know if ever had anybody hit you up for a network marketing type thing or an MLM type thing, Jesse, he never had that experience.
Jesse (17m 42s): Absolutely.
Dave (17m 42s): Doesn't it isn't just like it's cringy, right. It just a hundred
Jesse (17m 46s): Percent. But
Dave (17m 46s): Yeah. So we don't want to be in that, in that boat. So don't just, you know, I highly recommend you warm people up first before you start pitching your deal. So when we're working with clients, we have a whole process for this. We call it the warm-up campaign. Once we target our specific group of potential investors, we don't go in with, Hey, I got deals. If we got dough, no, the first step is, Hey, it stayed. Chances are, it's been a while since we've seen each other or connected, just wanted to reach out, say, hi, see how you're doing.
Let you know a little bit about what I've been up to. And then do a quick little recap of what's been going on in the last 3, 4, 5 years. You yourself, more the personal side, right? Not talking about real estate, not talking about markets, not talking, not trying to NLP anybody into investigating, just having a legitimate reconnection. So the way we do this with our clients, we'll do a three step email campaign, drip, drip, drip, like over a period of a week or 10 days. And the whole goal is just to get some movement, get some, some interaction, get people kind of going back and forth with you a little bit there because there is definitely capital in those connections.
Plus now it sets the stage for all of the marketing. That's going to come down the pipeline.
Jesse (19m 2s): So last time we were speaking you, you talked about kind of doing an audit on your phone. I believe, you know, looking for, you know, different or your contacts on your phone. I found that when I first started raising capital, it was, you know, your, your student network, you know, people that you knew through work there. Like when you really start to think about it, you do have tentacles that go into a lot of different areas. And it's just about organizing those. Has that changed at all for you? Or is it
Dave (19m 31s): No, we still do that process. So basically we, we want to create a list, a focus group of somewhere between one and 200 people, a hundred to 200 people that we want to laser focus in on to get started with Jesse. So what we do with our clients is we'll do a data dump. We'll take all of their phone contacts, their email contacts, their social media contacts, get them all into one place, sift sort, merge, purge, deduplicate duplicate, get it all cleaned up. And then you're probably going to start with a list of, I don't know, a thousand or 1500 people typically, or maybe even more.
And then the job is you go through that list and quickly whittle it down to a couple of hundred people that you actually do have a preexisting relationship with. Right? So these are people that have you bumped into them in the street. They'd know, you you'd know them. You could have a conversation, you know, at least that's, that's what we're looking for. Genuine connections. So that's, that's what we do with our
Jesse (20m 26s): Client. They do a stop and chat.
Dave (20m 28s): Exactly. Yeah. You could have a nice little conversation in the lineup for Starbucks.
Jesse (20m 32s): So the F the first thing you said there, it's like, to me, it's, it's a lot like dating this aspect of when you're absolutely completely needy. You have a deal, you can smell it. You can just, you get that vibe right away. And if
Dave (20m 46s): It, did you see me in my dating days? Is that what the transit sounds like? It sounds like you're spying on me,
Jesse (20m 52s): But it, it really, it really is funny. It's it does feel like it's almost like you're in high school again. And there's this aspect of when you feel, when it comes off, that you don't need that commitment. All of a sudden that you get that opposite reaction to somebody that's interested.
Dave (21m 7s): It that's exactly what it's like beautifully said.
Jesse (21m 10s): So this, so I guess just to cap off that second one, there, the point that you start to make this touch point does not have to be right when you get a deal. If anything, it doesn't hurt for people that are looking to raise capital to start reconnecting, you know, now prior, And I think one of the, one of the challenges, like you said, you know, I'm in brokerage and even, you know, even in a sales environment, I can only imagine if, you know, if somebody is not comfortable with talking or reaching out or it's outside their comfort level.
But one thing that I was told very early on was just like, you know, just bite the bullet and let people know what you're doing. And, and if real estate is what you're doing, there's, there's people that will invest with you that don't didn't know that you, you were actually investing. And I find that if you put yourself out there, you make these connections. Then when you do have a deal, it's, it's like you said, it's not a, you know, at the 11th hour, you're asking somebody to fund something.
Dave (22m 6s): Yeah, definitely. Well, and here's the thing. You come from a strong sales background. I come from a strong marketing background. And when you combine the two of them, then you're really on fire. So the beautiful thing I love about marketing is it can do a lot of that heavy lifting for you. So when you, you get the right marketing out there, what I call edutaining communication. So a little bit educational, hopefully a little bit entertaining, always with a clear call to action, never specifically selling a deal that selling people on the idea of booking a call with you.
That's, what's super powerful because then here's the, here's the difference, Jesse, instead of us reaching out, trying to convince somebody to listen to us about our deal, we use marketing to create curiosity, get them to put up their hand and ask us about the deal. That is a complete 180 and as a complete 180, when it comes to positioning as well. Right? So they want to know more from us versus us pushing our thing on them. So that's, that's my whole goal when it comes to this whole marketing thing is to try to attract investors instead of chasing after investors.
Jesse (23m 16s): Yeah. I like that. Edutaining good. Good. A little portmanteau there, Dave.
Dave (23m 21s): I, I, I wish I came up with that. Somebody smarter than me did. I can't remember who fortunately, but that, yeah, that's, that's the way to do it, edutain them.
Jesse (23m 29s): Okay. So we are on the TWA with
Dave (23m 34s): A few Eastern Canadians with your French. Look at me. I got the French last name, barely put three words together and fresh.
Jesse (23m 41s): You know what? I got
Dave (23m 42s): This Italian guy talking to me.
Jesse (23m 45s): I appreciate just being next to Quebec. They're the only ones that get my last name, right? When they're on a national bank or something. He still, yeah. Okay. So, all right. That's number one. And number two, third biggest mistake you see,
Dave (24m 0s): Oh man, I'm sure you see this all the time, Jessie and that is people kind of spraying and praying, right? So they think anybody with a pulse and a checkbook could make a good investor. So they start posting on Facebook. They're posting stuff all over the place. They're soliciting people in these public forums. And again, caveat here. I'm not a lawyer. I'm not giving legal advice. I'm a real estate guy and a marketer. That's, that's why they, but my understanding, and I'm pretty sure it's yours too, is that's that's illegal.
We're we're crossing, crossing the line with the good old Ontario securities commission, BC securities commissions, securities, and exchange commission in the states, if you're proactively soliciting investors in public forums, right. Especially strangers people that you don't know. So that's a big mistake back in the day, when newspapers were a thing, I'd see people putting in ads in the classified section and the Western investor and all these different places. And, you know, they might get away with it for awhile, but once the law comes down on you, that can be a very, very stressful, painful, and expensive experience.
So again, that's why we're working with clients, just helping them get started with raising capital. That's why we laser focus on leveraging their existing network first.
Jesse (25m 19s): Yeah, I think for Canadians, I think we have the national instruments. If anybody's curious to know what our equivalent is on the security side, but you know, in the states, I'm sure some listeners would be like, well, I saw, you know, I saw different people, advertise and grant Cardone, these different, you know, they're, they're looking at very specific exceptions within the law. And I, I, I think I'm going by memory reg, reg, D, and the states where if you're investing to certain individuals, if it's all accredited investors, if there's are, there is advertising, you can do.
But the average person, when they're just throwing everything out there, you really gotta be careful about that because, you know, I venture to guess the OSC and BC secure, I think it's BC securities commission. Is that right? Or is it, yep. I think that they might be a tad friendlier than the sec, but I, you don't want to get in the cross hairs of, of either,
Dave (26m 12s): Oh man. I, I know of a company in Alberta that had a full-time league. Like they had a legal department in-house they had, they, all their sales guys had to get the securities, whatever Canadian securities course thing and all that kind of stuff. They got shut down by the Alberta securities commission for six months. And their whole business was raising capital that's. That's how they made a living. That's all they paid the bills, they got shut down for six months for an investigation at the end of the six months.
They said, oh, it looks like you're doing everything right. You can go back. Continue. Yeah. Well, yeah, no, they're dead in the water after six months. Right. So
Jesse (26m 55s): Sham down a, a restaurant for a year. Same exact you're good now.
Dave (26m 60s): Yeah, exactly. So, I mean, and that was a full-time legal team and a multi multimillion dollar company. So think about for you and I are a little mom and pop real estate investor. I mean, yeah, just Laura getting a lawyer and trying to do anything with that bang you're down 10, 20, 30 grand in no time.
Jesse (27m 20s): Yeah, for sure. And that was one of the things for, for us, you know, we started with, you know, although you pay for it, we started with the solid legal team and you know, one nice thing about being in the industry is we knew a lot of people on that side, real estate or, or syndication or securities lawyers where, you know, you make sure you're doing everything correct. Okay. So those are the three. And, you know, once, once you have investors or you kind of are, I guess, people that you're educating on this kind of stuff, once they kind of have a handle on those aspects of investing or passive, are there any other ones that during the process, once you have acquired, I'm thinking from an investor relations standpoint?
Cause I feel like a lot of times there's conversations about raising capital and you finally do, it's great. You, you acquire the place, but then there's this whole other business where sometimes your personality type is great for raising capital, not so much for asset management,
Dave (28m 19s): Right? Yeah, definitely. Yeah. That's, that's a big hiccup for a lot of people, they get off to a good start and then the communication just kind of dries up. So I think, you know, and, and we work with a lot of what I call mom and pop investors, just getting, going, doing joint ventures and that sort of thing. Right. So what I always recommend to people is treat your investor. Even if it's your brother treat it as if it's a complete stranger and better yet I'm an accredited investor.
So ask yourself, you know, would an accredited investor want the proper legal paperwork? Yes. So make sure you've got the proper legal paperwork, but an accredited investor get independent legal advice. Yes. Make sure your brother gets his own independent legal advice. Would an accredited investor want regular reporting? Yes. How often quarterly semi-annually, whatever it is, then do the same thing. Right? So excuse me, Jesse. I came down with a little something here, so sorry for hacking on your shelf, but that's, that's the whole thing, right?
You gotta, you gotta have that communication, but you need to decide upfront in conjunction with your investor. How often did he want to hear from me? Because what I found in, in real estate investing as well as a lot of people are on the analytical side, so they can overdo it with almost too much communication, too much data, too much information when the investor really doesn't want that much. So you got to find that happy balance with your investor partners, and maybe you start off with a quarterly meetings for the first year back it off to every six months, the second year, and then keep it going like that, depending on what you agree with your investment partners.
Jesse (30m 1s): Yeah. I think it's good. I mean, in any relationship, any business relationship or, I mean, just in general setting expectations at the outset is, is a helpful because whether the there the right expert expectations or the wrong it's people get anchored to them. So you want to make sure that you're not, you know, setting expectations that you know, that you can't deliver on, or you find out that you can't deliver on. So being, you know, being careful, careful, and prudent about that. I think that makes a lot of sense.
Dave (30m 27s): Yeah. Good point.
Jesse (30m 29s): All right, Dave, we did a little bit more of a power round today. So I think we're going to have to chat about private money and next time I see it, because I think I was saying before the show with interest rates where they're at, I feel like that is going to be, it's going to start to be an area where we're going to see a lot more activity. We're already seeing it on the brokerage side, whether it's in the form of hard money loans or vendor take-back mortgages. So definitely should, should schedule a time to talk about that maybe in, in the fall.
We'll see where we're at.
Dave (31m 1s): That sounds great. My friend,
Jesse (31m 3s): So Dave, for our listeners, aside from Googling yourself or looking in the show notes here, where can listeners get in contact with you? See what you're up to?
Dave (31m 12s): Oh, thanks Jesse. So I'm really excited because I'm launching a brand new podcast. It's called the how to raise capital 1 0 1 show. You can find that wherever you like to listen to your podcasts and the first nine episodes of the show are a mini course on how to raise your first six figures in a matter of weeks, your first seven figures in a matter of months, even if you're just starting from scratch. So again, that's my new, not my new show that I'm pretty excited about the how to raise capital 1 0 1 show.
Jesse (31m 45s): My guest today has been Dave Dee, both Dave, thanks for being part of working capital. Again,
Dave (31m 50s): My pleasure, my friend. Thank you.
Jesse (31m 59s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Mark Reisman is a Founder and CEO at Empower Living Management and Chief of Acquisitions & Asset Management at Touzi Capital.
In this episode we talked about:
- Mark’s Bio & Background
- Senior Living & Multifamily Market
- Acquisition Process
- Management
- Underwriting Deals
- 2022-2023 Real Estate Market Outlook
- Geographic Areas for Investment
- Vetting Deals
- Mentorship, Resources and Lessons Learned
Useful links:
Senior Living Foresight https://www.youtube.com/c/seniorlivingforesight
The National Investment Center for Seniors Housing & Care (NIC) https://www.nic.org
American Seniors Housing Association (ASHA) https://www.ashaliving.org
Linkedin https://www.linkedin.com/in/mark-reisman/
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name is Jesper galley and you're listening to working capital the real estate podcast. My guest today is mark Riesman. He is the founder and CEO of in power living.
He is also the chief of acquisitions and asset management for Tuesday. Capital mark. How's your day going today?
Mark (38s): Going well, glad to be here.
Jesse (39s): Well, thanks again for joining, joining us today. I think listeners will get a lot of value. It's kind of hearing your background and story in the industry and where you specialize, but like we do with all of our guests before we kick it off, maybe you could give us a little bit of a background on your path in real estate where you got started and how that journey has been.
Mark (1m 2s): Yeah, it sounds good. I, I grew up in Los Angeles, went to school at UC Santa Barbara and we didn't have too many practical majors there for business. So my path was to go the emphasis in accounting from the biz econ major and got the main recruiters out of that program were a big four accounting firms. So from that I went into, I worked at PricewaterhouseCoopers for about five years plus some internships and, you know, spent a lot of time in accounting and finance have always had the entrepreneurial mindset though.
You know, I on real estate, after living with my parents for a couple of years to save up, I did buy a condo and rented out a couple of those bedrooms. And then, you know, from there just acquire more. So, you know, they had a house that I rented to. Students had some fourplexes, couple of partners in those here in Dallas, but Pricewaterhouse Coopers did bring me out here to, to Dallas, Texas. And I've been here for that about 16 years, a long time during that time again, you know, a lot of accounting and finance was controller of a restaurant fry franchising company.
Also I owned, well, I started doing triathlon and it's kind of spiraled out of control before you knew it. I owned the DFW tri club. And so I bring that up because one of my, my club member slash friends was in the club and we're on a triathlon trip. And I was pretty, pretty bored out of my mind at again, an accounting controller and, you know, with my real estate background, he was the CEO of a property management company for senior living.
And so he needed someone with my skillset and I was ready for something new. So I joined, we had 25 properties at the time, including independent living assisted living memory care, and then a couple of multifamily. And so, yeah, it was, it was a lot of fun time, a ton of learning going on during that time, especially, you know, the first eight months I got my legs under me, my friend ended up leaving to focus on his asset management business.
There's a little bit overlap with our clients. So I, I failed in the role as CEO CFO, a few months later, we lost our COO. And so rather than just hire someone quickly as the COO, despite my limited senior living background, I was the interim COO for about a year till we figured out what we needed out of that position and hired for it. So again, you know, running assisted living and memory care at that point, relied heavily on a really great team, you know, again kind of learning very collaborative team focused, but you know, ultimately I had to move on.
So, you know, summer of July, 2020, I left, I started to try and acquire my own communities and build it from the ground up. And so a couple of things happened there. One was, I Googled masters in senior living and I found a program at USC through their Leonard Davis school of gerontology, got to take my time getting that.
So a couple of, you know, just this last may, I got my master's in senior living hospitality. They had a neat program with Cornell to get the certificate in hospitality from Cornell as well. And then, you know, on the acquisition side I was chasing some deals. I did partner up with an Tang at Toesy capital and he, you know, we were going to partner on some deals, nothing ended up working out, but when I did have something ready to go, that did work out Toesy was very busy at a time with Bitcoin mining, oil and gas and some other, you know, very interesting deals at the time.
So, you know, I, he, he did invite me to be his chief of acquisitions and asset management to help with his large multifamily portfolio, some senior living that Toesy has as well. But for this deal here in a suburb of Atlanta, you know, I, it's still a good deal. I ended up bringing in another partner Romena with aspire ventures and yeah, great.
Yeah. You know, we're off to a couple of a couple months in the books here and after the fund start,
Jesse (6m 22s): That's great. So a couple things there, the, the first one, the senior living aspect, you know, it's kinda, it's I always look at it as the different sub categories of multifamily. What was that like getting into just that world, the senior living real estate? How, how was it different than, you know, compared to multi-family deals that you've done? I'm sure there's, there's nuances there that, that you don't think about when you're just doing straight up multifamily or, you know, either other asset classes where you're not really, there's no operating business aspect to them.
Mark (6m 59s): Yeah. Great question. And multifamily. I love multifamily. Okay. I love senior living there. They're great. And they they're there parts about each of those that I think they can learn from each other. And so, you know, when, when there are opportunities to blend them, we jump at it. So for, for multi-family, you know, if you're doing value, add the business plan is typically, you know, walk in, spend some CapEx, do some energy efficiency, upgrades, you know, maybe there's some kind of, you know, marketing or management, but you know, there there's maybe five or so people working there.
So it's not a big operations. It is real estate with some know-how. And so, you know, when that, when you then think about senior living, it is a very, you know, operations heavy it's, it's a business. You might have some of what I just mentioned from what my family, but more often than not the opportunity lies in the operation side. So in order to, you know, have a successful operations or investment in this case, you need to have really great partners who really know what they're doing.
And it, you know, I think I, I got pretty lucky the way that I got in, cause I kind of stepped into this, you know, great group of folks that I didn't have to, you know, I, I don't know. Yeah. I'm not the person that is going to be a caregiver. It's not in my nature, but my nature is how can I support my team so that they can self-actualize and when they self-actualize, that is reflect, you know, that rubs off on, on the residents and, you know, we, we have a better chance of them self-actualize so, and that that's really my place.
How can I best support the team who, you know, the boots on the ground or the folks supporting them.
Jesse (9m 8s): And in terms of the actual process on the acquisition side, is there a different approach that's taken? Cause it's, it's more of a, or somewhat similar to a private equity deal as opposed to a real estate deal, you know, what are the, some of the major differences that you find when you're, when you were acquiring? Cause I could imagine, you know, there's at least two things that you're looking at, you're looking at the real estate investment, but you're also looking at the operating business, you know how you're going to continue that with you, whether there's an operator there, if you could talk a little bit to that.
Mark (9m 40s): Yeah. So everything that you do for multifamily, you do for a senior living and then you, you know, so all the comp, the, the comp comparisons, the inspections all the same, you do add more inspections, there's a lot deeper audits, you know, residents records and it, you know, so, so th so there's more, and then, you know, from w with my accounting and finance background, you know, I, I usually start with the spreadsheet and then, you know, do things make sense?
Based off the hundreds of deals, I've looked at different areas, parts of the country, you know, is there room to increase rent? What do we have to do to increase those rents? So, so a piece of that, again, is similar to multifamily, but since there's only a handful of senior living communities in a five, 10 mile radius, you can kind of pinpoint, you know, can a market support, you know, the feasibility of, of what we're trying to do here.
The, again, going back to the spreadsheet, things have been crazy lately with, with labor costs. And so, you know, for independent living or the subsets of active adults, senior apartments, there's not a huge operations component. It is very similar to multifamily. You get to change the marketing. Maybe there's some extra activities. Those aren't very expensive, but when you start to add food for first, he add food.
So in some independent living may not have the some may. So maybe you're talking an extra, you know, five to seven people. When you had food, how many meals a day are you going to provide some independent living? Maybe it's, maybe it's just continental breakfast. That's not it, a large operations maybe have that plus one meal a day, or maybe have three meals a day, seven days a week. So there's, there's a spectrum there when you get to assisted living and memory care.
Yeah. You have, you know, three meals a day snacks, you know, seven days a week. And then with the assisted living and memory care, you add in the care or wellness component. So, you know, maybe we, we like, we, we usually have a registered nurse and RN in charge of that, that department and that you don't always need it. And then you have care team supporting those efforts, the ratio that you have for assisted living.
We typically underwrite 12 and a half residents for one caregiver for assisted living. And the memory care is usually about eight to one. Ultimately you need to provide a safe environment for them to, you know, for people to leave. So if you have a lot of people who are what we call high acuity and need a lot of extra support, maybe those re ratios shrink a little bit, but then you can also potentially charge more for, for those extra services.
So from a marketing perspective, some communities will have a all inclusive rent. So those rents are a little higher. Yup. Others charge a level of care. And so if you don't need much, you're not paying as much. If you need a lot, you pay a lot. And that's, I like that the most, I think that's fair for, you know, for everyone, if, if you're just charging for what you use, but you see it on.
Jesse (13m 35s): Yeah. That makes sense. And in terms of the management aspect of it, you know, when you go to buy multifamily, you know, depending on the philosophy of the investor, you could assume the current property management, you might have vertically integrated multi management within your firm. You might outsource it. Is it somewhat similar on the assisted living or senior living side of things, or is that something where you see majority of it's already in house and, you know, the purchaser would have those capabilities?
Mark (14m 8s): Yeah. I think it's similar to multifamily where, I mean, if it depends on the purchaser, so if you have a great operating team already in house, or that you work with, that you partner with, you know, even if you acquire a great operations, you may still want your people in there versus other purchasers who don't, and they, you know, if you want to get into market, or if you're already in a market, you don't make your partner, you know, then you can acquire that, that building or community take that the operator and then kitchen to go manage your other stuff.
So, yeah, the possibilities are similar.
Jesse (14m 54s): So in terms of the, the multi-family side of things, or I guess you, you could, you can answer this on both on both asset classes or, or, you know, subcategories, the underwriting process that you have done, or you do for properties that you're looking to purchase a lot has changed in the last 12 to 24 months. Has your underwriting change, you know, within the last year, and if so, what aspects of the underwriting?
Mark (15m 22s): Yeah, it's, it's getting much, much more difficult to get bills to pencil. Labor is, is the big, the big one for assisted living memory care. And then, you know, with interest rates creeping up, it, it is getting tough to underwrite stuff. I have quite a bit in the pipeline and I'm just not jumping on, on things right now. Like, you know, previously, so, you know, operating margins are, are key because you can get deals to have a return, but then, you know, if, if you're only doing a 20% or less operating margin there that comes with the higher risk.
Yeah. So previously before the pandemic, when I, when I was looking at a mix, you know, AOL memory care product type, I would aim for about a 35% operating margin, you know, 30% is still acceptable, but these days it is hard to get to 25%. You know, I, I do think, you know, ultimately with inflation, yeah, costs are going up, but we're also able to raise rents, but you can't do it right away.
You have to ease into it. You have to, you know, really create a story behind it. And so, you know, being, being sensitive to folks who might be on a, an income that, you know, it, it's not going to change much right now, if, if social security is increasing, like it is these days, I think it was just 5.9% recently with their Cola adjustment. You know, that that's something that I think is fair to pass on because we're now spending more to, you know, bring the people into, to help provide the care.
So, but it's, it's a open conversation with the folks that, you know, you're, you're, you're renting with you
Jesse (17m 31s): And has the structure on the debt side, has that on the debt side, has that changed in, you know, in light of the fact that, like you mentioned, there is quite a bit more inflation. The question of whether it's something that persists, I guess, is a somewhat of an open question, but yeah. On the debt structure side has, has your view on debt change given the environment that we're currently in?
Mark (17m 57s): So I haven't, so we closed on our AOL memory care community May 2nd. I don't have another example that is ready to pitch and chase. So I have seen a handful of multifamily, and I know that, you know, lenders are coming down on their LTV. You know, obviously like if, if you want a rate cap, those are th the, the cost of that is, is very expensive, you know, deal that we just closed on multiple 319 units in, in Houston multifamily.
We had the lender retrade us the night before lowering our loan amount by 3.3 million. And, you know, the w we did have an interest reserve from them. We bought a two year rate cap, and then instead of the third year rate cap, we just put cash in the bank for a reserve. So, you know, it's still the, the deal is still pencil. And luckily we're able to still close on that deal, but it was, it was a challenge.
Jesse (19m 15s): Yeah. I know it would be somewhat different for markets like I'm, I'm in, you know, either Toronto, Vancouver, New York, San Francisco, I, of these really expensive markets, they here operating margin 25, 30%, I guess, if you could kind of spin that a little bit more on the side. I oftentimes we'll S we'll think of it. At least the metric we use oftentimes is, is our expense ratio. You know, w what portion of, of our income is going to expenses, but we're, I mean, 25, 30%, that would be a very big challenge to find.
Are you finding that on the multifamily side, that your expense ratios or your
Mark (19m 54s): Yeah, no multifamily, you know, you're 50%,
Jesse (19m 57s): 2%. Yeah.
Mark (19m 59s): And even independent living still, if it's 150 unit independently, you know, we're still shooting for that, you know, 50% range, you know, can we go to 45% sure. But, you know, for as, as heavy as operations are now, you're still pumping out a great NOI if things are going according to the business plan and, you know, but, but then the cap rates are different, right? For the lower, for the lower operating margin, the cap rate increases because your risk is higher.
And so, you know, for multifamily, if you're running underwriting for 4%, 5%, you know, active adult, you're looking at 5%, generally, this is general writing. It's different for every market or unique situation for each building, but independent living, you know, maybe it's 6%, if you're adding in, you know, extra activities of a van or bus to transport people, a meal for assisted living rule of thumb is generally been about 7%, you know, can you go lower?
Sure. Can, you know, average, I'd say a seven memory care, seven to 8%, and then skilled nursing is a complete anything that I said today previously excluded skilled nursing. Yeah. But you know, those cap rates, you know, maybe it's 10 to 12%.
Jesse (21m 34s): Yeah. You're going to need that return. So in terms of the, you know, the, the environment is the environment. I mean, it's really the, there's certain things that we can de-risk and some things we can eliminate others, we just have to adjust to, or mitigate, or, or try to, in terms of the way that you're looking at the next year or two years without having a crystal ball, obviously, you know, what, what is your general view of this, the state that we're heading in from a real estate perspective, you alluded a little bit to, to rental increases, you know, over the longer term, anything else that you think that is coming down the pike for us?
Mark (22m 14s): Yeah. I'm not, I'm not gonna attempt to, to, to forecast that publicly. I will say that, you know, if you have in senior living, if you have, you know, good operating team and you stick to the fundamentals that, you know, if there is a downturn, you know, it's gonna, it's gonna make it very difficult for people without good operations to survive. And that'll give us more opportunity, you know, multifamily, I mean, you know, things that we'll be looking at our collection rates, you know, it's, I think it's been a big issue for, for multifamily, especially if you're in C class or B senior living.
I think, you know, there, I like to say senior living is recession resilient. It's not necessarily recession proof, right? You're not completely missing the exposure because if someone is investigating the stock market and the stock market crashes, you know, there goes their savings. If housing prices crash and now, you know, someone who's, who's retired and looking to move in was relying on the equity in their house.
Now there's less available or none. If there's an adult child, he's supporting the parents and they lose their job. Okay. So, but you do have, you know, it's not all doom and gloom because a lot of those folks, hopefully they're invested in something more conservative. There is some kind of savings, or, you know, a pension that is immune to those types of drops. And so, you know, do we fare better than multi-family in the downturn?
I think so. It's, I've seen data in the past that, you know, we, we do perform better. Will that continue to be the case? I hope so. We'll see.
Jesse (24m 15s): Yeah. I mean, you, you raise a good point with the, the aspect of rent that, you know, all things being equal, the asset asset prices or inf asset, excuse me, price level, rising inflation should download into rental rates being higher, you know, so that typically if I hesitate to use the word hedge, but if you look at real estate as partially hedging, or at least being like you said, resilient or resistant to inflation, it's that downloading of, of rent to our customers or our, you know, our tenants.
And on that note, on the asset price side of things, I think we've all regardless of the market, you're in, we've seen some crazy prices for real estate cap rates getting compressed and compressed and compressed. What I see in our market is owners vendors. Basically they haven't, there's still a big disconnect between where they think the valuation is of their properties and what the market's willing to pay. Is that what you're seeing and, and w you know, what, what do you think is the outcome of that?
Do you think that owners would, you know, eventually they, they see the tea leaves and they, they have to adjust, or you think there's just going to be a lot of vendors that are holding properties.
Mark (25m 30s): It's going to be all of the above. You know, I there's owners today who are now lowering prices or lowering expectations, you know, when we got Retraded on the multifamily, the, the seller worked with us on that. And so, you know, then we didn't ask for a hundred percent of the difference, but, you know, it is a shared risk. And so, you know, it depends on the tolerance of the individual sellers for each, each project, whether it's multifamily or senior.
Jesse (26m 4s): And is there a, a geo geographic area that you're looking to invest, or are you, are you, are you just picking deals based on, on the fundamentals of those deals?
Mark (26m 15s): Yeah. And so, since I'm in Dallas, it's easy, you know, two hour flight to a lot of parts of the country, you know,
Jesse (26m 22s): Level of landlord friendly parts of the country.
Mark (26m 26s): Right. And so we like, we like the sun belts, you know, my rule of thumb is generally about two hour flight now, would we, you know, we did look at stuff in the Midwest that was just beyond that, but it, it came scale. And so, you know, if we're looking at a portfolio that can support adding a team member, who's local, you know, then we have someone from our operating company in power living in that, in that town, you know, would I, I R or my COO still visit there.
Absolutely. But, you know, we wouldn't be kind of primary. We'd have someone from our network that would, you know, be full-time in that area.
Jesse (27m 14s): Yeah. That makes sense. So just want to shift gears a little bit here. So you, you are also an investor as a limited partner in real estate deals. I think there's, there's a lot of individuals out there. I know there's listeners, I've gotten emails before that they don't, you know, they're not going to be the general partner, they earn a good income, but they are maybe busy professional individuals from the LPs point of view, when you're looking at vetting, these deals, you know, what are a couple of the high level items that, you know, it will be the first thing that you look at when evaluating
Mark (27m 49s): Yeah. You know, especially the work I do with, with those, you know, it doesn't matter whether your LP, JV partner, what it comes down to, you know, knowing your operating partner. Yeah. So, you know, to the extent that you can do really great due diligence on your partner, you know, whether it's, you know, asking them a lot of questions, seeing a lot of case studies, you know, they, you need a great operating partner if you're an LP and you're looking to invest, you know, do you trust the sponsor?
And then, you know, so, so participating in the webinars, hearing all the work they did in the background. Yeah. I, I think that goes along with anything that you do, right. I'm one hand kind of going back to our earlier topic you were talking about. Yeah. I, I, I don't really invest anymore in the stock market. I know I should, to me, there's just, there's a lot of, there's a lot. I don't know. I'm not the expert there, someone to help manage that for me.
Sure. Can I invest in the ETF? Sure. But there's, there's a lot that I can't control. And so for me, I I'm much heavier invested in, in real estate. There's still stuff I can control, but I can control a lot more and I have inside information. Right. And so,
Jesse (29m 27s): And it's not illegal.
Mark (29m 29s): It's right. Exactly. Yeah. So I, you know, when I, when I think about investments, so you do you want to be diversified, right. And so, you know, if you're thinking about senior living as a diversification tool, it's great. He did need to do a lot of research. First, you should attend webinars events and, and, you know, understand kind of the background behind stuff.
Other than, you know, what we hear a lot in the media is, oh, a silver tsunami coming, you know, this big wave of, you know, the baby boomers are coming and it's true. But, you know, by the way, silver tsunami is a little derogatory for talking about our older friends here. But, you know, th the aging difference in the amount of caregivers, potential caregivers to older adults is going to be shrinking significantly here over the next three, four decades.
And so, you know, demographic wise, there's, there's compelling reasons to look at this as a different diversification tool, but do your homework first start to meet people in the industry?
Jesse (30m 44s): Yeah. We were, I was talking with a couple of colleagues yesterday about the diversification within the real estate domain, because there's this assumption that if you're just in real estate, that's just one bucket, but, you know, as you know, the hospitality, industrial office, multi Raz, and then those get chopped up even further. And I think there is a, you know, there's an argument that can be made that. Yeah, sure. It's you can diversify more in different asset classes, but it seems like your philosophy is very similar to mine. And that I know enough to know what I don't know.
So when somebody is talking about, you know, investing in a mine in, in the Midwest or Western Canada, I, I, you know, for me, unless, like you said, you have an expert in that area that you trust, I'm going to stick to what I know. I think the other nice thing with real estate is you seem like a level headed guy, mark, but for us a little bit more impulsive people, you know, we can't just press a button and sell, you know, seller assets stock. Market's definitely one of those things where every study I've seen on this topic shows that people get in and out of stocks way too much.
And their transaction costs are really what would start killing the returns.
Mark (31m 52s): And that's where technology is, is so great. And I feel like w what is it? Would it, it wouldn't be an NFT, would it where, you know, instead of having, you know, your, your LP investment going onto a piece of paper and sitting there until, you know, an event that, you know, you then, you know, sell your piece of paper when you can turn it into coin and then, you know, trade off that, you know, it might increase the transaction costs a little bit of, you know, getting it done.
But I think long-term all these escrows are going to turn into, you know, the, the word is escaping me right now, but, you know, going there's might be a part, we edit
Jesse (32m 46s): Sure. A we can edit something. I think I like, from my perspective, it's this aspect of, you know, starting to treat this stuff like credit cards, or, you know, this one, once you make it frictionless, I think for me is one of the, the, the challenges for depending on the individual. But yeah, I think, I think the aspect of real estate for me is that fact that there is a process. There's a, there's a kind of an implied count to 10 when you're thinking about being impulsive with real estate.
Mark (33m 17s): So actually, okay. So tokenize, that's what I said. Oh
Jesse (33m 20s): Yeah, absolutely.
Mark (33m 22s): So when we start to tokenize real estate, I think that's going to help free up this, you know, the ability to liquidate our investments much easier. So, yeah, that's, that's very interesting. And I know some groups that are starting to work on that as well,
Jesse (33m 41s): Right on, well, mark, we're coming up to the time here. There's a couple of questions we'd like to ask our guests before we wrap up, and then we can connect people with yourself and just basically give them a somewhere to go online. So if that works for you, I'll kick it off.
Mark (34m 0s): Yep. Sounds good.
Jesse (34m 2s): Awesome. What's something mark. And your career now that you know, that you, you wish you knew when you were first starting out, whether that's in senior living or just a real estate in general,
Mark (34m 15s): That's tough. I mean, certainly, especially in audit where I got to see all different types of days and, you know, and the inner workings of, of these big companies, small companies, I, I really appreciate the amount of diversity I've had with my background, but man, I also see folks who who've been in senior living this whole time and, you know, the level of that, the, the speed of how they've gotten to where they are today is, is great.
So I, I'm not going to say that I have any regrets. I think it's been a fun journey and I like where I'm at today, but it would be interesting to know if, if I had known about senior living at the time and, and focus on that from the beginning, you know, were how, how things be different. Oh, well,
Jesse (35m 7s): Yep. A couple words on mentorship, your view on mentorship and how important is, is something like that for somebody getting into our industry.
Mark (35m 17s): Oh man, it's, it's huge. And, you know, especially since I just wrapped up getting my masters at USC in senior living, you know, from that I learned about the vision center, which is a leadership development program that we're trying to get, get great people into the industry and giving them a pathway for growth. And so, you know, the, the program programs that we're doing at empower living are, are similar to that, right? We want to empower our employees or we call them team members to give them a path for growth.
And so we're, we're, we have, we're, we're working on partnerships with the local colleges, if there's gerontology programs, especially, you know, just ways that we can help develop them. So that'll help us attract top people, people who want to grow, who have growth mindset. And so we think, you know, that's just gonna continue to be a, something that is mutually beneficial. So, so it's very important.
Jesse (36m 23s): That's great. A couple of resources, one or two that you could recommend that could be a podcast. You're listening to a book you're reading a for listeners,
Mark (36m 33s): I would say senior living foresight is very interesting. And you know, Steven ran is this, he's been around the industry for awhile. He's got a lot of views and he, he challenges the industry. So it's very good. And he's got, you know, he's got a, a podcasts, there's a, what's it called and, you know, emails that come off.
And so it's, it's fun to listen to that senior housing news and McKnight's both have very good news. So you're staying up to date with that NIC NIC national investment center is, you know, my go-to for, you know, learning trends in the industry. And then I'm also a member of Asha American senior housing association, which is a little more on the advocacy side, but great data as well.
So, you know, those are combined, I think, you know, w what I do to keep up and yeah, I think those are good sources.
Jesse (37m 57s): Yeah. We'll put a, we'll put the links in the show notes. All right. My favorite question, first car, make and model.
Mark (38m 3s): I can't tell you that because that's like half of my security questions, but they don't make that car anymore.
Jesse (38m 9s): That's amazing. We've never gotten that one before, but, but I respect it.
Mark (38m 15s): I will say it was baby blue with blue Huck hubcaps and blue vinyl. And I inherited it from my grandma.
Jesse (38m 23s): Well, you're, you're, you're a classy guy, mark. I could tell that already mark, for, for people that want to learn more about yourself or senior living or the companies that, that you're associated with, we send them my guest today is Thank you so much for listening to working capital the real estate podcast.
I'm your host, Jesse, for galley. If you liked the episode, head on to iTunes and leave us a five star review and share it on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.
Kurt Uhlir is a globally recognised marketer, operator and speaker. He has built and run businesses from startups to over 500 million in annual revenue, assembled teams across 6 continents, has been part of a small team leading an IPO ($880M), and participated in dozens of acquisitions. Kurt serves as Chief Marketing Officer for Showcase IDX, which has helped real estate agents and brokers bring more than 3 million visitors to their websites in the past year.
In this episode we talked about:
Kurt’s Bio & Background
Differences between Residential and Commercial Sites
Implementing Marketing Strategy Approaches
Lead Magnets
Building Digital Strategies
Common Mistakes in Marketing Strategy
Building a Team
Upwork
2022-2023 Marketing and Business Development Trends
Importance of Consistency
View on Mentorship
Resources and Lessons Learned
Useful links:
Book “Deep Work: Rules for Focused Success in a Distracted World” by Cal Newport
https://www.linkedin.com/in/kurtuhlir/
https://kurtuhlir.com/
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time.
Jesse (23s): Ladies and gentlemen, my name's Jennifer galleon, and you're listening to working capital the real estate podcast. Our guest today is Curt EULAR. Kurt is a globally recognized marketer operator and speaker he's built and run businesses from startup to over 500 million in annual revenue, assembled teams across six continents. I've been part of the small team leading an IPO 880 million and participate in dozens of acquisitions. We're talking today about real estate coaching marketing, and just generally topics regarding real estate as we normally do on the podcast.
Kurt, how's it going?
Kurt (56s): That's great. Thanks for having me.
Jesse (58s): Thank you for coming on. I appreciate you taking the time out of your, out of your day for our guests. What we typically like to do is a little bit of a background rather than me. Just kind of reading things out. Maybe you could give a little bit of a background on how you got into this world of real estate.
Kurt (1m 15s): Yeah, I, I've always been a kind of entrepreneur, an operator, you know, at, at heart a little bit came from family, but I mean, like I started two legal entities when I was 14. One of those is still running today. Now it's only an eight figure a year business, but oh, sorry. It is a seven year figure a year business. It was an eight figure business for about 10 years, which was really good, but I tend to always be involved in myself, starting side hustles that become decent sized companies or helping others with that. And so kind of across almost any industry.
So I was at a company called Navteq became here technologies. If you've ever used a, a garment device MapQuest back in the day, you think about ways or anything that companies does 90% of all that mapping and spatial data globally and all the places that worked from, from anything in, in, in any of our real estate industries to GIS, to navigation, video games. I did that for 10 years and actually ended up finding my way about five years ago into a real estate where I'd built up all these new marketing channels that like we use today, like influencer marketing and social media marketing, and had an opportunity to come look at some stuff and, and, and more on the residential side.
And that's broadened a little bit more now across, you know, the, the broader industry, but it's like, man, it came in and it just like, it feels like such a pure form of entrepreneurship to me.
Jesse (2m 36s): Yeah. Fair enough. So from kind of that beginning to, to where you are at today, has that changed? What, you know, what, what are you doing right now and, and, you know, how does that relate potentially to marketing and real estate marketing generally speaking?
Kurt (2m 51s): Yeah, so I invested in a couple of PropTech companies, probably back even like eight, nine years ago, but five years ago I came, came into and ended up leading a lot of showcase. What's known to showcase IDX. So the home search primarily on the residential side and actually the only home search that consumers choose over Zillow. So our partners are web developers, agents that are building agent websites so that they, that agent grows their own businesses. It's great to have a sub-domain website from Keller Williams or Remax or ESP, but, but when an agent changes brokerages, like that's their brand, like you should have your own site.
That's what showcase IDX does. But about three years ago, the company was acquired. It's still a completely separate entity, but it was acquired by ESP roll holdings that owns exp Realty. So that's given me a much broader view and exposure into other parts of the industry on the commercial side global and a lot more, which I had had on the showcase IDX side, but a lot more into the, the, what that looks like from an investor perspective, because a lot of agents are investors themselves, but either way, most of those investors, especially those syndicating deals, they're not an agent they're working with one very often.
So that's been very interesting is that kind of gone back and realized how much showcased IDX grew from, from on the, on the investor side that I just wasn't, it wasn't aware of. I just thought people were kind of building websites and not realizing the big difference in focus when you're an investor or light commercial versus just pure residential.
Jesse (4m 14s): And what would that like, what, what would those differences look like between say residential and the commercial side?
Kurt (4m 21s): So like on the, on the pure commercial side and a bigger commercial, I mean, we, you don't have IDX, you don't have pure home searches like that. You're working with, you know, much larger firms often, but there's so many people that I found that were actually specializing in light commercial where it's the same, it's actually in the same feeds that say showcase IDX has from the residential side. But a lot of times people are building sites, just only showing those light commercial properties or what I find. I tend to find it a lot more than was people that were, they were doing residential and they found a way to really add like a one or two X multiple on their transaction volume by, by starting to do light commercial, Hey, you're already in Roswell, Georgia.
That's where I'm based at and go, Hey, if FMLS has some light commercial properties in there, you spin up just load a separate section of your website that tends to be better than a separate website, but that shows just those properties and focuses on that. And especially if you're an investor, syndicating deals use that as a way to siphon in and leads for, for potential deals at an investor. But commercial is like, it's very different if I'm doing a high rise, cause like that's not my main business and you know, but, but there's such a big opportunity in light commercial, whether it's a strip mall, a gas station or a farm.
Jesse (5m 36s): Yeah. So the, for listeners that don't know the, it IDX is just ID it's internet data exchange. And it's basically correct me if I'm wrong. It's typically a feed through a local real estate association or real estate board that you get that their data. And it's basically you transform it into a site that you have, so that if you're an investor, I can go on Kurt site and I can go search for a property. And that, and that's what we're talking about, right?
Kurt (6m 3s): Yeah. Yeah. I mean, it is actually it's, it is it's everything you just said. I mean, I think technically it is just the feed itself, but what that looks like to an agent or an investor or anybody is it's the experience, it's the home search. It's when you go to red wagon team.com and you want to look, you know, he, he works across like Los Angeles and some of that area, everything. And part of that home search experience is really what's needed. Use the IDX from a agent or investor perspective. Now there's technically the feed behind it, but it's all those tools that, that a visitor would engage in themselves.
Jesse (6m 34s): So I'm curious, I know in our area, like it, it depends on different state or province if on the Canadian side that there are certain rules of whether you have to be part of a board to be able to have that feed or get that feed a certain confidentiality, is it the same among different locations where you get that feed? You have to be an agent or broker.
Kurt (6m 57s): If you have to be a member of the MLS that's providing that feed, you do not always have to be an agent or a broker, depending on that's usually the case, but there are some analyzes where you don't have to be an agent or a broker. You might be an affiliate or some way other, but you do usually have to be a member because it's kind of viewed as well. I think it falls under in the U S broker reciprocity. The MLS is sometimes just look at that as Hey, as long as people are. Okay. Sharing it. You just need to be a member of that sharing.
Jesse (7m 23s): Yeah. That makes sense. And when you say light, light commercial, I just immediately think light industrial, but you mean just kind of smaller and commercial, like a,
Kurt (7m 33s): Yeah. Things can be stripped off, which sometimes do still come in, you know, with the, the bigger commercial broker does entities. But I mean, if, if you're looking at a, you know, a 12 story building, I'd say almost anywhere in the world, that's a, that's not coming through an IDX feed and, you know, that's, that's very, that's working with a Cress or somebody like that. Very different than somebody that I might buy a gas station or a strip mall from.
Jesse (7m 55s): Yeah.
Kurt (7m 56s): I spoke to somebody last night yesterday that they're literally looking for a, for a commercial farm. I mean, it's more of a something for, for just their family, but I mean, it will be a business unto itself, so it needs to be zoned as such. And so that would fall into a commercial entity for me.
Jesse (8m 10s): Yeah. And that makes sense, because even in our brokers, it's a strictly commercial. If we have something that's on the smaller end or if it's a retail and we want to get more eyes on it, we might move it into like actually put it on the MLS, which we typically don't do. And that would probably be captured by, you know, whatever feed that, that, that specific, you know, MLS is, is producing.
Kurt (8m 31s): Right. Well that, I mean, that makes sense. I think a lot of it also does come through is because of the brokerage or who people are working with a lot of times, whoever the owner is, it, you know, sometimes it depends on where they're coming. Sometimes you have people that, that own larger properties that also comes to gum and it's come to that smaller commercial side. On the other side, you also have a, I find investors where I may be investing in residential retail properties. And then as a small apartment building comes up, comes up a gas station, a strip mall. Well that I might, I may invest into those.
And so it depends on the agents that I'm working with, where I think where that feed and property may go as well.
Jesse (9m 8s): Yeah. That makes sense. So on the, you can move over to the, the marketing end of things. So whether it's, you know, business professionals, real estate agents, real estate investors, the aspect of, of implementing a marketing strategy, those elements, how crucial are they to the role? And maybe you could talk a little bit about, you know, from your, from your vantage point, what the, you know, the best approaches when it, when it comes to marketing strategy. And let's just say from somebody that's not exact, not completely starting from scratch, but they're looking to, to continue to build what they are currently working with.
Kurt (9m 44s): Yeah. I, I mean, I think I remember that marketing strategy and especially like thinking about what that looks like digitally for people it's crucial for, I'd say anyone, that's not like a Gary Vaynerchuk or grant Cardone. I mean, if you have some sort of influence, whether it's a, you know, nationally celebrity or local celebrity, yeah. You may be able to source deals yourself. But I think what everybody needs to be aware of, whether you're a, an investor, an agent or broker or anything is, Hey, you're, you're, you're be anybody that's going to work with you. Or, you know, whether selling you properties, buying from you perhaps, but definitely selling or syndicating investing with you, you're being vetted against other people that they could work with.
And so the, you know, there are people are going online to vet who they are. That is why should I work with you with your brokerage? Why should I sell to you if you're, if you're a, an acquisition, you know, in the acquiring side. And so like for me, like ever that vetting almost always takes place online. There may be some personal phone calls as well, but it takes place online. And really from a sourcing a deal perspective, like if you want to like 10 X your business in the next couple of years, the only way to do that is building an online persona. And it doesn't mean you have to be as big as grant Cardone or somebody like that.
But you have to have something that when somebody is searching for, start searching for where to sell their properties at, or who to work with, or Hey, what brokers do I work with? Or should I syndicate deals? Or what does that look like? Like people are going online to do that. And so you might get Google traffic, and that's a good thing. But by building a digital presence, it allows, it gives you the things to be able to start working, whether it's your door knocking, which still does work, or whether you're sending out emails or you're going to social media influencing, you have something to kind of push people back to.
And so it's crucial on anything, but for me, it's like, there's a bunch of things we can talk about around, like, it really has to be a website. I mean, cause otherwise you're just risking your business. I mean, everything else is good, but you have to have a hub to send people.
Jesse (11m 40s): Yeah. So, so on that point, like the, the model itself. So let's just, let's say, you know, for, for listeners, it might be a real estate investor. It might be an agent either way. You know, one is looking for business in the form of clients, on the real estate, real estate agent side, the other others, the other one is looking for investors. If they're raising capital or, you know, if they're expanding syndicating deals is the model, you know, the model that you typically see, or at least I see is the, you know, the model where there is some sort of lead magnet, we get them to this place where there's lead magnet, or like you said, a home base, a site, they get the lead magnet, you get them on a distribution list.
Is that model still kind of the, the kind of building blocks of this? Or is there, is there a little bit more involved? Maybe you could speak a little bit to that.
Kurt (12m 26s): I think you're right in that they have to have a website and a destination. I don't think you always have to have a lead magnet. Lead magnets can be great. The email sequences are wonderful as well, but I, I do think you have to have that website, but it's not just because it's not just because you're having a place to send them. You're right. Like you need to capture contact information to stay in touch with people like, Hey, Tik, TOK, YouTube podcasts, all of these things are great. But when the algorithm changes, if you don't have contact information, you're screwed. And I mean, and so your business is going to plumb it at that point.
So you need to have that hub that you own that sends people back to. But I think for most, most entrepreneurs, whether they're new or they're, they're, they're, they're trying to, you know, grow their business and they maybe haven't built an online presence. It's actually the act of building that website. That is what tends to grow their business. Like yes, getting up, getting emails, getting them there. But when I talk to people who, you know, Hey, like I have a friend here in Atlanta that owns about 30, maybe 35 residential properties. He runs out, I can talk to him and I know what he does.
I've known him for years. That's great. But, but he does not have that short, concise 32nd or three minute version. If somebody asks him, what does he do? And he's out at a party or he's out at church. He doesn't have that sharp response to be able to, to give them a response so that he could get another property so that he could start syndicating deals. And so by the sheer act of building a website and thinking through what would be my lead magnet, how would I describe myself in that concise viewpoint that I would also use verbally? That's what helped people grow their business?
Yes. Everything digitally that you mentioned, lead magnets and email campaigns that matters. But what I find holds back most people is they cannot articulate what do I do? And why should you work with me? And that's important just because you might be a lead. If I meet you at church or meet you at a barbecue or the park, but more likely, you know, somebody that could be a lead for me somewhere. And if I can't tell you what I do, there's no chance that you'll ever refer business to me.
Jesse (14m 21s): So what would that look like? If, if you're trying to have a concise way of doing that, as it say, as an investor, you, you meet somebody w where do you see that? Where they go wrong, where they, maybe they have a site, or, but they can't in a concise way say state what they're doing like to me, if somebody came up to me, what do you do? Working in commercial real estate, we do raise capital from deals to time to time, but kind of putting that together so that you don't lose that person. Or if, like you said, they have a connection that might be useful to you. So like what, what would be their approach in that scenario?
Kurt (14m 52s): If I'm coaching somebody individually, it's, it's, it's going to be as kind of archaic as just a Google doc where I'm going to literally like, Hey, I want, I want, I went three sections, then we're going to work on them together. It's going to be kind of a Twitter link version. It's going to be a three minute version. And it's going to be a multi paragraph version that you'd have on your website as well. That could be longer. That tells more of a story and let's work on these altogether. And, and then share them with people that if, especially if somebody is already been working in the area, share them and say, does this represent, is it, does this tell, tell, tell the story of who you think I am or where, or that I'm missing things on there, and I'm gonna share it to some other people that are potentially good clients and let them eat it up.
So like, I didn't have people that I've coached this program. So then we can share some of that around with people that have already gone through that process, but ask questions. I mean, it often cause it, it is too generic, a lot of level. It's one thing when you're at the brokerage level, but even like with what you just said, Hey, sometimes you help raise capital. Who do you raise capital from? Do you, are you syndicating? You know, are you syndicating deals across 20 people and we're trying to buy a commercial property or are you looking for one or two major person? Are you looking for family opposites? Like if you're syndicate, if you're raising capital, typically from family offices, that's a, that's a very definite definite thing versus, Hey, I'm bringing in people that are bringing in 25, 50,000 at a time, and we're syndicating up to help, you know, syndicate deals for people that are doing light commercial, like two completely different sets of who you work with and how, and how you work with those people.
Jesse (16m 24s): Yeah. And that makes sense. And so on this, like topic of you, you mentioned Gary V. Grant Cardone, you know what, regardless of, you know, how you view those individuals, when we're talking about influencers, where everything it seems like with talk Instagram, it just seems like there's a, you know, our industry, we've had this even before social media where, you know, everybody's a guru, you know, back in the nineties or early two thousands, just people at seminars. And, you know, sometimes you get a good one. Sometimes you don't. So for people that are, that are breaking in and having a digital strategy and whatever they do, whatever their background is from an entrepreneurial standpoint, you know, what, what is it that you recommend that sets them apart when they're actually engaging in that, you know, quote, quote, unquote influencer aspect of becoming a subject matter expert in your area.
Kurt (17m 15s): I would advise them to stop trying to be a guru and just be you. They, you know, there, there is actually a lot, I do agree with how Gary Vaynerchuk approaches things, but it's like, Hey, nobody's going to go up and be him tomorrow. I mean, that's even part of thing. Like, Hey mine, I'm working at this for 11 years before you might have a thousand people that follow you on YouTube or, you know, like that's, that's okay. But, but be you in, in, in with exactly who you help, like, I, you know, it's a little bit easier on the residential side for some examples for me, but it's like, I think about like, if I'm going to refer somebody to an agent, well, you know, well, who am I going to help at different things?
I think some of the most popular people that I know from a very local influencer, they weren't that way, but it's like somebody who in a city, you know, St. Louis or Chicago, side's like, who do they help? They help singles in downtown insert city name by condos and high rises like that too. They help like, and the only other person, they help us. Sometimes they help married people who where's that single person when they sold them, the condo sell their condo to somebody new. Like that's a very finite level where it's like, yeah, I think if you're trying to, if you're starting as an influencer, how specific can you get?
And just go deep in that, like, by all means like, be big, do, do commercial when, when you have millions of subscribers, but focus on your tight little area up front, like I've invested in a lot of, you know, much more, you know, blue collar businesses, you know, hourly workers and things and big tech con things that became big tech companies. So it's like, that's very different than what most people do. Usually it's like, I have some people that, like, if you have a marketing agency, they invest in marketing agencies that are doing seven figures of revenue and they help them to get to eight or nine figures and sell the company.
That's, that's the only people they invest in. Damn. If I had a marketing business, helping people, wherever they were, and I wanted to help grow my business, what, I just take money from Kurt Mueller that doesn't help somebody like that, or, or what this buddy who it's like, no, he has a history of, he's gone to 20 of these companies. He's bought a 25% stake in them. And they, they sell for a 10 X, multiple on a couple of years, that's who you take money from. And so if you're going to be a local influencer, like focus on that and focus on what you do and where you can help or where you're trying to be. And don't try to be the guru and Mitt that you're not there yet say I'm new into a light or smaller commercial.
And this is where I'm trying to help people and just tell the story as you grow. And people will come around for that if you're authentic. But I think too many people try to be a guru. And the end, it feels like snake oil, if somebody's selling or people can sense if you're not authentic. And like, if you don't know stuff, don't tell me you don't know it. And then say, I don't know, I'm going to bring in 10 people to go talk to. And that, that know this stuff.
Jesse (19m 60s): So aside from the, the authenticity aspect that you're kind of describing there, w what are some of the, the big mistakes you see individuals make when it, when it comes to their, whether it's their, their marketing strategy in general, but the items that are actually holding them back, are there, are there some, you know, ones that you see over and over again, that, that you try to correct right off the bat?
Kurt (20m 23s): Yeah. The, the two biggest things are one. They, they haven't done that work to be specific on who the profile on who they are, and like to pass that vetting to enough, to put it up on our website on a tick doc and a YouTube, you know, to do that, that, that quick little 32nd view on your YouTube channel and says who you are and why somebody should pay attention. They haven't done that. And, and then they kind of either vacillate between they have no concept about what they'll start to talk about, whether it's trying to build an influence or even writing content, or they feel like it has to be perfect.
And so they didn't have to have their next three years of ideas mapped out before it gets done. No, you don't need to do that. I mean, I was working with somebody literally this morning. That's like, they, we literally would just, all we did was look at their Google sheet for what are their first seven shows going to look like, like they're going to do these little five to 10 minute live things. And here's the first seven topics that they think they're going to do. And then there are a couple of people that call, we added two or three other ideas that shifted around that gives them seven ideas to go and do shows for. They don't have 70, they don't have 700, but they can get seven and they can get started with it.
And it feels bite-size and enough to get started and enough consistency that says, all right, I can film all these today. Or I could do one each day or one each week. And you add onto it after you see what works.
Jesse (21m 41s): Yeah. So for the, that analysis paralysis, I think it's not just real estate. I think people in general, you know, some people I think are more prone to it, but I think we all have that a little bit of that aspect. And it is if you don't have a social media presence or especially videos where you're actually being seen the idea of getting it perfect is I, I definitely can relate to that. And I think most people probably can. One, one thing I'm always curious to get, you know, individuals that are in your space, their idea on this, if, if you have a part of that and paralysis can be caused by you do two or three things, you know, we're in an economy where people are doing multiple things.
So, you know, whether it's you say you have your investor, you have a podcast, or like you're saying marketing doesn't really matter the business, but you have multiple things that you're doing is your recommendation of that. If there's a through line between those different areas that you, you kind of put them together and let's just use a website for an example, that you try to get everything in one hub, or do you keep them disparate. And what would be the kind of the deciding factors for you on that?
Kurt (22m 46s): In most cases on websites, I'm going to put them all together, unless there's a, unless there is a reason that to have a pure spinoff site, but like, it's so hard to rank. It's so easy and yet hard to rank websites today. But when you get authority on a website, then like it's so much easier to rank a second topic, a third topic, a fourth topic. So the only way I would ever do a second, a second website from something is, is if there was a reason that it needed to just live unto itself. If I'm doing a podcast it's gonna live on Kurt, eular.com, unless there was a real reason that I needed to separate that off.
Like if you and I were doing something together, Hey, that's a reason to spin it off somewhere else separately. But, you know, if I, it, but if I'm doing anything, it's going to live on my domain and I'm going to branch out from there because I want the benefit and multiplicity that I can get from Google when it hits. And then I could have a second, I could have a YouTube channel that's on just one thing. Like I've done a lot in the main American movement, helping companies and individuals build that can use that maiden in the USA label. Well, that's very specific. Well, like, okay, like I could go start a podcast on just that.
Where would I send them back to probably to my main website, unless I had a reason to do something separate.
Jesse (23m 60s): So we go down the line with you or we're successful entrepreneurs and in whatever domain that is, once you get to a critical mass where you really don't have the time to be doing all the things that you used to do before, whether that's, you know, working directly with, even on the investing side accountants or working directly with people that are editing, what is, what's your approach to being able to build out the team and how you can make sure that you're doing the things that are going to be the most valuable. And you know, it's not three in the morning and you're editing a website or you're, you know, you're, you're in an email thread with, with multiple accountants.
Kurt (24m 37s): Yeah. I, I, I do, I, I, as quickly as possible where, I mean, we're where you had the money in your vest or it, or it makes sense financially, just for you to hand it off, you bring in help, just like you said. And so I would say, look, look to the network. You already have. A lot of times there will be people that are, they're trying to, they're trying to get to where you're at in two or three years. And so, you know, bringing them in for, to pay for some done for you work that changes their business trajectory and helps them out today, but it takes stuff off of your plate.
And so that, that I really, I find a lot of times there are people that are working on things. I've hired friends that now have general contracting business. And, but yet I needed them. I knew they were in a place their business for five years ago where it made sense for me to farm off 10, 15 hours a week, where they were good business operator, but they, they didn't have the room to step up themselves. But then there's other places too. It's like, there may be things in your network where you can just go to, and you find somebody that like, they're going to be your chief operating officer when your business grows.
And you start to hand that off to them and you find a business deal that works for them. But also like Upwork can be great. I found a lot of, I'll say a little secret for people hire my mom.com it, you can get anything from full-time employees to part-time people, but somebody who's decided that they're, they, they, you know, they'd been up. Usually somebody who's been a part-time or a stay at home parent for a number of years. And in some cases you have somebody who was a creative, you know, ran a creative design department that could help build your website or social media assets. And I mean, they were working at Coca-Cola and like the five years they've been a stay at home parent, and now they have 10 hours a week that they want to farm out.
And you'll never find that person on Upwork because like, it's just a different thing. And he, I mean, I have full-time employees I've hired off of that, but sometimes transitory, and then sometimes that's what they were looking for. It's a great little nugget to go find somebody, but Upwork has been great for me as well, where I'll go and find somebody that I trust and, and, and farm work out to them.
Jesse (26m 34s): Yeah. And for those that don't know, I think it's pretty common at this point, upwork.com, you know, I've, I think I've mentioned it on the show. We've gotten a lot of success, my partner and through Upwork and it, and it depends like you, through that, you can, we're actually just talking with a client at lunch yesterday and they were like, they were kind of amazed of what the level of, you know, you could have somebody do clean up a, a pitch deck for you to somebody that's a, you know, editing videos or, you know, and it has a long-term relationship I find really useful with Upwork is you can see not just the reviews, but what I like with Upwork is that if they're individuals, you can see how much they've earned on Upwork.
And I think like that to me, is an important, maybe even a more important metric because money talks and if, if they are actually doing the work, it, you know, coupled with, you know, not an absolutely terrible review, you can kind of get an idea of, of who you're working with. And then lastly, on Upwork, I think it's great. The fact that you can have different levels of proficiency in your native language. So if you're in Latin-America and you need somebody that speaks the native language, you can go there and if you're in the us, you can do that.
So I find that Upwork for anybody that hasn't tried it, I would definitely recommend, you know, it's not a plug for them, but I'd definitely recommend creating a profile because there's always these little things that we just don't have the time for that we really shouldn't be doing that. It's literally somebody that'll get it turned around in a day or two. And it's pretty amazing with some of the results that you can get if you're careful about vetting.
Kurt (28m 3s): Yeah. And I think that key in vetting is important, I think. And I agree with everything you said, I think a few tips because I've spent lots of money on Upwork and some successfully and some not, but the knot has led me to finding success. Successes. If you don't even know what you can hand off by signing up for an account and Upwork, you can do searches for things that you do every day and go look and see are other like, are there people on there? And it will help people spark and go, oh, I could farm this out to somebody out. And, and, and so it's good for thinking that through, but to your point, yes, you can see how much people earn, but some cases you may see the people are cranking through.
And what they're really good at is they're not actually the ones doing the work, but you don't know the behind the scenes. They're farming it out to other people which can be good and bad. It's still usually needs. It could be good at completing stuff, but I love that, but I'd say you've never worked with any site like this, either hire my mom.com, which is not quite as much as I've worked for reviews, but you'll get super quality people assume that the person you hire, no matter what the reviews look like, isn't going to work out. Like I say, come up with a test and like hire three people to do the same job. And at least one of them will end up usually being great.
And if you make a decision, sometimes two rarely what all three match out on some cases, it's just like the third person might not come up. Like I have Dwayne in my team who he's gone through with designers. And it's like, I'd say about a third of the designers that he ends up, like interacting with actually ended up following through with their work. So it's always good that he started two or three. And even if both work out, you can come back to somebody, but, but try it. But when it, if it doesn't work with just one person, that's okay.
If you're going to learn, and then you're gonna make a better decision on the next person.
Jesse (29m 45s): Yeah. And I, and I find the, once you do find somebody that works, it's just like, it's such a useful tool. I had something there's a while ago where I think I sent, we just didn't have the bandwidth at work. I just needed emails for like 800 outreaches for investors. And it was just like, find the emails online. I don't want personally emails. I, they, you need to find them and for what, you know, whatever this person did, whether they crawled on the web, you got these back and it was a ridiculously low costs. And then I had another one where for investors, real estate investors, if you're creating pitch decks, I mean, I had one where it was, I would normally have our assistant at work doing it.
But again, we were at a busy time and I said, listen, like, I could probably just do this on my own, but I need this whole thing formatted properly. And like within 48 hours or 24 hours, whatever, it was perfectly formatted, PowerPoint, little things like that, where you don't realize you waste so much time on, because they're just those things where you're like, I need to get them done. And if you don't have that outlet, you don't have the outlet. So definitely recommend that for individuals. So for the 20, 20 to 2023, I know we're kind of in a crazy time right now, just kind of coming out of this fingers, crossed that we're all heading in the right direction over the last a year, year and a half.
What do you see? Are there trends that you're seeing right now that people are jumping on, that you think are useful or are there, you know, different things that are happening in the marketing space or even in kind of the business development side of things that you're seeing?
Kurt (31m 15s): I see people jumping on trends and it's like a lot of what I see is some are healthy trends and some are not healthy trends. And so I see a lot more people trying social media podcasts, YouTube, which is great. I don't see a lot of them that I feel like have something thought through from a strategy where they don't have that digital hub we talked about. They don't have a plan for it. YouTube is great for you right now, but what happens when the algorithm changes? And so they, they haven't done that. And you don't have to have fully thought through, but people are trying things. I think they're feeling much more comfortable getting started.
They that's the positive side on things. The other side is I, I find a lot of times, especially on the investor side and even on, on the agent side, whether commercial or residential is they think because they've tried something before and it didn't work. They're like, Hey, I'm done with it. The websites don't work anymore. Oh, I tried that social media thing. I got nothing from Facebook, really? Like how many stories do you want, where it's like, maybe you just did it wrong. And so I've, I find actually things tend to be bifurcated very much where a lot of people that have never tried a lot of the digital platforms they're trying to now, which is great on the other side, people think that they tried it once or twice, twice, and rather than realize that the problem was how they approached it.
They think the problem is just with that chip or that network. And they go, ah, social doesn't work. Yeah, no, no, very often one of the reason a business that I've been in hasn't worked was because of me and that's that where I need to look at it and go, maybe I wasn't consistent. Maybe my topics weren't good. Maybe I wasn't narrowed. And so I think too many people nowadays are going they're Fickling on things that they should not be fickled on. And they should realize that, no, no, you should go retry that again, the fact that you tried Twitter, you tried Pinterest. Yeah. It was really good. And bang your head against the wall for nine months.
Now go try it with Tik TOK and, but try it in a different way and talk to the people that have been successful. Be very transparent about why it didn't work and people just aren't doing that and said they just fickle on the whole channel.
Jesse (33m 10s): Yeah. We've had investors on the show that have absolutely blown up on tech talk and, and Instagram, and it's kind of amazing. And I'm blanking on the name here. We had them on recently. And what he basically said was, cause you know, everybody's they do the post-mortem like, how did, how did it happen and whatever. And he said, I just made a commitment that for 30 days I was going to do a Tik TOK video about real estate every day at the same time every day. And not that that's a strategy, it's just going to work for everybody. But I think it goes to this idea of I'm a big believer in consistency and the real challenge.
And it's not easy when you don't see the success yet where you know that hockey stick curve where that, you know, the blade might be very long until you get that pop off. Whereas if you, if you kept going, it was month 12, or if it was month 18, what's your view on consistency? Like how important is it? Especially in, I find in the social media and digital world, if you, if you kind of check out early, you don't really know what could have happened.
Kurt (34m 11s): I'd say consistency is actually the only thing that matters. I mean, a consistency matters more than your content, more than how you look more outside of maybe the sound quality for about anything. If you're doing video or audio, consistency is the most important thing that you have. It's not, in some cases, it is because you're putting out content, whether it's daily or weekly or whatever that looks like. But it's the changes that it has, that it makes in me myself when I'm being consistent with something over the last probably, maybe almost 90 days at this point, I have so many things going in my, in my, in my full-time job and all a bunch of investments and my side hustle that, I mean, my life was, was becoming chaos.
I felt like, and I wasn't being as good as everything. So I'm taking 30 to 45 minutes every day and I'm writing right now. So I'm putting out, you know, five to 10,000 words a week just on super quality content. Sometimes that's editing and all there. But I did that because when I was retrospective, I looked down and realized I wasn't being consistent in my day-to-day things, even when I was focused on just each one of those jobs. And it, for me, I know taking, writing and saying, I'm going to narrow down on this topic. And just focus on that, that changed in me, makes me a better leader, a better residential person, a better marketer and a better investor.
And so I think that consistency is actually what helps people into being more successful, whether they're doing social or digital or anything else. And to your point, it's, it is, it is making the commitment and it doesn't have to be like, I'm going to do a one-hour video every day, or I'm going write for 45 minutes. My commitment is that I will write every day. It ends up being 30 to 45 minutes. If I write for two minutes, I have checked my box. I'm good. And I feel, I feel good. So if I can sit down and that's all I can do, it's for two minutes. That's great. If in the other some days I take two hours because I'm in a flow and my business allows me to do that.
Jesse (36m 3s): Yeah. Yeah. I think, and I think that's part of the challenge where you're describing like a lot of people, especially the people in our world will have a full-time job will have a side hustle and then you get to this point of like, yeah, you want to go deep in one thing, but then oftentimes you see that they're not really going deep in any of them. So being able to juggle that and make sure that, you know, if you have those two or three things happening, that you are actually giving them the time or at least outsourcing the things that are important. So you have the time to do those things.
Well.
Kurt (36m 34s): Yeah. Especially if you're, if you're working on a side hustle, things haven't clicked yet. If you, if you have not, you don't even have to read atomic habits, the book, get the audio book, listen to it in your car and listen to it at the gym. But atomic habits is like, it's the core for everything. I think because it gives people the permission to not be perfect and to not take an hour on everything, sir, seriously, sit down at your desk for two minutes and do whatever it is and be very joyous that, that that's what you've accomplished your task. That's so much more important for getting the longevity than it is about just sheer number of hours at any one time.
Jesse (37m 9s): Yeah, for sure. Well, Kurt, I want to be mindful of the time. There's a couple of questions we'd like to wrap up with for our guests. If you're cool with that, we'll, we'll go with those questions and then we'll, we'll let listeners know where they can connect with you.
Kurt (37m 21s): Yeah.
Jesse (37m 22s): So first one, in terms of mentorship, you know, people coming into our industry, it could be marketing, it could be real estate, you know, pick an industry. What is your view on mentorship from the perspective of younger people coming into the industry? You know, what advice would you give them?
Kurt (37m 40s): It's, it's critical. And I think you have to have it. And I don't care whether you're get a mentor or a coach by officially asking somebody, or if it just kind of ends up becoming an unofficial relationship. That happens for a lot of people too. And you just kind of Ruth realized later, like, wow, you've been guiding me for a couple of years, but I, I think you have to have a mentor and it's not just somebody who has been like monetarily successful. It's somebody that's been successful for 10, at least 10 years. And wherever you're going, I like, Hey, I don't want somebody to guide me in my marriage.
That's, you know, just five years down the line, I want somebody who's been, you know, you're 40 years into a marriage and you know what, that looks like. I'm gonna know somebody who's sold two businesses or they've done, you know, I've been successful in commercial real estate for the last 25 years. Like that's who I wanted my mentor.
Jesse (38m 29s): Yeah. That makes sense. All right. Next question. Something that you know now in your career, you wish you knew when you first got started,
Kurt (38m 38s): That fee, that being wrong about something and being right. Feels the exact same until you realize that you're wildly coyote off the Cliff's edge. And that you've actually been wrong about something for the last six months or six years.
Jesse (38m 51s): I like it. You kind of alluded to one atomic habits. What's some media, whether it's digital content, a book that you're reading that you could recommend to listeners
Kurt (39m 1s): Notebooks right now, atomic habits is a really good one on there. And so that's probably what I point most people back to that and deep work by Cal Cal Ripken. So our Newport Cal Newport,
Jesse (39m 15s): Cal Newport. Yeah. That's great. But we'll put a couple of links up last question. First car, make and model.
Kurt (39m 22s): Cause like a 20 year old Chevy cavalier.
Jesse (39m 27s): I was close. I was the Pontiac Pontiac. What was the opposite of the Sunfire? That's the one. Yeah, pretty much the same car and just, yeah, well I have a nineties. Awesome. So for individuals that want to connect with you, Kurt, we'll put a couple of links up aside from a Google search, where can they go?
Kurt (39m 45s): My website, dealer.com is that best place. Cause it mentioned like hubs at farms yet anywhere you want to know what the personal life of somebody that's had my background, it's going to send you over to Instagram business stuff. You go to LinkedIn. If you want to read about servant leadership. Great. I got tens of thousands of words on there. Boy,
Jesse (40m 1s): My guest today has been Kurt Mueller, Kurt, thanks for being part of working capital
Kurt (40m 6s): Things rather than me.
Jesse (40m 15s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Rich Fettke has a passion for helping people improve their businesses, grow their wealth, and live more fulfilling lives. He is the author of The Wise Investor, Extreme Success, and the audio program Momentum. Rich is also a co-founder of RealWealth. Since 2003, the company has helped over 60,000 members improve their financial intelligence and acquire cash flowing income properties — so they can live life on their own terms. As a licensed real estate broker and an active investor, Rich was selected as a Rich Dad Author for his expertise as a Wealth Mindset Expert.
In this episode we talked about:
* Rich’s Bio & Background
* Helping Individuals with Real Estate Investment
* Geographic Preferences
* Interest Rates and Inflation Overview
* Coaching
* Writing a Book
* Mentor’s View on Assets and Liabilities
* Definition of Real Wealth
* Thoughts on Being Self-made
* Wealthy People Mindset
* Resources
Useful links:
Book: “ Be Your Future Self Now: The Science of Intentional Transformation” by Benjamin Hardy
Book: “The Willpower Instinct: How Self-Control Works, Why It Matters, And What You Can Do To Get More Of It” by Kelly McGonigal
https://realwealth.com
Antony Davies is the Milton Friedman Distinguished Fellow at Foundation for Economic Education, associate professor of economics at Duquesne University, and co-host of the podcast, Words & Numbers. Dr. Davies authors monthly columns on economics and public policy for the Philadelphia Inquirer and Pittsburgh Tribune-Review. He has written a book on understanding statistics, published by the Cato Institute, and has co-authored hundreds of op-eds for, among others, the Wall Street Journal, Los Angeles Times, and Washington Post. His YouTube videos on economics, government, and policy have garnered millions of views.
In this episode we talked about:
- Antony’s Bio & Background
- View on Inflation: Dangers and Outlook
- Money Printing
- Stagflation
- Fiscal and Monetary Measures to Defend against Inflation
- Interest Rates
- Government Policies on Housing Regulations
- Resources
Useful links:
https://podcasts.apple.com/us/podcast/words-numbers/id1237781005
https://www.youtube.com/c/AntonyDavies
Mark McGuire is a Chief Investment Officer, Hearthfire Holdings. in 2017 he started to build a real estate business. He hired and fired agents, learned from his mistakes, and then re-hired all over again with a new perspective. Since 2013, Mark and his team have brokered more than 300 homes with a total sales volume exceeding $83M. They have also raised over 15 million in capital for Hearthfire. Mark’s biggest passion is wealth building and investing. He is a limited partner in 12 syndications, ranging from multifamily to industrial, hospitality to self-storage. He has invested in multiple private companies in the biotech, finance, and AI spaces. In addition, he currently owns 20 residential units in various real estate partnerships and oversees the management of 130 residential units his family owns. Mark has also executed multiple 1031 exchanges. He’s seen up-markets and down-markets and discovered opportunities in both.
In this episode we talked about:
* Mark’s Bio & Background
* Building his Career in Real Estate
* Limited Partnership Role
* Real Estate Deals Outlook: the best Takeaways from Investors
* Red Flags while looking for LP & GP
* Multifamily Investments
* Mark’s Focus in Real Estate Right Now
* Economic Outlook 2022-2023
* Mentorship, Resources and Lessons Learned
Useful links:
Slicing Pie: Funding Your Company Without Funds
https://hfirecapital.com
https://www.linkedin.com/in/investingwithmark/
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time
Jesse (23s): This is Jessica forgotten and you're listening to working capital the real estate podcast. My guest today is Mark McGuire. He's the C I O of Herth capital. He's a full-time real estate investor and operator that's when mark at the time plunge into real estate sales, after running hard on his own for three years, working 80 to 100 hours a week, mark realized he needed help. He transitioned his real estate practice to Keller Williams in 2017 to learn how to build a real estate business. He hired and fired agents learn from his mistakes and then rehired them all over again.
Since 2013, mark and his team have brokered more than 300 homes with a total sales volume exceeding 83 million. They've also raised over 50 million capital for her fire, mark, you and I were just talking before we want to get into a lot of what you're doing now, which sounds like general partner and sponsoring deals. First of all, welcome aboard.
Mark (1m 13s): Thanks for having me Jesse excited.
Jesse (1m 15s): Yeah, I really appreciate it. So lots to talk about here. You've had a pretty, a pretty interesting background in terms of where you started out in your career and what you're doing today. And I want to get into for listeners the different asset classes that you're working with, but before we do that, why don't you take us back to kind of where you got into real estate? How that your story unfolded at the beginning?
Mark (1m 39s): Yeah, so real estate was something that was in my family. You know, I tried to go the college route net that really didn't align with my way of being a really I learned hands-on and I could, I could do the school thing, but I just hated it. And my mom's a teacher, so that went over really well. And then, you know, transition to my first entrepreneurial venture was playing in a band and we played, I was in a band professionally for seven years. We ended up getting a record contract with RCA records and I had had my I'm sorry,
Jesse (2m 15s): Small outfit.
Mark (2m 16s): Yeah, yeah, just a little bit. And I had had my real estate license at the time. And when we got the record contract, I remember, you know, this real moment of clarity of looking at how much money I was going to get as part of the contract that was guaranteed. And then how much money I had commissions pending with my residential real estate sales business. And I just was like, well, why would I sign this 14 to 20 year contract? Like that makes no sense. I'm, I'm going to be a slave. So went into real estate sales full time and had the opportunity to, to really start to understand business and learned about this whole thing called like a profit and loss.
I never went to school for any of it. So it was kind of just a giant trial by fire and I'm kind of became obsessed. And then after that, it was just like, how much more could I could I build? It was just a constant pursuit of growth.
Jesse (3m 8s): Fair enough. So you kind of run through the process, you're in music, which is awesome. What a, what instrument or where you vocals? What did you play?
Mark (3m 16s): No, I was actually, I was, I played drums. I did sing background vocals, but drums was really my main contribution.
Jesse (3m 22s): Nice, nice. I'm a big, big guitar guy. Just, just, just bought a, a PRS recently. And so I'm pretty, I'm having fun with that somewhere in the background there. So that's really cool. So RCA, I, like I said, it's not exactly a, a small outfit, so congrats on that. But even with that, you kind of look back and you start real estate as a path. So bring us up to speed today. I know that you're continuing to build wealth through real estate and you are LP on a few deals in various asset classes and running point or general partner on others.
Maybe you could tell listeners a little bit about what that looks like and how that process kind of evolved.
Mark (4m 3s): Yeah. So when I was in residential real estate sales, I spent a lot of time, you know, getting to run numbers on just single families. One thing that I was really fortunate to have was a family that was in real estate. So my, my grandfather was the main driving force and he owned a bunch of properties and I got the opportunity to work and be the, the, the assistant to the maintenance man. So I was like the guy that just said, Hey, there's a pile of trash, go over there, go take it and load it in the truck and throw it out.
So I did that for a couple of years and, you know, that's what it took to be in the band and have the flexibility to be able to get up and go whenever I needed to, they either had to go for on the site or they didn't. So there, it was just a matter of, you know, as I made money and, and, and generated income from residential real estate sales, my grandfather always told me, you know, real estate sales, you know, will make you money, but it will make you rich. And I don't know if you've ever heard of the saying brokers died, broke because so many people in sales, they make good money in commission, but then they, you know, spend it all and they don't get into assets that help you defer some of those taxes
Jesse (5m 19s): And build wealth.
Mark (5m 20s): Yeah. So it really came down to saying, Hey, I want to, I want to be able to get paid while I sleep. And so I've started buying condos and single families. And because this was 2013, 14 when the market was, you know, really, really low and then just kind of wanted to grow it from there and got interested in the commercial loan space. And, you know, I lived on as little as I could without feeling like I was, you know, I'm going to say punishing myself.
I wasn't like sitting there and eating ramen. No, I was never the ramen noodles guy. There's a lot of those people that, you know, they, I mean, I like pain, but I don't like it that much.
Jesse (6m 0s): You know? And I don't understand that maybe we said Italian upbringing. I'm like, you know, pasta is just this chief.
Mark (6m 5s): It is. But Robin noodles is pasta. It's just possible of sodium
Jesse (6m 10s): A hundred percent, exactly. Dumping, just dumping a bag of salt in there.
Mark (6m 16s): So I basically took it from, you know, just doing small single family and getting introduced to the concept of syndication I was trying to buy up. And it was just, I didn't have enough income. I didn't really know the way that the game was played. So syndication was my way to be a part of bigger deals. And I got, it was a, it was a question of bandwidth because you only had so much time to operate so many deals the right way to execute on them. And syndications for me were a way to keep my money moving at a good velocity without having to actually be the one driving the ship forward.
Jesse (6m 50s): So in those syndications where you limited partner in like the first one,
Mark (6m 55s): Yeah, I was an LP in probably seven or eight before I started on the GP side.
Jesse (7m 3s): Yeah. Which is that's fascinating to me because some, some would argue that it's, it's easier to get into being the LPN and definitely in a sense it is right. You're just, you're just providing capital. But I think the analysis is for somebody that's breaking into the industry, it's pretty, you know, ballsy to just jump into LPs with, without doing your proper due diligence. And I'm not saying that you didn't, I'm saying a lot of people, they see an investment and then they go in and that's why we had Brian Burke on.
He wrote the passive, I think it's passive real estate investor.
Mark (7m 36s): It's a hands-off hands-on that's
Jesse (7m 39s): Right. So we were both talking at the last BiggerPockets conference and what I found fascinating about this book, not just to plug it, it's just from the LPs point of view, which you never really read in a lot of these books. A lot of it is you're the GP you're running the deals. So that's pretty awesome. And then the other thing I, I feel in tell me if this is what you experience, I've told partners of mine before that we should be an LPN, this deal. And it's not necessarily because I think the deal is great. Is I really like the sponsor. I really want to see what, what he or she does with the investment.
And you learn so much about, okay, they're using this software, oh, they're G they're doing updates this way. I, you know, the last person I invested in did, did them this way. So I feel like there's a lot to learn from somebody who has already established themselves as an LP. Was that kind of your experience in those first, you know, six or seven, whatever they were.
Mark (8m 27s): So it's funny. I never went into syndication, investing, thinking I was going to be the guy syndicating. So I always went, I went into it because, you know, I could do my own deals. I knew how to run them. I knew how I knew how to pull the levers. I mean, it started as single family, right. Which is buy it at the right price, fix it and understand what the rental value is going to be at the end. Now, syndications do that same thing on a scale times, 100, 200 times. Right? So that's, it's the same concept, but it's kind of like if someone just gave you a graphing calculator and said, Hey, tell me what the graph looks like for this, you know, inequality, if you don't know how the basic calculus or algebra works behind it, then, you know, giving it, given that calculator is great, but like, you need to know how the, the math, how, what the long form version is.
And that's what single family was for me was the long form version. Now that I'm in a syndication, it's like, okay, what are the levers that we're going to pull here? How are we going to pull them? How much do we need to pull in totality in order to get up to what we can project? And at that point, like, I can pretty quickly go like, all right, this, this will work. Or it won't.
Jesse (9m 38s): Yeah. And I find that the one thing with single family and I I've had a very similar kind of history or, or path that you took. I mean, it can, it's very binary. It could go that you have a terrible experience or that you have a great experience in that is really predicated on the fact that you don't have a hundred tenants. You have one or two in a certain investment. So if it goes poorly, you feel like the whole thing is going poorly, where that the nice thing with apartments is you do scale it up and you're able to have economies and, you know, the losses, the winds help with the losses and things kind of even note.
But I feel like a lot of it is, is that mental barrier, you know, when, when you're starting out buying that first condo, the idea of you owning 80 units is, you know, so far away from, from your reality. So tell us how you moved from. So you moved from kind of what you're doing originally in real estate, into being an LP on these deals of whatever it was, six, six to 10 or whatever you invested, what was the, your experience or what was your outlook after seeing different investors? Do these deals differently?
Mark (10m 43s): I mean, you know, Brian Burke covered a ton of it in his book. So if you haven't read that, read that, I mean, it's, it's, it really sums up pretty much everything you need to know in more detail than you need to know it. So if I were to boil it down to brass tacks and make it really simple, I learned who communicates well, cause I value communication. If you don't communicate well, I don't wanna, I don't want my money with you. I like quarterly communication, monthly communications, just too much for me, because at that point, like I don't, if I wanted to have monthly communication, I'd be, I'd run the deal.
I, I want to know that my money is okay, but I
Jesse (11m 20s): Don't from the contractor.
Mark (11m 22s): Yeah. I, yeah, not interested. I wanna, I wanna know, you know, who does what they say they're going to do. And by that, that can be with respect to distributions that can be with respect to execution of the business plan. There's different ways that that shows up, but I'm paying a lot of attention to do they execute and do what they say, do they deliver? Because so many people and anyone can put something on a spreadsheet, say here's what this is going to do.
And this is gonna be worth X by this time. But if you don't go and see you, those, you know, quarterly execution updates, demonstrating that they're tracking performer, tracking their execution timeline. Even if the NOI doesn't track because the market's not, you know, didn't pan out the way you thought, but you're executing to the business plan. I'm not going to fall to sponsor for that. I just, wouldn't
Jesse (12m 18s): Sorry. Go ahead.
Mark (12m 19s): Those were the two, those were the two big things for me. And then I would say the, the third thing is you get to see who actually underwrites, conservatively, everyone, underwrites, conservatively. It's like, everyone leads with that. And when you
Jesse (12m 35s): Conservative figures here, we're just going to change this exit cap rate here. And there's your 30% IRR.
Mark (12m 40s): Yeah, exactly, exactly. It all. It all comes down to that. You get to see, you know, as the tide is going out here, I think we're starting to see the high water mark. You're going out. You're about to see who's swimming naked. It is going to it's it's gonna, it's going to come.
Jesse (12m 58s): Yeah. Well, it it's to your point of, you know, I don't necessarily see that you're going to track exactly like your, you know, your memorandum or your deck. You showed everybody, but it is this idea of like communicating on a regular basis, tracking the progress. It sounds like when I hear guys like you talk, you can almost hear a sales background because if you're a good sales person and in this case, like real estate sales, the first, the, one of the most valuable a number of them, but one of the mentors I had, one of the most valuable lessons I ever got was listened, deliver bad news, quickly, deliver it fast.
And you know, you, a lot of people try to run away from it, but listen, like, I'm going to give you a quarterly report. This is what's going on. I'm going to give it to you every quarter. I'm not going to try to run away from, with what's happening. We're obviously gonna make sure that, you know, things go as smoothly as possible. But I think communication is huge. And in the long run, even though it hurts those days where you're delivering bad, you know, bad information, it's important that you do that for your credibility.
Mark (13m 58s): I don't, I would say not don't just deliver bad news, but deliver the solution, delivery, deliver your solution to the problem, along with the problem. Because, you know, coming from the days of residential real estate, if I went and delivered a home inspection report with a bunch of bad news and didn't provide avenues to solve it, then like there's full on panic. And everyone's like, wow, man, this is terrible. And people just go, you know, off the cliff into the deep end.
Jesse (14m 28s): Yeah, no, I couldn't, I couldn't agree more. So let's get into a little bit about the LPGP relationship. So for those that don't know, I think most of the listeners are familiar with the general partner and limited partners. Basically try to give me your, your perspective of what you're looking for. Let's start on the LP side when you're looking at a general partner. So you talked about somebody who's a communicator, somebody who's going to be, you know, tells you what the, what they're going to do is, is in communication with you.
But what are, what are a couple of red flags? You know, we can pull them from, you know, from Brian, but we've got you here and I'd like to get your thoughts on it.
Mark (15m 8s): Yeah, here's what I would say. I always want to know what are the assumptions in the model? I always ask, you know, what are your rent bumps? That's a big one because you can go and make revenue look a lot higher than it really can and, and will be if you're over aggressive, I want to know. And that kind of goes along with how are you to creating the value? So is it through, you know, rent?
Is it through adding additional square footage in self storage game? Or is it adding, you know, like converting units that, and, you know, chopping them up and making them a little smaller, but I also want to know, you know, what's your exit cap rate assumption. That's such a big lever. That's so just not understood it. The general person does not understand how exit cap rates are such a powerful lever in the value gaming
Jesse (16m 8s): Return.
Mark (16m 9s): Oh yeah. So that's a really, really, really big one. And if you don't know, the re the relationship net operating income divided by cap rate equals your asset value. So understand if you're going in buying, you know, a cap rate and it's, and it's hard to set it because just cause you're going in at a five cap on actual is there could be a ton of runway in the, in the, in the gross revenues because it's not being managed well. So, you know, sometimes people think that they're getting a steal, you're paying a high cap rate on something like that. But if, you know, as the operators, a ton of runway on the rent roll and fine, give them a five cap and just know that you're going to double the revenue and then you're going to sell it at a six, but the double revenue still generates the value.
Jesse (16m 50s): Yeah. I think one thing I'd tell a younger investors or people that are trying to understand the, the usefulness and sometimes the work you should throw cap rates out of perfect illustration is you can have a building with a 1% cap rate. And it's an absolutely amazing investment because you, you have vacant possession of a building in a great market. So, you know, this idea of, of cap rate being the be all and end all, you know, you have to really factor it into our, are we a stabilized asset? Are we fully tenanted the other piece too, of, you know, just so listeners are following along with exit cap rate, or sometimes you'll hear it called the reversion if you're in, in college and finance right now.
So this idea that you have to apply a cap rate to that last year, or say a five-year investment that last year net operating income, just like mark was saying here, that is an assumption in the deal. And the common wisdom is that that cap rate should be technically higher than your entry cap because the building has degraded over time or, or kind of, it has gotten older, the actual structure, not the land and that cap rate, you know, you can just do the math right now. If you have a million dollars NOI divide that by 4.5 or divided by 5.5, you're going to see a drastic difference in the valuation.
And that's going to really affect the levered return on investment. So that's a great point. Are there any, w you know, when you look at an investor or an investment, and you're seeing the, the debt side of the equation, the mortgage, what do you like to see there? Is there anything that you're looking out for that you're keeping your eye on specifically?
Mark (18m 22s): I mean, I'd like to understand recourse, is there recourse on it or is there not because if there's recourse on it, you know, the person who's running the deal has more skin in the game because when you're an LP, generally, I'm not going to say always, but pretty much always you're at risk. Capital is only the capital, the equity you contributed to the, your LP position. Whereas the sponsor who's on the GP side, they're the ones taking the risk, signing on the debt.
So most, you know, most, most people in, in multi-family, and, and in like industrial, they're going to go for CMBS or life insurance company, life code debt, and they're going to go for non-recourse, which is smart. It's very smart. But if someone like self storage, a lot of times we're going for like regional banks and regional banks don't want to give non-recourse, they'll give partial recourse. Yeah. So I still have skin in this game if I don't do this thing. Right.
And versus someone on a multifamily, if the project totally goes sideways, they hand the keys back and go, Hey, sorry, this is your problem. Like, I tried my best. And you as the investor who put up the check, you're out the money and the guy who ran the deal just lost the reputation. I mean, that's, that's what you're really losing, but they didn't lose cash. So to speak.
Jesse (19m 41s): Yeah. That's a great point. I, the last investment that we were running GP on, I remembered speaking with an investor and he said, and it's not a dumb question. It's a, it's a logical question. They said, well, you know, how much are you investing personally? You know, I thought it would be more. And I said, my answer to him was, listen, it's, it's the wrong question. I'll answer it. But it's the wrong question. And I'll tell you why. So I tell him how much we're investing in the deal. But then secondly, I'm saying that we're signing on this debt and it's, this is, this is not debt.
This is basically my unborn kids. If everything goes wrong here, that's what gets affected because we're personally guaranteeing the debt. I th that's a question I think is important because at the end of the day, if I know that the GP is really, like you said, has complete skin in the game, that changes the dynamic for me, for sure.
Mark (20m 30s): Yep. Yeah. I mean, and, and honestly, like I, especially right now, I will want to see lower leverage. Multifamily investments have been going 80% with a 24 month IO interest only period. And on a 30 year amortization schedule. So talking high leverage with very little principal pay down with, so your 30 year, the higher your amortization period, the, the slower you pay down your principal loan balance. And then when you go and you add a 24 month interest only period on the front of that, you're paying no principal for two years, and then you're paying small principal for the three years.
So if you're holding it for five years, you're really banking on the market to go up. So at the time of disposition, you're not in disposition to sale, you're not in a place where you're going to get, you know, you're gonna be under underwater. And then at that point, you're you got a deficiency. So you're paying to sell the property, or you're having to refi at that. Five-year mark. So I, I hate high leverage right now, like 80% leverage scares the shit out of me and interest only periods on loans.
Also equally terrifying right now for me, unless you're at a super low leverage point.
Jesse (21m 46s): Well, it's like when you describe it that way, you're like the big short 2.0 there where you have like this balloon, or, you know, you have an IO period. And then all of a sudden it kicks into to have whatever you're looking for, stabilize that after that. But I think, I think what we've learned over the last six months, or even shorter than that with interest rates is that LTV is important to a certain extent. But what most banks that we're dealing with, what they're looking at is that service coverage right now, how much more do you have to pay then than your actual servicing of the, of the mortgage or debt.
And I think that is a, probably a prudent way to look at it, but yeah, I think, I think you're right. I think most of the going forward this next year, I think these high, these individuals or companies that are doing very high loan to value are kind of setting themselves up to potentially be in a little bit of trouble if you know, the economy goes the wrong way.
Mark (22m 39s): Well, and so then the question becomes, okay, so let's say you got a five-year term with a 24 month IO at 30 year am. Well, do you have extensions beyond that? That will allow you to go and buy some time if the market doesn't, you know, the market's not cooperating with your exit timeframe that you originally intended. So that's understanding, you know, the ability to have extensions on the backend. Can you buy an extension or does the rate reset? Meaning like now you have to go and go to, you know, whatever prime is or prime plus, whatever the agreed upon amount is in the loan docs.
And this is the thing until you operate, actually, you don't even know how to answer these questions. You don't even know what this shit means. Let alone have the ability to ask the question to be able to actually ascertain that answer.
Jesse (23m 29s): Well, I, like you said earlier, just go on a podcast, here's your credibility. So I want to kind of jump to what you're kind of looking at right now. What are deals? You know, what, what's your target and are you doing more self storage? You're looking at apartments,
Mark (23m 46s): We're all self storage. I mean, you know, with hearth fire, all we do is self storage. That's, you know, singular focus. I mean, we just want to go and be fantastic in that space and just crush that space and know it inside and out that said the challenge right now is with rates ticking up, the more money you borrow, the bigger the deal, the rate hikes are because it's compounding a problem. So on a mortgage, as a residential, and you're borrowing 250 or 300,000 bucks, that's such a big deal.
It does impact, but not a huge deal. If you're going to borrow 5 million bucks that little, you know, half, half a point and rate can really impact your, your, your monthly debt service. And at that point, it impacts what you can pay and your debt service coverage ratio and what you can pay for, for the property. And right now, sellers, haven't adjusted to
Jesse (24m 45s): A hundred percent
Mark (24m 46s): New debt terms like seller sale price expectations are still at, you know, all time low rates. And there's a gap right now. And the thing is, is there's a lot of stupid that hasn't burned off yet. There's a lot of people still paying way too much. Yeah. I don't know when that stops. So it's like, we're just in a mode of sticking to our guns, putting in LOI, but being patient.
Jesse (25m 9s): Yeah. It's very, yeah. The price that pricing is so sticky because people, once they anchor to it, like, you know, just for on the kind of the sales side with real estate, once you stick to a price, you do not want to come off it. We have clients right now that we're actively, you know, we've marked down some prices depending on the asset class, but people are starting to say, well, here's my offers here because cost of capital is going up. And our clients are just like, no, like the prices that shouldn't affect price at all. It's like, no, it does. And it should. But the fact that there's that disconnect.
It'll be interesting to see how long this lasts. If we, if we stay in this kind of environment, even if the interest rates kind of stay stagnant, I feel like the prices have to reflect, have to adjust to it. But I think it's definitely the, there is a time period where people do not want to mark down because they're just used to what we've been living through for the last 10 years, to be honest.
Mark (26m 1s): Yeah. It'll be real interesting. I mean, we've been up until the right fence 2012. And so there's a lot of sponsors, syndicators, whatever you want to call it that have operated like crap that have gotten away with poor execution and poor operations and poor, poor deal management. And now that pricing is reverting and you're going to start. And I mean, I don't know. I think we're right now, we're kind of at the crest and now people are questioning like where value sits, right?
This instant, which whenever there's uncertainty in pricing, that usually means a price. The pricing is going to start to come down and how much it comes down, who knows that depends on rates and how much move, but prices are going to come down. And it really boils down to like, if you don't execute well on your business plan and you leave money in the table as a respect to your NOI, when it comes time to exit, it's going to cost you and that's going to be, that's going to cost investors that returns.
Jesse (27m 1s): Yeah. Yeah. I couldn't agree more. It's it's so hard to kind of do the analysis on, from an economic standpoint where we had Peter Lindemann, who's a professor at warden. He kind of wrote the book on like real estate finance. And we're talking about the economy and we have these kind of artificial, not artificial, but I think most people would agree. COVID-19 was not exactly a typical recession. It was a technical recession, but it was something that was more akin to like a, a natural disaster. So we're recovering off of that. And the question is, if the economy is going to go into recession where it naturally would have gone, or if it's going to continue along the way it is, that's really going to be the, you know, which way do we go on these things because interest rates where they're at right now, I think if the economy continues to be healthy, we can, we needed a little bit higher interest rates.
The question is if it starts running off from an inflation standpoint, but who knows? We, I, I don't, I don't crystal ball it. I just asked my guests to. So
Mark (28m 1s): W I'll be happy to tell you that we're in a recession and no one's actually said it yet. But as more business owners I talk to and, you know, cash is getting tight and all that excess liquidity that COVID created, or should I say the government created as a result of COVID, that's starting to burn off, except for like the craziest part is the people who got the most amount of money. Well, it's not that crazy. The wealthiest people who got the most amount of money are the ones who still have the money. And that's like the last bit of liquidity that's kind of hanging out and about, but all this stock market sell off and all this crap that's going on.
This, this, all this stuff in crypto it's, it's, it's all in response to people are starting to feel tight with respect to liquidity, and you wait, give it another 45 days and it'll come out officially.
Jesse (28m 44s): You know, I think this is the thing where you being a prudent investor really starts to pay dividends. And like you said, you can hide a lot with prices, just continually going up, like, Hey, I'm a great operator. Prices have gone up in my market 12% every year. So it hides a lot of poor management and poor operating. So TBD we'll, you know, we'll see what happens over the next little while. I want to get to kind of where people on listening can reach out to you and see what you're up to before we do. We typically, before we end the show, we ask our guests for questions, kind of a rapid fire, so to speak.
So if you're good with that, I'll lay them on. You
Mark (29m 22s): Let's do it.
Jesse (29m 23s): All right, mark. What's something that, you know, now in your investing career that you wish you knew when you first started out and you know, it could be something operational can be something on the investing side,
Mark (29m 35s): Any commercial asset, you control the value of your building based upon your net operating income. So the better you can a building, the more you can control the value of it when it's commercially based. So I would go commercial sooner.
Jesse (29m 49s): Yeah. That's great. What would you tell somebody that's looking to get into our industry, whether building a real estate business or going into, as an investor, whether it's LP or GP, you know, what would you tell that young, younger individual
Mark (30m 5s): Go find someone who's really good at it and work for free and learn everything you can and, you know, find a way to add value to their operation. And, you know, don't put your capital on the line, put your time on the line. Cause you got time to give you don't have money to give at that point.
Jesse (30m 21s): Yeah. Fair enough. Any resources or books you're reading right now that you think the listeners would get some value out of?
Mark (30m 30s): You know, it's interesting. I'm reading a book right now called slicing pie. It's by a guy by the name of Mike Moyer. It's interesting. Cause it talks about equity and what's fair and how to determine an equitable equity share. So I'm reading that right now.
Jesse (30m 47s): Sure. For some reason I thought PI like the math thing, once you brought up calculus.
Mark (30m 52s): No, it's I believe it or not. I'm not a math guy. I like addition, subtraction, multiplication, division, but stick letters in my math. And it all goes downhill for me.
Jesse (31m 0s): There you go. Well, luckily your PNL doesn't have a ton. It doesn't have any of the letters that don't form words. First car make and model
Mark (31m 12s): Man. The first one that I drove that was like kind of handed down, but like wasn't mine. The first one that I bought
Jesse (31m 20s): Was when you bought,
Mark (31m 22s): I bought a Mazda three
Jesse (31m 25s): Rotary engine.
Mark (31m 27s): Yeah. Mazda3 stick shift. There you go. Because I was cool like that
Jesse (31m 33s): Starting my buddy about this. I was just like stick shift. I had a million people have said this, but I watched this, I listen to his podcast, econ talk. He's like, it is a millennial security device. And it was just like, nobody drives stick. I, my first car was a, was a stick as well. And it's just like, yeah,
Mark (31m 50s): Well it's funny. I've, I've gotten in driven stick shift cards since I got rid of that car and then got another car. But it's now it's like, it's a little more herky jerky. Cause you know, not driving in every day. And plus every clutch is a little different,
Jesse (32m 4s): But yeah, you gotta, you gotta work. Awesome. So for listeners, aside from, as I always say an easy Google search, any specific places that you'd have people reach out, we'll put links in the, in the description for the show.
Mark (32m 19s): Yeah. Easiest way to find me is investing with mark.com, M a R K and then Instagram back slash investing with mark Facebook, LinkedIn. It's all there.
Jesse (32m 32s): My guest today has been Mark McGuire, mark. Thank you for being part of working capital.
Mark (32m 38s): Thanks.
Jesse (32m 45s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time
Speaker 0 (22s): E
Jesse (23s): This is Jessica forgotten and you're listening to working capital the real estate podcast. My guest today is Mark McGuire. He's the C I O of Herth capital. He's a full-time real estate investor and operator that's when mark at the time plunge into real estate sales, after running hard on his own for three years, working 80 to 100 hours a week, mark realized he needed help. He transitioned his real estate practice to Keller Williams in 2017 to learn how to build a real estate business. He hired and fired agents learn from his mistakes and then rehired them all over again.
Since 2013, mark and his team have brokered more than 300 homes with a total sales volume exceeding 83 million. They've also raised over 50 million capital for her fire, mark, you and I were just talking before we want to get into a lot of what you're doing now, which sounds like general partner and sponsoring deals. First of all, welcome aboard.
Mark (1m 13s): Thanks for having me Jesse excited.
Jesse (1m 15s): Yeah, I really appreciate it. So lots to talk about here. You've had a pretty, a pretty interesting background in terms of where you started out in your career and what you're doing today. And I want to get into for listeners the different asset classes that you're working with, but before we do that, why don't you take us back to kind of where you got into real estate? How that your story unfolded at the beginning?
Mark (1m 39s): Yeah, so real estate was something that was in my family. You know, I tried to go the college route net that really didn't align with my way of being a really I learned hands-on and I could, I could do the school thing, but I just hated it. And my mom's a teacher, so that went over really well. And then, you know, transition to my first entrepreneurial venture was playing in a band and we played, I was in a band professionally for seven years. We ended up getting a record contract with RCA records and I had had my I'm sorry,
Jesse (2m 15s): Small outfit.
Mark (2m 16s): Yeah, yeah, just a little bit. And I had had my real estate license at the time. And when we got the record contract, I remember, you know, this real moment of clarity of looking at how much money I was going to get as part of the contract that was guaranteed. And then how much money I had commissions pending with my residential real estate sales business. And I just was like, well, why would I sign this 14 to 20 year contract? Like that makes no sense. I'm, I'm going to be a slave. So went into real estate sales full time and had the opportunity to, to really start to understand business and learned about this whole thing called like a profit and loss.
I never went to school for any of it. So it was kind of just a giant trial by fire and I'm kind of became obsessed. And then after that, it was just like, how much more could I could I build? It was just a constant pursuit of growth.
Jesse (3m 8s): Fair enough. So you kind of run through the process, you're in music, which is awesome. What a, what instrument or where you vocals? What did you play?
Mark (3m 16s): No, I was actually, I was, I played drums. I did sing background vocals, but drums was really my main contribution.
Jesse (3m 22s): Nice, nice. I'm a big, big guitar guy. Just, just, just bought a, a PRS recently. And so I'm pretty, I'm having fun with that somewhere in the background there. So that's really cool. So RCA, I, like I said, it's not exactly a, a small outfit, so congrats on that. But even with that, you kind of look back and you start real estate as a path. So bring us up to speed today. I know that you're continuing to build wealth through real estate and you are LP on a few deals in various asset classes and running point or general partner on others.
Maybe you could tell listeners a little bit about what that looks like and how that process kind of evolved.
Mark (4m 3s): Yeah. So when I was in residential real estate sales, I spent a lot of time, you know, getting to run numbers on just single families. One thing that I was really fortunate to have was a family that was in real estate. So my, my grandfather was the main driving force and he owned a bunch of properties and I got the opportunity to work and be the, the, the assistant to the maintenance man. So I was like the guy that just said, Hey, there's a pile of trash, go over there, go take it and load it in the truck and throw it out.
So I did that for a couple of years and, you know, that's what it took to be in the band and have the flexibility to be able to get up and go whenever I needed to, they either had to go for on the site or they didn't. So there, it was just a matter of, you know, as I made money and, and, and generated income from residential real estate sales, my grandfather always told me, you know, real estate sales, you know, will make you money, but it will make you rich. And I don't know if you've ever heard of the saying brokers died, broke because so many people in sales, they make good money in commission, but then they, you know, spend it all and they don't get into assets that help you defer some of those taxes
Jesse (5m 19s): And build wealth.
Mark (5m 20s): Yeah. So it really came down to saying, Hey, I want to, I want to be able to get paid while I sleep. And so I've started buying condos and single families. And because this was 2013, 14 when the market was, you know, really, really low and then just kind of wanted to grow it from there and got interested in the commercial loan space. And, you know, I lived on as little as I could without feeling like I was, you know, I'm going to say punishing myself.
I wasn't like sitting there and eating ramen. No, I was never the ramen noodles guy. There's a lot of those people that, you know, they, I mean, I like pain, but I don't like it that much.
Jesse (6m 0s): You know? And I don't understand that maybe we said Italian upbringing. I'm like, you know, pasta is just this chief.
Mark (6m 5s): It is. But Robin noodles is pasta. It's just possible of sodium
Jesse (6m 10s): A hundred percent, exactly. Dumping, just dumping a bag of salt in there.
Mark (6m 16s): So I basically took it from, you know, just doing small single family and getting introduced to the concept of syndication I was trying to buy up. And it was just, I didn't have enough income. I didn't really know the way that the game was played. So syndication was my way to be a part of bigger deals. And I got, it was a, it was a question of bandwidth because you only had so much time to operate so many deals the right way to execute on them. And syndications for me were a way to keep my money moving at a good velocity without having to actually be the one driving the ship forward.
Jesse (6m 50s): So in those syndications where you limited partner in like the first one,
Mark (6m 55s): Yeah, I was an LP in probably seven or eight before I started on the GP side.
Jesse (7m 3s): Yeah. Which is that's fascinating to me because some, some would argue that it's, it's easier to get into being the LPN and definitely in a sense it is right. You're just, you're just providing capital. But I think the analysis is for somebody that's breaking into the industry, it's pretty, you know, ballsy to just jump into LPs with, without doing your proper due diligence. And I'm not saying that you didn't, I'm saying a lot of people, they see an investment and then they go in and that's why we had Brian Burke on.
He wrote the passive, I think it's passive real estate investor.
Mark (7m 36s): It's a hands-off hands-on that's
Jesse (7m 39s): Right. So we were both talking at the last BiggerPockets conference and what I found fascinating about this book, not just to plug it, it's just from the LPs point of view, which you never really read in a lot of these books. A lot of it is you're the GP you're running the deals. So that's pretty awesome. And then the other thing I, I feel in tell me if this is what you experience, I've told partners of mine before that we should be an LPN, this deal. And it's not necessarily because I think the deal is great. Is I really like the sponsor. I really want to see what, what he or she does with the investment.
And you learn so much about, okay, they're using this software, oh, they're G they're doing updates this way. I, you know, the last person I invested in did, did them this way. So I feel like there's a lot to learn from somebody who has already established themselves as an LP. Was that kind of your experience in those first, you know, six or seven, whatever they were.
Mark (8m 27s): So it's funny. I never went into syndication, investing, thinking I was going to be the guy syndicating. So I always went, I went into it because, you know, I could do my own deals. I knew how to run them. I knew how I knew how to pull the levers. I mean, it started as single family, right. Which is buy it at the right price, fix it and understand what the rental value is going to be at the end. Now, syndications do that same thing on a scale times, 100, 200 times. Right? So that's, it's the same concept, but it's kind of like if someone just gave you a graphing calculator and said, Hey, tell me what the graph looks like for this, you know, inequality, if you don't know how the basic calculus or algebra works behind it, then, you know, giving it, given that calculator is great, but like, you need to know how the, the math, how, what the long form version is.
And that's what single family was for me was the long form version. Now that I'm in a syndication, it's like, okay, what are the levers that we're going to pull here? How are we going to pull them? How much do we need to pull in totality in order to get up to what we can project? And at that point, like, I can pretty quickly go like, all right, this, this will work. Or it won't.
Jesse (9m 38s): Yeah. And I find that the one thing with single family and I I've had a very similar kind of history or, or path that you took. I mean, it can, it's very binary. It could go that you have a terrible experience or that you have a great experience in that is really predicated on the fact that you don't have a hundred tenants. You have one or two in a certain investment. So if it goes poorly, you feel like the whole thing is going poorly, where that the nice thing with apartments is you do scale it up and you're able to have economies and, you know, the losses, the winds help with the losses and things kind of even note.
But I feel like a lot of it is, is that mental barrier, you know, when, when you're starting out buying that first condo, the idea of you owning 80 units is, you know, so far away from, from your reality. So tell us how you moved from. So you moved from kind of what you're doing originally in real estate, into being an LP on these deals of whatever it was, six, six to 10 or whatever you invested, what was the, your experience or what was your outlook after seeing different investors? Do these deals differently?
Mark (10m 43s): I mean, you know, Brian Burke covered a ton of it in his book. So if you haven't read that, read that, I mean, it's, it's, it really sums up pretty much everything you need to know in more detail than you need to know it. So if I were to boil it down to brass tacks and make it really simple, I learned who communicates well, cause I value communication. If you don't communicate well, I don't wanna, I don't want my money with you. I like quarterly communication, monthly communications, just too much for me, because at that point, like I don't, if I wanted to have monthly communication, I'd be, I'd run the deal.
I, I want to know that my money is okay, but I
Jesse (11m 20s): Don't from the contractor.
Mark (11m 22s): Yeah. I, yeah, not interested. I wanna, I wanna know, you know, who does what they say they're going to do. And by that, that can be with respect to distributions that can be with respect to execution of the business plan. There's different ways that that shows up, but I'm paying a lot of attention to do they execute and do what they say, do they deliver? Because so many people and anyone can put something on a spreadsheet, say here's what this is going to do.
And this is gonna be worth X by this time. But if you don't go and see you, those, you know, quarterly execution updates, demonstrating that they're tracking performer, tracking their execution timeline. Even if the NOI doesn't track because the market's not, you know, didn't pan out the way you thought, but you're executing to the business plan. I'm not going to fall to sponsor for that. I just, wouldn't
Jesse (12m 18s): Sorry. Go ahead.
Mark (12m 19s): Those were the two, those were the two big things for me. And then I would say the, the third thing is you get to see who actually underwrites, conservatively, everyone, underwrites, conservatively. It's like, everyone leads with that. And when you
Jesse (12m 35s): Conservative figures here, we're just going to change this exit cap rate here. And there's your 30% IRR.
Mark (12m 40s): Yeah, exactly, exactly. It all. It all comes down to that. You get to see, you know, as the tide is going out here, I think we're starting to see the high water mark. You're going out. You're about to see who's swimming naked. It is going to it's it's gonna, it's going to come.
Jesse (12m 58s): Yeah. Well, it it's to your point of, you know, I don't necessarily see that you're going to track exactly like your, you know, your memorandum or your deck. You showed everybody, but it is this idea of like communicating on a regular basis, tracking the progress. It sounds like when I hear guys like you talk, you can almost hear a sales background because if you're a good sales person and in this case, like real estate sales, the first, the, one of the most valuable a number of them, but one of the mentors I had, one of the most valuable lessons I ever got was listened, deliver bad news, quickly, deliver it fast.
And you know, you, a lot of people try to run away from it, but listen, like, I'm going to give you a quarterly report. This is what's going on. I'm going to give it to you every quarter. I'm not going to try to run away from, with what's happening. We're obviously gonna make sure that, you know, things go as smoothly as possible. But I think communication is huge. And in the long run, even though it hurts those days where you're delivering bad, you know, bad information, it's important that you do that for your credibility.
Mark (13m 58s): I don't, I would say not don't just deliver bad news, but deliver the solution, delivery, deliver your solution to the problem, along with the problem. Because, you know, coming from the days of residential real estate, if I went and delivered a home inspection report with a bunch of bad news and didn't provide avenues to solve it, then like there's full on panic. And everyone's like, wow, man, this is terrible. And people just go, you know, off the cliff into the deep end.
Jesse (14m 28s): Yeah, no, I couldn't, I couldn't agree more. So let's get into a little bit about the LPGP relationship. So for those that don't know, I think most of the listeners are familiar with the general partner and limited partners. Basically try to give me your, your perspective of what you're looking for. Let's start on the LP side when you're looking at a general partner. So you talked about somebody who's a communicator, somebody who's going to be, you know, tells you what the, what they're going to do is, is in communication with you.
But what are, what are a couple of red flags? You know, we can pull them from, you know, from Brian, but we've got you here and I'd like to get your thoughts on it.
Mark (15m 8s): Yeah, here's what I would say. I always want to know what are the assumptions in the model? I always ask, you know, what are your rent bumps? That's a big one because you can go and make revenue look a lot higher than it really can and, and will be if you're over aggressive, I want to know. And that kind of goes along with how are you to creating the value? So is it through, you know, rent?
Is it through adding additional square footage in self storage game? Or is it adding, you know, like converting units that, and, you know, chopping them up and making them a little smaller, but I also want to know, you know, what's your exit cap rate assumption. That's such a big lever. That's so just not understood it. The general person does not understand how exit cap rates are such a powerful lever in the value gaming
Jesse (16m 8s): Return.
Mark (16m 9s): Oh yeah. So that's a really, really, really big one. And if you don't know, the re the relationship net operating income divided by cap rate equals your asset value. So understand if you're going in buying, you know, a cap rate and it's, and it's hard to set it because just cause you're going in at a five cap on actual is there could be a ton of runway in the, in the, in the gross revenues because it's not being managed well. So, you know, sometimes people think that they're getting a steal, you're paying a high cap rate on something like that. But if, you know, as the operators, a ton of runway on the rent roll and fine, give them a five cap and just know that you're going to double the revenue and then you're going to sell it at a six, but the double revenue still generates the value.
Jesse (16m 50s): Yeah. I think one thing I'd tell a younger investors or people that are trying to understand the, the usefulness and sometimes the work you should throw cap rates out of perfect illustration is you can have a building with a 1% cap rate. And it's an absolutely amazing investment because you, you have vacant possession of a building in a great market. So, you know, this idea of, of cap rate being the be all and end all, you know, you have to really factor it into our, are we a stabilized asset? Are we fully tenanted the other piece too, of, you know, just so listeners are following along with exit cap rate, or sometimes you'll hear it called the reversion if you're in, in college and finance right now.
So this idea that you have to apply a cap rate to that last year, or say a five-year investment that last year net operating income, just like mark was saying here, that is an assumption in the deal. And the common wisdom is that that cap rate should be technically higher than your entry cap because the building has degraded over time or, or kind of, it has gotten older, the actual structure, not the land and that cap rate, you know, you can just do the math right now. If you have a million dollars NOI divide that by 4.5 or divided by 5.5, you're going to see a drastic difference in the valuation.
And that's going to really affect the levered return on investment. So that's a great point. Are there any, w you know, when you look at an investor or an investment, and you're seeing the, the debt side of the equation, the mortgage, what do you like to see there? Is there anything that you're looking out for that you're keeping your eye on specifically?
Mark (18m 22s): I mean, I'd like to understand recourse, is there recourse on it or is there not because if there's recourse on it, you know, the person who's running the deal has more skin in the game because when you're an LP, generally, I'm not going to say always, but pretty much always you're at risk. Capital is only the capital, the equity you contributed to the, your LP position. Whereas the sponsor who's on the GP side, they're the ones taking the risk, signing on the debt.
So most, you know, most, most people in, in multi-family, and, and in like industrial, they're going to go for CMBS or life insurance company, life code debt, and they're going to go for non-recourse, which is smart. It's very smart. But if someone like self storage, a lot of times we're going for like regional banks and regional banks don't want to give non-recourse, they'll give partial recourse. Yeah. So I still have skin in this game if I don't do this thing. Right.
And versus someone on a multifamily, if the project totally goes sideways, they hand the keys back and go, Hey, sorry, this is your problem. Like, I tried my best. And you as the investor who put up the check, you're out the money and the guy who ran the deal just lost the reputation. I mean, that's, that's what you're really losing, but they didn't lose cash. So to speak.
Jesse (19m 41s): Yeah. That's a great point. I, the last investment that we were running GP on, I remembered speaking with an investor and he said, and it's not a dumb question. It's a, it's a logical question. They said, well, you know, how much are you investing personally? You know, I thought it would be more. And I said, my answer to him was, listen, it's, it's the wrong question. I'll answer it. But it's the wrong question. And I'll tell you why. So I tell him how much we're investing in the deal. But then secondly, I'm saying that we're signing on this debt and it's, this is, this is not debt.
This is basically my unborn kids. If everything goes wrong here, that's what gets affected because we're personally guaranteeing the debt. I th that's a question I think is important because at the end of the day, if I know that the GP is really, like you said, has complete skin in the game, that changes the dynamic for me, for sure.
Mark (20m 30s): Yep. Yeah. I mean, and, and honestly, like I, especially right now, I will want to see lower leverage. Multifamily investments have been going 80% with a 24 month IO interest only period. And on a 30 year amortization schedule. So talking high leverage with very little principal pay down with, so your 30 year, the higher your amortization period, the, the slower you pay down your principal loan balance. And then when you go and you add a 24 month interest only period on the front of that, you're paying no principal for two years, and then you're paying small principal for the three years.
So if you're holding it for five years, you're really banking on the market to go up. So at the time of disposition, you're not in disposition to sale, you're not in a place where you're going to get, you know, you're gonna be under underwater. And then at that point, you're you got a deficiency. So you're paying to sell the property, or you're having to refi at that. Five-year mark. So I, I hate high leverage right now, like 80% leverage scares the shit out of me and interest only periods on loans.
Also equally terrifying right now for me, unless you're at a super low leverage point.
Jesse (21m 46s): Well, it's like when you describe it that way, you're like the big short 2.0 there where you have like this balloon, or, you know, you have an IO period. And then all of a sudden it kicks into to have whatever you're looking for, stabilize that after that. But I think, I think what we've learned over the last six months, or even shorter than that with interest rates is that LTV is important to a certain extent. But what most banks that we're dealing with, what they're looking at is that service coverage right now, how much more do you have to pay then than your actual servicing of the, of the mortgage or debt.
And I think that is a, probably a prudent way to look at it, but yeah, I think, I think you're right. I think most of the going forward this next year, I think these high, these individuals or companies that are doing very high loan to value are kind of setting themselves up to potentially be in a little bit of trouble if you know, the economy goes the wrong way.
Mark (22m 39s): Well, and so then the question becomes, okay, so let's say you got a five-year term with a 24 month IO at 30 year am. Well, do you have extensions beyond that? That will allow you to go and buy some time if the market doesn't, you know, the market's not cooperating with your exit timeframe that you originally intended. So that's understanding, you know, the ability to have extensions on the backend. Can you buy an extension or does the rate reset? Meaning like now you have to go and go to, you know, whatever prime is or prime plus, whatever the agreed upon amount is in the loan docs.
And this is the thing until you operate, actually, you don't even know how to answer these questions. You don't even know what this shit means. Let alone have the ability to ask the question to be able to actually ascertain that answer.
Jesse (23m 29s): Well, I, like you said earlier, just go on a podcast, here's your credibility. So I want to kind of jump to what you're kind of looking at right now. What are deals? You know, what, what's your target and are you doing more self storage? You're looking at apartments,
Mark (23m 46s): We're all self storage. I mean, you know, with hearth fire, all we do is self storage. That's, you know, singular focus. I mean, we just want to go and be fantastic in that space and just crush that space and know it inside and out that said the challenge right now is with rates ticking up, the more money you borrow, the bigger the deal, the rate hikes are because it's compounding a problem. So on a mortgage, as a residential, and you're borrowing 250 or 300,000 bucks, that's such a big deal.
It does impact, but not a huge deal. If you're going to borrow 5 million bucks that little, you know, half, half a point and rate can really impact your, your, your monthly debt service. And at that point, it impacts what you can pay and your debt service coverage ratio and what you can pay for, for the property. And right now, sellers, haven't adjusted to
Jesse (24m 45s): A hundred percent
Mark (24m 46s): New debt terms like seller sale price expectations are still at, you know, all time low rates. And there's a gap right now. And the thing is, is there's a lot of stupid that hasn't burned off yet. There's a lot of people still paying way too much. Yeah. I don't know when that stops. So it's like, we're just in a mode of sticking to our guns, putting in LOI, but being patient.
Jesse (25m 9s): Yeah. It's very, yeah. The price that pricing is so sticky because people, once they anchor to it, like, you know, just for on the kind of the sales side with real estate, once you stick to a price, you do not want to come off it. We have clients right now that we're actively, you know, we've marked down some prices depending on the asset class, but people are starting to say, well, here's my offers here because cost of capital is going up. And our clients are just like, no, like the prices that shouldn't affect price at all. It's like, no, it does. And it should. But the fact that there's that disconnect.
It'll be interesting to see how long this lasts. If we, if we stay in this kind of environment, even if the interest rates kind of stay stagnant, I feel like the prices have to reflect, have to adjust to it. But I think it's definitely the, there is a time period where people do not want to mark down because they're just used to what we've been living through for the last 10 years, to be honest.
Mark (26m 1s): Yeah. It'll be real interesting. I mean, we've been up until the right fence 2012. And so there's a lot of sponsors, syndicators, whatever you want to call it that have operated like crap that have gotten away with poor execution and poor operations and poor, poor deal management. And now that pricing is reverting and you're going to start. And I mean, I don't know. I think we're right now, we're kind of at the crest and now people are questioning like where value sits, right?
This instant, which whenever there's uncertainty in pricing, that usually means a price. The pricing is going to start to come down and how much it comes down, who knows that depends on rates and how much move, but prices are going to come down. And it really boils down to like, if you don't execute well on your business plan and you leave money in the table as a respect to your NOI, when it comes time to exit, it's going to cost you and that's going to be, that's going to cost investors that returns.
Jesse (27m 1s): Yeah. Yeah. I couldn't agree more. It's it's so hard to kind of do the analysis on, from an economic standpoint where we had Peter Lindemann, who's a professor at warden. He kind of wrote the book on like real estate finance. And we're talking about the economy and we have these kind of artificial, not artificial, but I think most people would agree. COVID-19 was not exactly a typical recession. It was a technical recession, but it was something that was more akin to like a, a natural disaster. So we're recovering off of that. And the question is, if the economy is going to go into recession where it naturally would have gone, or if it's going to continue along the way it is, that's really going to be the, you know, which way do we go on these things because interest rates where they're at right now, I think if the economy continues to be healthy, we can, we needed a little bit higher interest rates.
The question is if it starts running off from an inflation standpoint, but who knows? We, I, I don't, I don't crystal ball it. I just asked my guests to. So
Mark (28m 1s): W I'll be happy to tell you that we're in a recession and no one's actually said it yet. But as more business owners I talk to and, you know, cash is getting tight and all that excess liquidity that COVID created, or should I say the government created as a result of COVID, that's starting to burn off, except for like the craziest part is the people who got the most amount of money. Well, it's not that crazy. The wealthiest people who got the most amount of money are the ones who still have the money. And that's like the last bit of liquidity that's kind of hanging out and about, but all this stock market sell off and all this crap that's going on.
This, this, all this stuff in crypto it's, it's, it's all in response to people are starting to feel tight with respect to liquidity, and you wait, give it another 45 days and it'll come out officially.
Jesse (28m 44s): You know, I think this is the thing where you being a prudent investor really starts to pay dividends. And like you said, you can hide a lot with prices, just continually going up, like, Hey, I'm a great operator. Prices have gone up in my market 12% every year. So it hides a lot of poor management and poor operating. So TBD we'll, you know, we'll see what happens over the next little while. I want to get to kind of where people on listening can reach out to you and see what you're up to before we do. We typically, before we end the show, we ask our guests for questions, kind of a rapid fire, so to speak.
So if you're good with that, I'll lay them on. You
Mark (29m 22s): Let's do it.
Jesse (29m 23s): All right, mark. What's something that, you know, now in your investing career that you wish you knew when you first started out and you know, it could be something operational can be something on the investing side,
Mark (29m 35s): Any commercial asset, you control the value of your building based upon your net operating income. So the better you can a building, the more you can control the value of it when it's commercially based. So I would go commercial sooner.
Jesse (29m 49s): Yeah. That's great. What would you tell somebody that's looking to get into our industry, whether building a real estate business or going into, as an investor, whether it's LP or GP, you know, what would you tell that young, younger individual
Mark (30m 5s): Go find someone who's really good at it and work for free and learn everything you can and, you know, find a way to add value to their operation. And, you know, don't put your capital on the line, put your time on the line. Cause you got time to give you don't have money to give at that point.
Jesse (30m 21s): Yeah. Fair enough. Any resources or books you're reading right now that you think the listeners would get some value out of?
Mark (30m 30s): You know, it's interesting. I'm reading a book right now called slicing pie. It's by a guy by the name of Mike Moyer. It's interesting. Cause it talks about equity and what's fair and how to determine an equitable equity share. So I'm reading that right now.
Jesse (30m 47s): Sure. For some reason I thought PI like the math thing, once you brought up calculus.
Mark (30m 52s): No, it's I believe it or not. I'm not a math guy. I like addition, subtraction, multiplication, division, but stick letters in my math. And it all goes downhill for me.
Jesse (31m 0s): There you go. Well, luckily your PNL doesn't have a ton. It doesn't have any of the letters that don't form words. First car make and model
Mark (31m 12s): Man. The first one that I drove that was like kind of handed down, but like wasn't mine. The first one that I bought
Jesse (31m 20s): Was when you bought,
Mark (31m 22s): I bought a Mazda three
Jesse (31m 25s): Rotary engine.
Mark (31m 27s): Yeah. Mazda3 stick shift. There you go. Because I was cool like that
Jesse (31m 33s): Starting my buddy about this. I was just like stick shift. I had a million people have said this, but I watched this, I listen to his podcast, econ talk. He's like, it is a millennial security device. And it was just like, nobody drives stick. I, my first car was a, was a stick as well. And it's just like, yeah,
Mark (31m 50s): Well it's funny. I've, I've gotten in driven stick shift cards since I got rid of that car and then got another car. But it's now it's like, it's a little more herky jerky. Cause you know, not driving in every day. And plus every clutch is a little different,
Jesse (32m 4s): But yeah, you gotta, you gotta work. Awesome. So for listeners, aside from, as I always say an easy Google search, any specific places that you'd have people reach out, we'll put links in the, in the description for the show.
Mark (32m 19s): Yeah. Easiest way to find me is investing with mark.com, M a R K and then Instagram back slash investing with mark Facebook, LinkedIn. It's all there.
Jesse (32m 32s): My guest today has been Mark McGuire, mark. Thank you for being part of working capital.
Mark (32m 38s): Thanks.
Jesse (32m 45s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Capitalizing on student rental opportunity
In this Episode You’ll Learn:
-Jesse’s Real Estate investing bio
-How COVID has changed Real Estate investing strategies.
-Handling risk and uncertainty.
-Investing in population centers like Toronto.
-Learning, refining, and expanding on strategies that work.
Transcription:
*Speaker 0 (0s): Hello listeners. It's your host, Jesse for galley. First of all, want to say thank you to everybody that continues to listen. We broke a hundred a little while ago, and I really, really am encouraged by the support and any questions that listeners have. You can always reach out to me and we can create a, just ask Jesse episode for those episodes. Anyways, I thought we'd do something a little bit different today. I was recently a guest on a very good podcast, breakthrough real estate, investing podcasts. If you don't know them, check them out.
They started podcasting back when Joe Rogan was doing his podcast out of his old house in that dark basement. So they've been around for a long time, check them out. It's great for people that are getting into real estate investing, or if you're a seasoned vet and you just want to up your game. So without further ado, my episode with breakthrough.
Speaker 2 (1m 4s): Welcome back, everybody. Thanks for joining us again. We are really happy to have you with us today for another exciting episode, full of, you know, chock full of knowledge and real estate stuff. So excited to get to that. And as always with me here again is Sandy McKay. How are you Sandy?
Speaker 3 (1m 24s): Fantastic Rob, because I had to be here again and you know, we're, we're getting into some interesting real estate stuff in the market and the world. So I think we'll have a good show discussing all sorts of stuff around that.
Speaker 2 (1m 36s): Yeah, we are. Things are changing, man. They are changing a little bit. So we do have some exciting updates. It's not just like the market's going up, the market's going up. And it was a little bit of a volatility there. So we can discuss that in a little bit, but everybody listening should go over to our website, breakthrough REI, podcasts.ca. They can get all of our past episodes from there. They can interact with our guests through the show notes and, and, and get access to any, any, you know, materials that our guests have, have left for us on there.
So breakthrough REI, podcast.ca you can also get our free gift.
Speaker 3 (2m 18s): Yeah. The ultimate strategy for building wealth through real estates. And of course, like, you all know you get on our email list when you do that and you will hear, but everything else we got going on and all the updates, all the, all the maybe events we've got coming up, webinars, whatever we, whatever we're putting out there, you will hear about it and never miss on an episode.
Speaker 2 (2m 37s): And please go over to iTunes and leave us a rating review. You guys know that helps it. Doesn't take too long, go over there and tell us what you think. Leave us a five-star review that always helps. And more people will be able to hear the show more people. When they go on search real estate, investing podcasts, they'll ours will pop up and there'll be able to hear all of our past guests and all the info that we shared over the years, over the past eight years or Sandy going on eight years now. So we're seeing program we're still here, we're still going strong and we're still excited.
Every single time we get behind these microphones. So, so yeah, listening.
Speaker 3 (3m 19s): Okay. Keep listening, keep growing. I think we're a, you know, it's fun. We're doing, we've, we've gotten into lots of transitions over eight years in different different ways and you know, we're ramping up if nothing else right now, we're, we're not slowing down. So we're going to ramp up and keep pumping up more shows.
Speaker 2 (3m 35s): That's right. And just like always today is no different. We have an exciting guest and Jesse is back. He was our guest on episode 1, 26 in September of 2, 20 20. So we're excited to hear the progress that he has been doing since then. He's been doing a lot of exciting things. So we're going to be hearing about that, and we're really excited to have you with us.
Speaker 0 (4m 3s): Thanks guys. Pleasure to be here. Good to see you guys again,
Speaker 2 (4m 5s): You know, so didn't want to mess up your last name. So I just didn't say it.
Speaker 0 (4m 10s): No problem.
Speaker 3 (4m 11s): I think for galley, I think we can hit is that right? I'll do a quick little backstory on who you are and, and that's, or listeners can, can recall if they missed out on episode 1 26, but just forgot was a commercial real estate broker and investor start investing in student rentals. We're over 10 years ago, I guess, on that now. And I've been investing since then single family homes, condos, et cetera, and, and definitely into multi-family apartments. And we'll talk a little bit about that in today. He's also got his user channel is contributed on bigger pockets.
He's got his podcast growing. He's probably working capital and certainly has some insight to share over the commercial landscape as well as he's, like I said, a commercial commercial broker in the lovely city of Toronto. And of course we've seen some, some major, you know, interesting stuff happening in that world over the last couple of years with, with COVID. So we'll talk to him about all these things in more in the show. So, yeah. Welcome again. And I'm happy to over here,
Speaker 0 (5m 13s): A pleasure to be here. It's a, it's pretty amazing eight years guys. Congrats on that. That is a, I feel like I don't even, I don't even think I was listening to podcasts eight years ago. Let alone knew what they were.
Speaker 2 (5m 27s): You were too young back then. Is that it?
Speaker 0 (5m 29s): Yeah. In the mid twenties, it was too young to get into podcasts.
Speaker 3 (5m 34s): Yeah. Well, why don't we sit with, why don't we start with a little bit of backstory. I know if someone's listening to your sh or your previous episode, you've probably heard this, but what's how did he get into real estates in the first place? What brought you here?
Speaker 0 (5m 47s): Yeah, sure. Yeah. For any repeat listeners, I won't bore them and go into super granular detailed, but I got started in, in Waterloo. I went to school and I went to university in Waterloo, Ontario, for those that don't know it's about an hour and a half west of Toronto, and I started renting out student housing out there. So that's how I got my first that's the area that I started originally. And from there continued to do that. Finish my degree. I worked in Toronto and eventually shifted from the student rentals that I kind of built up from there to different areas in Southern Ontario, switched from buying those into buying condos in Toronto.
And you know, if anybody knows the Toronto market, even now, especially back then, it was a bit of a hockey stick graph continues to be prices were going up quite a bit. And at the time I was doing some assignments of condos. So for, you know, any American listeners typically you'll hear the term wholesaling, but basically selling the contracts of, of condos, which at the time you had to be really careful about because, you know, the CRA was just the Canadian revenue agency was getting very particular on how this income is treated.
So from there, I switched kind of my geography to Toronto and started buying assets there. And then I work with Avis and young commercial real estate. I met my partner, John there, and we started buying multifamily apartments. And the first one that we bought was in Hamilton, which again is west of Toronto, but an hour. And from there, I think we talked a little bit before the show bought our first deal that we had, we raised capital for. And that was in pretty much downtown Toronto.
I have, if you're from Toronto, you'd probably call it Midtown. But for those that don't know the city, it's pretty much right in the city.
Speaker 2 (7m 39s): So let's dive into that deal. Then, like, one of the things that we like to do here is talk about some of the big challenges, right. Involved in something like that. So, so, you know, that's a massive undertaking, first of all, raising the capital and then finding the right building. That's gonna, you know, have the return that your investors want. So there's all kinds of challenges in there.
Speaker 0 (8m 1s): Yeah. I guess you could start with the first one and finding the property there's, you know, seeming seemingly continues to be quite a bit of capital out there. Deals are harder to come by good deals. So from that perspective, it was pretty much the same program that we use in brokerage and finding clients, you know, you're, you're looking for off-market deals and this particular deal was an off-market deal. You know, I used the resources that we have available, you know, for those in Canada, whether that's a land registry or you're lucky enough to have access to corporate searches and, you know, software like CoStar in the states, it would be, you know, secretary of state to find owners.
And then from there, it's just a matter of calling owners and seeing if they are open to selling. I found that there's a lot of owners out there that will maybe not necessarily take a lower price, but some will take a lower price if it means that they're just dealing without marketing the property without going through the hassle of, of bringing it to market. Sometimes it's the anonymity of, of not, you know, every single person knows you're selling your property. So it was really just a, just an old fashioned cold call. You know, I said, Jessica galley, I'm an investor in the, in the Toronto area passed by this property today.
And just wanted to see if you consider selling. And we kind of went back and forth, and that was how we initially took down the deal. So, you know, number one, it's always great. If you can find off market, you know, once they're out on MLS or wherever people are marketing the values, pretty much roaded from the, you know, the premium you pay on it. And then from there, we knew that we wanted to raise capital for it. It was just under $4 million. So it wasn't something that you necessarily it's right on the cusp.
I would say at least from a Canadian perspective on if you would need outside capital. But what we wanted to do is get practice at actually raising capital because really the, all the process that you go through, the, you know, creating in our case, the, the corporate structures, the limited partnership agreements, going to others to talk about the investment, creating, you know, information, memorandum that looks good. And you know, that you can actually sell it to investors. All that is the same, whether you're buying 5 million or 30 million and we see them in brokerage.
So for us, we wanted to cut our teeth on this one, raising outside capital. And that's what we, that's kind of the process that we went through for this one.
Speaker 3 (10m 29s): Th you have the data of the deal first, or the raising capital part first, or how did that work out with
Speaker 0 (10m 34s): Yeah, the, the chicken or the egg, you know, what, what I, you know, there's a bunch of resources online. You see it a lot more in the states now syndicated deals, and you're starting to see it more in Canada. People, syndicating deals for us. What we did was the process I wanted to follow was not have actual signed commitments from investors, but soft commitments that I kind of looked at people that I did my MBA with people that I did. I went to university friends from high school that I still connected with. Basically, if you go to your iPhone or whatever, whatever phone you have, I just know, cause I have the iPhone, you go to your phone book, you scroll all the way down to the bottom that shows how many people are saving your phone.
It's pretty crazy how many people are you actually save, and you can export that to Excel. And literally, I just emailed people that I just described. I said, Hey, you know, if you don't know what I'm doing to real estate a lot, you know, a lot of them did, were starting to look for properties to acquire manage. And we're looking for investors. This is the type of properties. So we had kind of a, a model property. These are the type of returns we're going after. And if you're interested, do you want me to let you know, if we do come across a property like this, and if not, no pressure, you know, basically unsubscribed type of thing.
If you, you know, you don't want to be involved. So through that, we got a lot of interest of people that gave us kind of a soft commitment, but then when we actually went to get the deal under contract, we definitely gave ourselves a couple outs in terms of financing. So to answer your question directly deal under contract first, then investors. But it wasn't like we, you know, we didn't even think about investors until we, you know, we put the offer and it was definitely part of the process.
Speaker 3 (12m 24s): Cool. How much were you raising or, you know, the exact amounts, I guess, but how many investors were you bringing into was intend to bring on like, you know, dozens or was it like one or two?
Speaker 0 (12m 34s): Yeah, the intent was to, so part of it was to not just make it like a partnership of four people, because then it kind of defeats the purpose of what we're trying to, you know, start to practice. I don't know the exact amount, but it was probably, I think with the GP, like with, with ourselves, which are my two partners, probably around nine or 10 and it wasn't supposed to be that high either, but we had a couple investors that we really wanted to get in the deal. And it was right when we were at the end, you know, it was tough to getting to the halfway mark that was easy, then like getting that extra bit, like really stretched for it.
And then in the end we had a bunch of guys that were just, or a couple of guys that were just like, yeah, no, I, I, I want to get in. And it, we, we had to fit them in. So we basically had to go back to some investors and say, listen, we want to get this other person in the deal. Would you be cool with, you know, having a $75,000 investments that have a hundred? So that's kind of the process we went from there. So it wasn't just one or two. We wanted to raise like a normal limited partnership.
Speaker 3 (13m 39s): Cool. And, you know, I think a lot of people are surprised. Like you said, it's pretty in a way it kind of made it pretty simple. You just went through your phone book and asked people, which is people, a lot of the times, they're kind of scared to do that. How did you, how did you like w what type of people ended up coming in on this? Are these like, you know, super rich uncles or something, are they like everyday kinda just homeowners that have home that could be
Speaker 0 (14m 6s): So, you know, for, for those that, you know, like from the outset, I, I I'm in commercial real estate. So there were a few of the guys in the industry, surprisingly, not as many as you would think. I think we talked about this last time. I'm always surprised, you know, how few people in our industry invest in our industry. So the type of individuals, what we did in Canada, you have a couple exemptions that you can use to get w get outside of having to file. Like you would, if you, your IPO and a stock. And those they're called prospectus exemptions.
One of them is friends and family. The other one is accredited investor status. So we were going to go specifically with accredited investors, but we noticed that there was a few of the guys that we, we had invest that were kind of on the border. And to, for that status, you have to meet a certain income threshold and a certain amount of time. So for us, that, for us, it was not really like super rich guys. Well, I mean, we had a couple of hockey players, but it wasn't because like, we were searching for high net worth individuals that was like word of mouth because our industry, there's just a lot of ex hockey players and, and so good connections there, but generally speaking, it's accountants in Toronto, you know, real estate brokers, you know, a couple other finance guys, like not, you know, not some rich old dude that has millions of dollars.
So it was pretty, pretty evenly split. We went in with 75, I think 75,000 was the minimum investment.
Speaker 2 (15m 39s): Awesome. Which if you think about it, I mean, if you're going to buy something on your own, I, I challenge you to be able to fund it with, with 75,000. So this is an exciting deal for a lot of people, you know, in that position. Yeah.
Speaker 0 (15m 53s): I think for a lot of the guys, like they wanted to get into real estate in some capacity, we're all, you know, my close buddies, we're all in our kind of, you know, late twenties, early thirties. And it's kind of that part in the career where they're starting to make, you know, make pretty good money and, you know, they don't want to go do what we do, you know, and actually own the property, speak with property managers. They just want to be connected with it in some way, this is a, you know, a route for them.
Speaker 2 (16m 22s): Okay. So now let's talk about the building itself, right? You've, you've found the deal. You must have some kind of a plan for, you know, increasing value. Let's talk about that.
Speaker 0 (16m 32s): Yeah. You know, that's like the, the Canadian landlord landscape, I know, should be a book or something, but it's, it's pretty challenging for, for landlords. It's definitely a tenant centric market, but that being said, you know, there are ways that we can add value to buildings and do it properly and, and make sure that, you know, our investors are taken care of, but you're also treating tenants with dignity and, and doing everything above board. So for us, the area that we bought is a place called the intersections bathrooms and Eglinton Toronto.
So for anybody that knows it's pretty much in the heart of forest hill and for still, I think, you know, probably the, some of the most expensive homes in Canada in this neighborhood. So part of the appeal of this property was the fact that the market, the rents were way under market and what we thought, or we came into our plan was we could take these two condo quality. And by that, I just mean putting a washers and dryers in the units, dishwashers, you know, the, the creature comforts that we, a lot of people take for granted, but in a lot of rentals, they don't have them and basically turn over the suites and put them into where we would class like a high-end rental.
So we had to pivot on that because this was, we closed the middle of last year. So we're right in the middle of the pandemic. So for us, it was okay, that high end market. And if you guys remember rental rates were going up, going up and then the pandemic happen and they kind of plateaued. So for us to be able to get the higher high-end started to the thesis, didn't really work from our vantage point. So what we did was okay, instead of spending $75,000 on a suite turnover, we spend $50,000 on a suite turnover, but we turn them into B class, even not super high end, but B class and where we can still get our return and we're not spending a crazy amount of money.
So that's kind of, that was the strategy going in. So since then we've renovated one suite, we're working with tenants right now on the other suites. And, you know, just anticipate the question about dealing with tenants and how to, you know, how to come to an agreement to actually get the units, because we did buy these fully tenanted. And part of the art, not science of Canadian real estate investing is working out an agreement with the tenants, if they're willing to end tendency. And it's a very, you have to be very delicate about dealing with that because, you know, for listeners that don't know, you can't just kick a tenant out because you're at the end of the lease.
This is not the way it works here. So that, you know, is something that we're navigating. And we have for the last six months.
Speaker 3 (19m 19s): Yeah. One of the beautiful parts of, of investing in Ontario at least is, is, is that, that landlord tenant stuff, lots of opportunity in it, I guess is the, is the, is the positive part of it, if you can navigate your way through it, but, but it's, yeah. It's, this is also a deterrent at times. So yeah.
Speaker 2 (19m 39s): I mean, it can be tough because, because you've bought the building with the rent significantly under market, what they should be, and nobody in that position is going to be like, yeah, I volunteered just leave. Right? Like they, they know they're going to have to go find something else. It's probably going to cost them more. So the whole thing is to work out a win-win situation for everybody. So you can go in there and renovate those suites.
Speaker 3 (20m 4s): You had a few tools that you mentioned before I wanted to ask you about your CoStar and some other ways of finding deals, you kind of breezed right through it. But I think there would be some listeners that might have gone. What the heck, what's that? How do I use that? How do I find, how do I use that to source deals? Cause that's the, that's the, you know, the every day dilemma with the investing in real estate, it's not necessarily the capital part, which is, you know, it's, that's one thing, but it's finding the deals is always the hardest part. How do you use those tools? You mentioned
Speaker 0 (20m 33s): Yeah, a hundred percent. Like I said, for, for listeners that have the benefit of tools, that a lot of the, you know, the guys in our guys and gals in our world in brokerage take take for granted. So we use CoStar quite a bit, CoStar tracks pretty much almost all of the commercial real estate properties. So multi Rez, retail, industrial office. So a lot of times if I'm looking at an area and I'm trying to find the owner of a building, I'll go directly to CoStar, look for the numbered company or the individual.
I guess if you're, if you're looking purely on the residential side, you'll find individuals, but for us, a lot of times, there's that extra layer that we have to go through. And it's typically a corporate name. And then from there, the corporate searches, I believe you can pay for them online. Again, a nice benefit of being in a brokerage. You know, we can email somebody in our brokerage and say, can you run a corporate search? And all that means is that the corporate, you know, veil of the numbered company, it'll just show who the actual individuals are. And then taking that to the next step.
You know, whether it's Canada 4 0 1, 1, are you trying to figure out based on the address, you know, what the actual phone number is? You know, sometimes you just can't find them and you just have an address and we've snail mailed stuff before too. And, you know, especially on the broker gen, you're just like, I want to connect with them and we cannot find a number for the person. Sometimes your only option is male. So that's like, if I, if you're going the CoStar route again, if you have access or you have a friend that's a broker, you know, then you typically will have access to stuff called real net and real track in, in Ontario.
I think it's, I think it's specific to Ontario, but I'm sure every province and state has something similar. And in that case, you know, you're looking up the actual record of the last sale. So it will typically show the stakeholders. A lot of times they'll show the banking, you know, it was paid for in cash. And I think real trap is actually purchased by Altice, which is another company similar to CoStar. I think that was fairly recently. You would probably know no, Sandy,
Speaker 3 (22m 40s): I know. Well, cause we use what we use real real track a bit too. And it's all, yeah, it must be
Speaker 0 (22m 46s): All to studio or something now. Yeah. I remember logging in and being like, what the hell is this?
Speaker 3 (22m 52s): But it's a good tool.
Speaker 0 (22m 53s): So that's, that's the road that I would typically take. Now, if, if you're an individual that, you know, you don't have access to the majority of, of these things, you know, there's different, different avenues. You can go, the land registry is one of them. And if you go in any city, you can Google the land registry for ownership, and then you kinda kind of have to follow that same, that same process, the challenge for most people, especially if they're looking for commercial and they're not associated with any brokerages or they don't have a realtor that they're working with is the fact that the numbered companies there's, you know, there's very few tools aside from actually paying for corporate searches, which you can do as well.
There's a bunch of like, you know, online places that you can actually buy corporate searches to figure out who the owners are, but then of the day you can always, you know, you can still drive for dollars and, and find properties. You like figure out what the address and go that road as well. But yeah, that's kind of the process I use.
Speaker 2 (23m 50s): And city hall often as a kiosk where you can just sit down and, and, you know, do a registry search.
Speaker 0 (23m 57s): Yup.
Speaker 3 (23m 58s): I know it used to do that. We just started with that rubber. We used to do the Oshawa
Speaker 2 (24m 1s): All the time.
Speaker 3 (24m 2s): Yeah. I moved to Hamilton and they wanted to charge us for all that crap. So I kind of got annoyed by it, but every city has a bit different. So some of them are really easy and open source of info. Some of them are a little more holding it hostage and want you to pay or want you to go through hoops to get it. But you know, whatever you're willing to do, if you, if you gotta, you gotta go through a couple of hoops. That just means there's probably more, more. Yeah.
Speaker 0 (24m 29s): So do you guys, do you guys still do, will you go through land registry or do you guys now use different software? I know you, you guys, I think, well, Sandy, I know you do a lot on the residential side.
Speaker 3 (24m 40s): Yeah. We use real track though. A lot for the multi Rez. We've we've been using that for a couple of years. I would say once I found out about it, that's been, we've done a few deals from that. It's it's it's, you know, you gotta do, you gotta go through the work after like, just finding the info is one thing, but then yeah. Working through the call list and you know, it is quite a bit of work, which is, you know, again, why there's, why there's good opportunity at the other end of it. But real tracks have been pretty good. I mean, I think for us paying for it was roughly five grand a year.
I'm not sure if that, that financial elements changed now with, with, with their setup, but there, there are some real estate boards even that have free access to that. So depending that's one of the perks you mentioned, you know, some of the perks of having a real estate license or being a part of a brokerage, there's also real estate boards. Even that give you, I know there's a few that have free access to real tracks. So
Speaker 0 (25m 35s): Yeah, we, we had a few of our, so I work in kind of investment sales on the office and office, but our actual multi-racial team in our brokerage, they they've, a lot of the younger guys have had a lot of success on real track they've, you know, and it's probably because CoStar is, you know, it's so crowded now because it's easy. Like you can type into coaster this property and then you get the information. But if every other brokers chasing the same thing, that's where real track, you know, if people aren't using it as much in our worlds, that's the benefit.
But like you said, it's one thing to get the information you got to do the other 70 or 80%.
Speaker 3 (26m 13s): Yeah. Make the calls. Sometimes it's all the non-glamorous stuff.
Speaker 0 (26m 17s): Yeah.
Speaker 2 (26m 18s): My last three or four deals have been MLS deals that nobody wanted generally stuff that I showed to my clients over and over and over again. And nobody was, nobody was taking it. So I'm like, okay, well there's a deal here. I guess I'll take this one.
Speaker 0 (26m 32s): Was that cause they, like, there was the concern that if it's on MLS, it's not going to be a good deal or,
Speaker 2 (26m 37s): Oh no. I mean, Hey, that's what I do. Right? Like I'm a realtor. So my clients are buying stuff all the time. It would just be, so I've always been, you know, I've always been not necessarily property first, but like when I find something really, really that I think is really juicy anyways, I'll push it. Right. And so those would typically be the ones where like the, my 10 bedroom student rental in Peterborough that's up and running now, legally all got all the, like everything's a above board.
And I mean, I showed that I would say at least 20 of my clients saw that building and it was just, maybe it was too daunting. Maybe, you know, I had more vision than the people I was showing at the time. I don't know whatever it was, but you know, over and over and over again. And then just going, okay, why is nobody want this? Like, it's a, it's a gold mine. So you know, stuff like that.
Speaker 0 (27m 33s): Yeah. Yeah. I'm, I'm pretty bullish on student, student Rez. Again, I feel like it's going to come back. I know everybody. Well, not everybody. I think conventional wisdom or a lot of individuals just thought, you know, the pandemic, that's going to be the end of schools. And I was getting old from Waterloo, univer, sorry, Wilfrid Laurier university in Waterloo. They were calling me and they were like, Mr. do you own a property on Marshall avenue? I was like sold that like six years ago. Okay. Our records indicate you still own it. We I'm like, what's the call for, and the individual, like we're desperate need for housing for students.
So like they, they're trying to go the private route and get students that I guess are oversubscribed and residents to, to housing. And you know, that's one data point. But even in our brokerage, we've started to sell more student reds. So it's coming back.
Speaker 2 (28m 25s): It's interesting because I think during that time too, at the height of everything, right, they, in the, in the like actual dorm rooms on campus, they were doing this distancing thing where let's say the unit had six bedrooms. They would go, okay, now we're all going to put three students in there. So which made everyone else more desperate for outside accommodations, which worked for us. I've heard like both sides of the story from different investors in different areas and student rentals, but ours, luckily, you know, we didn't really have a hitch in Peterborough.
That's where ours are.
Speaker 0 (29m 0s): Yeah.
Speaker 3 (29m 3s): Lots of interesting. I look on, on the market and everything. Why don't we tell, why don't we, why don't we talk a bit with that on the commercial side? Why don't we hear what's been going on with, with that in the last couple of years? I mean, we, we last shouted, it was kind of starting of COVID and probably everyone was worried about commercial ever coming back or office ever coming back. Now we're kind of rolling into the, hopefully the ending here, like everything we'll see, what's changed. What's what's what's going on in that world.
Speaker 0 (29m 33s): So the commercial real estate like to take it from the four major asset classes. What we've seen is, you know, multi rise has continued to do well, you know, I'm sure it's not a surprise to anybody that that asset class has been one of the darlings of the industry. There's still rental appreciation. We're seeing a lot of investment go into apartments. So really it's again, you know, less, less, sorry, more and more capital chasing, less and less product. So you really have to kind of work hard to find that product, but that is definitely a sector that boosted or kept a lot of these commercial firms income or profits high industrial was another one, you know, who would have thought you'd have a global pandemic coincide with a lot of shoppers going online to begin with.
So a lot of these last mile delivery locations started getting built like crazy. We're in a huge, still in a huge supply constraint. On the industrial side, we were low before the pandemic from a vacancy perspective. I think Toronto is number two in north America. I think LA was, I think they were number one or anyways, we were, we were right up there and now we're sub 2%. Again, last you hear 1%, one and a half percent. So industrial has been crazy.
Retail is, since we last spoke retail, a lot of people are like, oh, retail is not doing that. Great. And it's not necessarily true. Like I always say, when you have like Joe's TaeKwonDo or, you know, Stacy's nails, you know, you have those types of plazas that don't have any grocery store anchored aspect to them, or you don't have any essential service aspect to them. Yeah. Those have struggled. But over the last year there's been a lot of opportunities and assets purchased with those essential services and grocery store anchored that institutional and private capital are putting money into.
So I think that's going to remain strong. It's just has to be fundamental because you know, the states is overbuilt and we're, you know, we're not at that extreme, but we ha we overbuilt retail for, for years and years. And then, you know, the question mark on office is it will be interesting to see how this one plays out because you know, to, to Rob's point in student rise where you have people distancing, you know, same thing in off it's like are as a company, number one, are we going to go back to the office? Number two, if we do go back to the office, do we need less space or do we need more space because of distancing?
And you know, this conversation was happening over the last little while. I can say that. It definitely got to the point where a lot of people put inventory onto the sublease market. For some contexts in our city, we have normally 600,000 to 900,000 square feet on the sublease market. I think in COVID we peaked at like three, I think it was 3.3 million. So that is a lot of stuff going on the sublease market. And a lot of that is like a knee-jerk reaction from a CFO or CEO.
That's like, alright, well, put it on the sublease market. So we've now come back down. I think we're now in the low twos. So from our perspective in brokerage, that's going in the right direction. We look at that as, you know, normalizing or have individuals that are getting a little bit more clear on what they, what their plans are in the future. But I think this is a net positive, obviously, you know, fear and brokerage. If you're not glass half full, it's gonna, it's gonna be a challenging time. And for me, that works in office.
A lot of what we do is in the office space. This was something that if you've been in office for a long time, you saw this trajectory happening before COVID this hybrid working zoom. We now know so well, this was something that predated COVID, it kind of pushed us into really determining why we, we occupy space. What is the office for? And I'm sure, you know, even you guys probably see it with the businesses that you work with, or even in brokerage, you know, you start asking serious questions of what are, what is the office for and what is, you know, can we work in other ways?
And w from our clients, some of the answers were, we don't need to be in the office for this. And other clients were like 100%, this aspect of our business, we need a, we need a physical location. So that's kind of the upshot of, I'd say like the major commercial sectors
Speaker 5 (33m 54s): I'm saying.
Speaker 2 (33m 57s): And would you say that those, those ones, that sort of the ones that said, absolutely we need an office. Those are the ones that have basically brought those numbers back down. And do you think that now there's going to be more sort of changing their minds on that? Or do you think we're going to sit sort of right around where we are now? And that's sort of going to be in a new plateau.
Speaker 0 (34m 19s): There are a lot of offices that right now are still sitting vacant because, you know, we, we had so many false starts, especially in, in, you know, in Canada, Toronto, specifically for us, we're, you know, we're okay, we're back. Oh, no, we're not back. And I don't want to say, you know, there's the, you know, the quote that this time it's different. I don't want to be that bold. But one of the things this particular time is that we have indication from the city of Toronto, that they are going to be occupying their offices in March, the end of March.
So they usually don't say anything unless they're going to actually do it because it would just look really poorly on them. And that wasn't something we had over the last year. We didn't have the city or any leadership really give clear direction. You know, like when we, when we opened up again, a lot of the direction from the province was all right, we're opened up, you know, but don't go crazy. And you Yell at us like we're on queen street where retail shop. You tell them that you can leave your house, but tell them not to everybody go shop.
So I think this month particular, because just recently, we are now allowed to occupy without a passport. We are going to be able to unmask in a week. And then the city is giving the business community direction. What you started to see after, as banks starting to put in place their policies. Because what I've learned over the years is that legal teams love to just point to other reasons why their decision made sense. And, you know, you have a legal team at a big bank. That's like, well, the city of Toronto did it.
So, you know, as silly as that sounds. So I think, I think TBD on, on how the recovery happens, but I think that it's going to be healthy for the office market, because as you guys know, it's not just about the tenants or sorry, the landlords, it's a tenant landlord market. And I think for a long time, it's been very unhealthy for the tenants.
Speaker 2 (36m 14s): I find it odd Jessie, that you should expect leadership from the leaders I've learned, I've learned over the past a year and a half that that's just not going to happen.
Speaker 0 (36m 23s): Yeah. Yeah. Well, you know, direction is, you know, not even leadership, just a little bit of direction would be, would be a helpful piece for us. But, you know, that's, that's kind of how I see, you know, the next year going in terms of, you know, continued, you know, continued investment because money is still very ubiquitous. Like we have a ton of money circulating, but it's always that inverse relationship. It's like, you got to find the deals now. And then, you know, when the deals are everywhere, there's no money.
So
Speaker 3 (36m 57s): That's, you know, that's what I, that's what we talked to a lot of clients or just people that we're talking about investments is like, you know, anyone waiting for the next opportunity, the next buying market or whatever. It's. And maybe, maybe there's a slight bit of that even. I don't know if it's a window right now, or if it's here for a little bit of a, of a few months or whatever, but there's a little window. It feels like almost today, actually, as we're sitting here, there's been a couple of weeks of, of where we've been having these conversations around, say, if, if you, if you missed and you hadn't bought in the last couple of months and you really, really want to, or need to, like now it's an amazing time.
And it's so funny. Every time this happens, the pushback, there's always another reason to push back. And now they're all scared. So you're like, well,
Speaker 2 (37m 39s): We're dealing with, you're dealing with somebody that has that mentality in the first place. Like the person that's like, oh, I'm going to wait and see what happens. That's, that's, you know, that's going to be just heightened in this climate. I think, you know, it's not going to alleviate any doubts or fears just because the market's dipped a little bit. They'll be like, oh, I'll wait and see if it continues. Yeah. Yeah.
Speaker 0 (38m 0s): What have you guys seen on the, on the residential side? Has the, has that market like, is that bifurcated between between homes and condos has one, has one done better than the other?
Speaker 3 (38m 15s): I mean, how like a detached and, and not, not condos take away them, but everything else is definitely, definitely a cool, the little in the, in the sense that it's only cooled in the amount of offers, amount of action on the house. It's not cool in terms of price, really, from what we've seen, prices that, you know, we've just hit that level where people have gone. Now we're past everyone buying for hundreds of thousands over asking it every time it's still happening, but not every time because now people are listing at already the hundreds of thousands.
And they're not listing at the right where we were two months ago. So I think, yeah,
Speaker 0 (38m 50s): Isn't that amazing with residential real estate? My mom would call me and be like, ah, this place is so familiar and a half. I was like, okay. It was listed at 600. I was like, well, it shouldn't have been listed. It's like, no,
Speaker 3 (38m 60s): No, I know it's so silly. So now they're listening at a million and a half and they're just selling at a million and a half or the selling at a million, four seven, or they're not, or they're not getting 10 offers or 20 or 50 offers on offer day. They're getting one or none. And then they're, you know, people are the buyers in general, a little tired of all that crap too. So, you know, that being said, we, we, we had one of our, this in the past few days, we, we sold the fourplex here in Hamilton that was went nuts when like 500 grand over ASCA.
We didn't expect that we'd expect maybe maybe a hundred or, and changeover. It went way, way over. And like, I don't know. I think the, that, that multi-family investment market is still really, really, really, really hot, whether that be small multi-families or bigger in the apartment building style, like there's that market's still, there's still a lot of money out there to invest in that people have a lot of people that own real estate for sure have made a lot of money and they need to do something. And they look at real estate and go, well, I made my money in real estate.
I just guess I'll reinvest in real estate. I think that's a pretty common a mindset out there. So the investors are going nuts still. And yeah, I think the single family, new first time home buyers and stuff, or are a little tired and maybe feel like they missed out and probably
Speaker 2 (40m 19s): Now might be the time for them to jump back in. Because like you said, like seen a drastic reduction in the amount of showings over the past. Let's be three weeks even. Yeah. And, and I think that's a good indication that now might be time for those people who have been sitting there or, or thinking, feeling a little defeated maybe to, to jump back in.
Speaker 0 (40m 40s): I was a little surprised during the, during the pandemic where people were, you know, saying the thesis was okay, everybody's leaving cities where, you know, the condos are dead. And I was just kind of, you know, first of all, I was surprised that that was of you're hearing that by these, you know, talking heads or people that are supposed to be experts in our industry when I was my thinking was good cities, like quality cities, whether it's New York, Toronto, Bo like the city, the city is really where everybody comes for efficiencies.
And even now like condo prices, it at least like in my building, I think there's been a couple of record condo prices in the building in the last few weeks. So it seems to me that condo is still a huge demand, unless, unless I'm totally misreading,
Speaker 3 (41m 27s): I think at the rate at a, at a, at a standard sort of priced condo, like if you get in the more expensive ones, there's definitely little slower, but an average price gone over for sure. I mean, we're selling, we're seeing, we're seeing new builds in Hamilton now over a thousand square foot, which is new for Hamilton, not new for Toronto. I think Toronto are more of what 1500 square foot maybe are up in that range. Yeah. You know, so some of these, you know, a Hamilton market at a thousand per square foot is seemingly crazy for condos. They're going to sell they're selling. They're not going to stop.
It's like, they're not going to sell out. They're going to sell it for sure.
Speaker 0 (42m 0s): Yeah, it's crazy. But people are still buying them and like the developments in Hamilton, cause there was a F a few condo, I think it's a Brad lamb had a condo development and are there a couple other
Speaker 3 (42m 13s): Television city was his big one, which has been in a few, few years in the works, which is why it had maybe a little more hype around it than, than some, but a lot of the Toronto developers for sure. Coming in, coming that way. And I know Hampton's not probably alone in that there's other markets that have had some version of that, like a kitchen of our or London. And I th there's definitely a lot more to come. I mean, Hamilton's going through a condo explosion. It's been, that's been a few years in the making and, and certainly more to come, literally the whole waterfront developments, all that sort of stuff.
A lot of the Toronto, cause I think it's just tough to the, the numbers are tight in Toronto. I mean, I've heard Toronto is about as tight as any market in north America in terms of building and developing those types of products.
Speaker 0 (42m 58s): I say like how many times people said myself included where it's just like, if I was just out of school right now, I wouldn't be able to afford the place that I live in. You know, if very difficult to get into the market at this point. Like pre-construction, I always thought was a great kind of way to get into, you know, break into a market because you have a bit of a forced savings plan, especially if you're younger, but you know, it's, it's typically a little bit more achievable to get in when you have somebody, you know, saying you got to make this payment every 60 or 90 days, whatever that is.
Speaker 3 (43m 32s): Yeah. Now it's, you know, you're getting into, what's certainly over half a million, if not up to where it's a million, even in some cases. So it's, yeah, it's really hard to get in at that point now. Yeah. It's hard to say we could be w by the time the show airs, you know, when we're sitting here reviewing this, we could be this all can change. Right. A lot of things in the world they're making changes happen pretty fast. We know the governments, historically government likes to intervene, so they could, they could be jumping in here. I think he pointed saying, you know, we're changing the down payment amount needed on an investment properties or we're changing the, you know, the, the dreaded one that everyone's worried about as the, no more, or, or taxing now on your sale of your primary residence.
Like that could be that major, like that could change, could change the dynamic completely. So that's another reason why I tell people just get in because you never know when anything could happen. And the, we, we learned in 2017, it's like a week's notice. And all of a sudden there's major changes that are
Speaker 0 (44m 32s): Going to affect that. Your broker said he, any, any reason is get in your, the news. Get it. But no, it makes sense that we've had, like the capital gains thing is something that has come up with investors, like interest rates too. But it's funny, like, it's, it is something that people think about, like that aspect of the business and not even just capital gains on principle residents, but for our investors who are, it's normally investment properties where they're just, you know, just increasing, I think Trudeau mentioned, I don't know if it was like in the middle of last year of increasing the actual inclusion rate on even investment properties.
So it's definitely something people are thinking about. I think across the board, it's not just interest rates, definitely tax policy, but like you said, like anything can change. You know, there's a global pandemic, there's a war in the Ukraine, like one, you know, a couple of things change and everybody needs to pivot.
Speaker 2 (45m 20s): Yeah. And, and I mean, it's, it's almost impossible now for us to stick to this, but Sandy and I, you know, sort of started out saying, okay, we're not going to do like market updates and stuff like that because, you know, we want to stay timely if someone listens to this down the road, but you know what I do think it'll, it'll put some little, like little bookmarks, you know, in history and it adds like a way of saying, okay, that's where they were, then here's where we are now. And sort of, how has it changed since then, right? Yeah.
Speaker 0 (45m 48s): So yeah. You notice when you do 50 minute podcasts, it's really hard to have evergreen content, you know, like somebody saying something topical and you know, something's going on this month or this year.
Speaker 2 (45m 59s): Yeah. Speaking to topical. Why don't you tell us about your podcast?
Speaker 0 (46m 2s): Yeah, sure. So working capital, the real estate podcast, that's the name? I started it, it just, coincidentally, the first episodes started at the beginning of COVID where people were like, oh, that's great. You know, and you're doing stuff to keep yourself occupied, but it was like, you know, how podcasts are, they don't just come out like that. You actually have to prepare. And I think on the last episode I kind of bent Sandy's ear. He helped me out at the beginning. I'm like, you know, when you're not in the, in your world, it's like, where do the podcasts live with? Like, how do I click that link? Where does that link come from?
So for the podcast, I think we're close to a hundred episodes now. I've been, I haven't taken a week off. So I've been pretty happy to be consistent. You know, it's like going to the gym where you, you know, people are like, I don't have time, but if you make time, if you're committed to it, and it's very selfish of me to bring on people that are a lot smarter than me and get to talk to them for 45 minutes. And I'm sure you guys, you know, same thing where especially being in brokerage, you know, I have access to a lot of individuals that I have no business having a 15 minute conversation with that are, you know, high up in our industry, but can give great advice to listeners.
So for me, the way I kind of summarize it for individuals that are, that are curious, what it is, is it's focused on real estate investors, but it comes from all different types of guests, you know, from lawyers to actual investors, to people that are, you know, tax or tax or just accountants. So for us, it's really kind of holistically looking at it. And, you know, just a small example, we talked about raising capital at the beginning of the show, you know, having somebody on that's actually a securities lawyer and kind of walks through what that process is.
And, you know, obviously get legal advice, but it can give you kind of an understanding of that aspect of the business. So yeah, that's, that's it, you can, I mean, Google it it's, you can go to working capital podcast.com if you want to check out any of the recent episodes.
Speaker 2 (48m 0s): And obviously we'll put that link in the show notes,
Speaker 3 (48m 4s): Definitely gotta be a, you raise an interesting, just, there's been some news around that people getting in trouble with securities and stuff like that. You definitely want to be careful and know what you're doing when you're getting involved in that sort of side of raising money and making sure it's, you know, just, just, I don't even really want to say stuff cause I don't want to give advice really on it, but you gotta be careful just to make sure, you know, when you're doing
Speaker 2 (48m 24s): Everything we see on the show is our opinions only, and, and our experiences, not legal advice,
Speaker 0 (48m 31s): But
Speaker 2 (48m 31s): Somebody's going to say Sandy,
Speaker 0 (48m 35s): If you get on the, even on the investor end of things, like not even just the legal piece, but obviously you owed, you owe a fiduciary responsibility now. And for people that don't work in brokerage, maybe that might be the first time they're doing something like that. But one thing I have found is it's not for everybody, some people investing on their own bootstrapping, their own properties, or maybe working with one or two partners is the way to go because there are stressors that are involved in capital raising that are not involved with, you know, if John and I, and my partner, we own our property, let's make an executive decision to do this for us, that same decision we're thinking about 10 other people or, you know, 50 other people, whatever your investment is.
And it's something that is definitely a different way because you're kind of a steward for these investors. So it's definitely something you want to be careful of just jumping into, talk to people that have done it before.
Speaker 3 (49m 27s): Totally different mindset. Yeah. It's like owning a private versus public company. It's totally changes the way that the leaders of the, of the company or the investment make decisions. It's it changes the whole mindset certainly want to, yeah, certainly lots of talks about that. We don't have time to get into, but, but definitely go check out your show. That's awesome. They've built it that much content. I think that's one of the things that's, you know, any real estate investor or any, anyone in business of any kind, really could really benefit from this is going into interviewing people. Like that's like the easiest way to learn and grow yourself, but also provide value to the marketplace is like a lot of people are really, really excited to get interviewed and they will, it doesn't really much matter who it is talking to them about it.
If you invite someone to come into your, your blog and do your show and your videos and your book, they read any magazine, whatever, it's a pretty easy way to get access to people. It's a great way. So, you know, we're kind of encouraging the competition with that, but a lot of people should, should get into that. I think that's of the most underutilized versions of a kind of business growth in general, right?
Speaker 0 (50m 32s): Yep. A hundred percent
Speaker 2 (50m 34s): Jesse, what's next for you?
Speaker 0 (50m 37s): So we didn't touch on it here, but I purchased a property, a townhouse in Florida. And part of the reason I did that was I wanted to start actually again, do the training wheels version of investing in Florida on the small scale, and then figure out maybe in a year or two, if we want to raise capital to buy stuff in the states. So that will probably be something I do in the next few years or hopefully expand, but yeah, we'll see. We'll, we'll talk to you in a year or two and see, see where we're at.
Speaker 2 (51m 8s): All right. That sounds good, man. That sounds good. Costa Rica, any, any thoughts on investing?
Speaker 0 (51m 14s): I'm going to have to bug you about that. That's that's pretty cool that, that you're down there now.
Speaker 3 (51m 19s): So many people following, following you or you're following them or whatever, or the pack is just going. I know so many people are going that way now. Hmm. That's exciting. Yeah.
Speaker 2 (51m 28s): There's been a lot of interest for sure, man. And it's been exciting so far definitely to, to spend a whole winter, you know, not, not in the snow.
Speaker 0 (51m 40s): Yeah.
Speaker 2 (51m 40s): There's been a different experience, so, okay. So Jesse, what is the best way for someone to get in touch with you?
Speaker 0 (51m 48s): They can get in touch working capital podcasts.com or at Jesse for galleon Instagram. It's funny. I spent a lot of time. There are people will DM me. And oftentimes that turns into kind of an email conversation if it's more formal. So Jesse J E S S E F R a G a L E. You can look me up and if you have any questions about real estate, don't, don't hesitate to reach out. I'm always happy to help.
Speaker 2 (52m 13s): Are you still looking for investors for other projects?
Speaker 0 (52m 16s): Yeah, we're, we're always keeping investors kind of interests because we're always actively looking. It's just, you know, like we talked about, it's more so finding the right deal. But when we do definitely, you know, if you're interested on that aspect, happy to have a conversation.
Speaker 3 (52m 33s): Awesome.
Speaker 2 (52m 35s): Perfect. And again, those, the, the, those points of contact will be in the show notes for Jesse, anyone that missed that can just go back in there and there'll be able to contact him through there. Sandy, how can people get in touch with you?
Speaker 3 (52m 49s): The easiest way now is just a it's through social media, for sure or sandy@freedomreps.com.
Speaker 2 (52m 56s): You can reach me@robatmisterbreakthrough.ca. Thanks for joining us, everybody. We'll see you next time.
Speaker 0 (53m 12s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.*
Jim Clayton is the Director and Timothy R. Price Chair at the Brookfield Centre in the Schulich School of Business at York University in Toronto.
In this episode we talked about:
- Jim’s Bio & Background
- Real Estate Education Evolution
- Climate Risk and the Opportunity for Real Estate
- Dealing with Tax & Climate
- The Courses Jim Teaches in the Schulich School
- Leadership in Real Estate
- Jim’s View on Current Real Estate Environment
- Resources
Useful links:
Adam Grant “Think Again”
The surprising habits of original thinkers | Adam Grant https://www.youtube.com/watch?v=fxbCHn6gE3U
https://schulich.yorku.ca/faculty/jim-clayton/
shorturl.at/vDFGI
Transcription:
*Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time
Jesse (22s): E
Speaker 1 (24s): Everybody. This is Jennifer galley. You're listening to working capital. I thought today, we'd do a, just ask Jesse. You can always reach out to me directly. If you have any questions related to real estate investing. I did a YouTube video a little while back, and if you're interested in that you can head over to working capital podcast.com. It should be under the video section. It's basically an interview with Chris . Who's a cross border tax specialist, and really wanted to do a conversation about investing from another country.
So if you've ever wanted to buy real estate or interested in buying real estate in a different country, wanting to get into a little bit of something like tips do's and don'ts when it comes to that. Now I'll focus this a little bit more on Canadians investing in the U S but you could think of it as us investing in Canada, or really, you know, investing in a different country altogether. You know, a lot of these will apply to both. I think the key is that there is some sort of relationship between those countries and, you know, if you're investing the country, you're thinking about investing likely if that is what you're thinking, we'll have some sort of relationship just use Canada in the U S because the treaty, the tax treaties that we have are so robust and it makes investing relatively simple, but there still are a few things that people should look out for.
And I did also did a post on Instagram, and this is where it kind of fleshed out some of the, the tips. So we'll start with number one here. I think what's so critical when you're doing this is to figure out what your investing strategy is. And by that, I mean, where you're going to invest, what type of assets you're going to invest and what type of strategy you are going to work with those assets. And what I mean by that is the, where is pretty obvious, which geography are you going to invest in?
If you're investing in the states, are you investing in Florida? Are you investing in California, Texas? The second piece about asset class is, you know, real estate is a diverse industry. There are all kinds of different asset classes. You have everything from self storage to retail, to industrial, multi res, and you know, everything else in between hotels. So getting clear on what type of investment from an asset class perspective is really important because it'll set up a lot of the basis of how you're going to go and where you're going to invest.
Now, the last one is the real estate strategy itself. Now this is so important because oftentimes the strategy that you're going to have. So whether that is doing flips, whether that is looking at burn investments, where you're doing a rehab, a refinancing, and renting out a lot, a lot of times, those strategies will dictate where you should be investing geographically. So for example, if you're looking at short-term rentals, you know, Miami is probably a great market for that. Something in the Midwest, in a small town, probably not, but conversely, if you're looking at land plays, the inverse of that would be true.
So the strategy itself is one of those critical aspects of figuring out what you want to do, the strategy you're going to work with those asset classes. And then that will be a function of what geography that you end up investing in. So the next one, you know, back to geography itself, researching the local market. So once you have that market or the general area picked out again, we know re real estate location, location, location, and it's, so hyper-focused, you can't just say this state or this city or this town, you really get granular.
And you're looking at what neighborhoods, which neighborhoods in a specific town. So I think that's where understanding the actual local market. And in part with that is an analysis of the type of zoning regulation that is in a particular area. What type of certain potentially unique bylaws the city has? How has that, how has the city and the state itself, are they, or the province? How are they in terms of their friendliness to landlords, you know, red state blue state in the case, in case of the, in the U S and those things are all important because as Canadian listeners know, we come from a very, very regulated market up here, and it's definitely something I would want to consider if I'm investing in another country, if I can pick a less regulated market, that's, you know, a hundred miles or 50 miles, you know, a couple of towns over from the one that I was originally looking at.
So researching the local market is definitely another piece of that puzzle. Now move over to the legal entity. So this is one that I think a lot of Canadians get tripped up on because you see these late info info Marshall's are late at night. You have people invest in the states, you know, form an LLC. And it's just terrible advice. So for context in the states, you know, the American listeners limited liability company, we understand what that is it's used in real estate.
Often in Canada, we don't have an equivalent of the LOC and not for the purposes of being a pass through entity as it is in the states. So what happens is Canadians form an LLC, go into the states and then realize that the Canadian government looks at it as a corporation. The problem with that is you will now be double tax, you know, not to get into specific details, but what will happen is you'll be taxed twice because of that. And you're open to now double taxation, because you formed an entity that you didn't research, and should've never been formed to begin with.
So that legal entity is not a question that you can answer in the abstract. Somebody has to look at your individual situation where you're investing, what you're investing with in the value of the asset. All of those are factors that you really should put in the upfront, frankly, costs because accountants and lawyers, you know, if anybody has done a real estate deal, they typically don't like giving free advice. And if they do, it's not for long. So having a consultation, or even if you have any friends that are, that, do you know tax law or, or are in cross border investing, but you definitely want to spend the time to figure out what the right structure is from the start, because you don't want to be trying to change up ownership or transfers once you've actually acquired something and it's tax time.
So I think that would be the next one, choosing the right legal structure. Now the, the million dollar question or multi-million dollar question is debt as individuals that don't live in a certain country, that country, that you're investing with, likely doesn't know who you are, doesn't know your credit history to them. You are a foreign investor and you haven't built any credibility in that country unless you've lived there, or have you no ties to that country. So in the context of a American investing in Canada or Canadian investing in the U S I think it's really important to try to figure out if you can utilize debt that is recognized by both countries.
And what I mean by that is your best bet is to find a bank that has operations in those two countries, use that as the conduit to start the conversation about debt now, to be completely straight forward, that is still going to require you to put a pretty substantial down payment. Typically, a lot of times, the strategy you can use is if you do own a home in the states, or you own a home in Canada using that home and utilizing a home equity line of credit or a home equity loan to invest in the other countries is typically a good strategy.
And then it's a matter of if you want to continue to invest in the states, it's building that identity in the states, you know, getting a credit card. If you can get a credit card down there, start actually paying taxes, and then you're starting to build a credibility, but one of the overlook things, I think that is a really good way to invest in other countries. If that's your goal is to really establish partnerships with individuals. And, you know, oftentimes if you're listening to this and you're thinking of investing in another country, you might be the person with the capital and the, the operational person might out there.
You just haven't met them yet. And if there's somebody in a local market that you can supply the capital, they will take up, you know, whether it's the property management or asset management, you might have a good, you know, a good fit between the two of you. And it opens you up now to probably get debt at a cheaper level. That's local with that individual that you partner with. So that's definitely something to think about. And I think ultimately all of those things of kind of defining your investment goals, you know, researching the local market asset CA asset class mortgage, and kind of the entity, it's really all those things have to be factored in together.
But ultimately at the end of the day, one of the best places to start still in 2022 is go down to the market that you want to invest in, speak with the local real estate agents, maybe even go to the real Rhea, the real estate association, almost every town in north America has one and understand the market that you want to invest with, build credibility with the brokers in that area. And kind of, you can take that approach. And as you get more information, you can kind of compare different cities or different properties and go from there.
So that is all for today. Like I said, if anybody's interested in these kind of quick, you know, quick and dirty questions, feel free to reach out to me. You can fire me an email, Jessie for galley@gmail.com, or you can go to working capital podcast.com on the contact, us happy to go over any topics you find interesting when it comes to commercial real estate investing. Anyways, I am out of here. Have a great day.
Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse, for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.*
Sam Primm is a Real Estate Investor, Educator with over 40 million dollar Real Estate using people's money He started a successful Rental Real Estate company, Wholesale company and he does Flips as well. In this episode we talked about:
* Sam’s Bio & Background
* The First Investment in Real Estate
* Using Other People's Money to Buy Real Estate
* Network Building
* Private & Institutional Lenders
* Capital Structure
* Interest Rate Risks
* Journey on Social Media
* The Process of Property Acquisition
* Mentorship, Resources and Lessons Learned Useful links:
Book “Pitch Anything” by Oren Klaff
Book “Eat that frog” by Brian Tracy
https://www.instagram.com/samfasterfreedom/?hl=en
https://fasterfreedom.com Transciption: Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name is Jennifer gala and you're listening to working capital the real estate podcast. My guest today is Sam prim. Sam is a real estate investor educator with over $40 million worth of real estate using other people's money.
He started a successful rental real estate company, a wholesale company, and he does flips as well. We just kind of went over a little bit about his portfolio right now, Sam, how's it going?
Sam (45s): It's going well, man, it's going well, appreciate you having me on.
Jesse (47s): Yeah, thanks so much for coming on. I think one thing we miss here in the intro is just the fact that your social media presence with real estate is pretty pronounced. It's part of the reason that we connected, I saw what you were doing online. And I said, you know, I think that listeners would get a lot of value about you coming on, telling your story, and also talking a little bit about that presence online. So thanks for coming on. Really appreciate it. Why don't we take a couple of steps back as we normally do here and talk a little bit about your background and how you got into real estate, you know, from, you know, where you started and where you're at today.
Sam (1m 23s): Yeah, for sure. So I don't have the most exciting story, like, you know, some guests and some people I know that, you know, came over here or grew up super, super poor and didn't have, you know, much of an upbringing. I had a normal upbringing, you know, my parents were middle-class. My dad was an engineer. My mom was a teacher. My dad worked for the same company for 40 years and retired. That was kinda what I was grown up in. That was kind of how I was raised, you know, save money, save money, save money, invest, and went to college and was kind of planning that path.
But kinda during college, I started a, a house, you know, painting company with my buddy. We started to kind of paint in the summers, painted exteriors of houses and fences and decks, kinda got some entrepreneurial itches and then went to school and finished school and then, you know, graduated and got a job out of school. And he got an engineering degree and we were just doing our own thing. And then we started to connect and talk real estate and we decided to go in and buy one house a year for 10 years was our goal. And just kind of start to just see what real estate can do for us on the side.
And that kind of ballooned into what I'm doing today. I kind of really kind of ventured away from that traditional mindset of work for somebody else, your whole life. I was able to quit my full-time job and go full-time in real estate a few years later and really enjoying now showing other people that you do have an option. You can do the traditional path, but if that's not for you or you can't do that, or whatever, whatever the reason may be, you do not have to work for someone else, your whole life. You can do what you want when you want and real estate's the best, you know, kind of bridge to help you get to that life.
Jesse (2m 53s): So, Sam, what was the first investment in real estate that you, that you ever did? What did that look like?
Sam (2m 60s): It was a single family rental. I actually bought it in 2014 into 2014, bought it with the thought that you got to, I was going to fix it up and sell it and take that profit and put 20% down on a rental. So back then, even when I started, you know, investing in real estate, I thought 20% down on rental property. So, all right, I don't have 20% to put down, so I'm going to flip a house, take that profit and then put 20% down. So I thought for every, you know, one rental I wanted to buy, I had to flip one, so two houses to get one rental.
But during that process, I learned a, about the cash out refinance and kind of leveraging money and leveraging bank funds and all that, all that stuff that I'm sure a lot of your viewers know about, but I didn't know about it. And I ended up actually turning that one into a rental that worked out pretty well. So just, you know, jumped in and was figuring it out and then found out about refinancing and, and all that cash out stuff. And you haven't looked back since, and haven't had to put 20% down of my own money on anything since. So
Jesse (3m 55s): That's great. So in terms of the actual debt side of the equation, when you are looking for properties and over your career, when you've been looking for properties using other people's money, I mean, people hear that and they, you know, intuitively understand what that means. You know, you understand what the words mean, but in terms of actually executing that and doing it in a way that doesn't put you in a unreasonable amount of risk, how do you approach that? And what does that look like for you when you're saying you're using other people's money to buy real estate?
Sam (4m 26s): Yeah, for sure. Cause if you're, if you're not using your own money, you're putting 20% down, you know, you could be overleveraging yourself, like you said, and putting yourself at unnecessary risk, you know, shift in the market could sink you. And, and that did a lot in oh eight, it's sunk a lot of people. So the key to using other people's money in your own money honestly, is making sure there's equity in the property. Everybody thinks that banks care about that 20% down when you're buying rentals, they don't, they care about that 80%. They want to just make sure that they are not over leveraged themselves and that there's 80% equity in the deal.
So if you can creatively use somebody else's money to find distressed properties, you know, fix them up, manage them well, whether we're talking, you know, single families, commercial multi-families, whatever it is, if you can just find the deals out there and use other people's money and, you know, find a good enough deal and increase the value enough that there is at least 20% equity at the end, then you're not over leveraged. If, if you bought a million dollar apartment complex and put $200,000 down, there's 80% equity. If I've, you know, did the same thing and use somebody else's money and have $800,000 of somebody else's money in the deal, and it's still worth a million, why it's the same position?
There's, you know, there's, there's not any risk there. As long as that equity is built in, obviously there's some more intricacies that go into it and there's a ton different ways to do it. But I think the key concept that you brought up and kind of wanted me to drive home is as long as you're buying at a discount and managing it properly, you shouldn't over leverage yourself. If you do it the right way, it's not buying things at market value, you know, a hundred percent of costs, a hundred percent of value, a hundred percent of loan. It's, you know, we're, we're deep, we're much less than that. There's a lot of equity built in at the end of these deals that just grows over time.
Jesse (6m 5s): So during that time 2014, and I guess the, the few years after that, that got you to where you're at today, the actual network that you had, the people that you went to to actually raise money from, how did that evolve? You know, did you have somebody in the beginning that you were doing this with, that kind of showed you who the ideal people would be that would invest with you? What did that look like?
Sam (6m 25s): Yeah, kind of. So I knew that you could use other people's money to buy and fix up a property. I think, I don't remember. I think that flip or flop the torque and Christina moose or whatever, the ones that was on HTV. I remember seeing them go to like their lawyer's somebody's house and they would get the money and then they would fix up the house and they would split the profit with them. So I knew you could do that. So I knew that you could borrow money to buy and fix up a house. I just didn't know about the 20% down. And that's what I did on my first property. I borrowed the money to buy it and fix it up. It was from like a kind of a friend of a friend kind of thing. It was one of my dad's friends that owned a business.
I'd known him growing up a little bit and he'd always talked about, you know, if we ever get into business, you know, he'd like to help me out kind of like a, a mentor type thing, but he wasn't a real estate investor more just on the business and mindset side of things. And we talked and, you know, met a few times and, and showed them the plans and show them what we wanted to do. And he said that he would be willing to give us, you know, you know, a hundred thousand dollars to buy and fix up a house. If we found something that worked and showed him the deal and ran through the numbers and we did that. And then we did it again. And I continued to use that same private lender for, for a long time.
My first, first three or four years in investing in real estate, I had a full-time job. So it probably maybe a 20, 20 rentals or so. So it was good, but it wasn't anything crazy. But then after that, you just make connections and know the right people and that lender talks to other people. And then eventually we, you know, got more money than we know what to do with now, just as far as, you know, sourcing deals for private lenders, it's, it's just, it can be tough to find private lenders. So I was pretty lucky, but I always tell people whether it takes you two months or two years to find a private lender, always be looking one private lender can change your life.
There's other, there's other options. In the meantime, you can wholesale, you can use hard money, you can use lines of credit, you can do a ton of different things. Self-directed IRAs, all those are great. But, you know, using a, having a private lender that has flexible terms that will lend you a hundred percent of purchase and rehab on, you know, whatever the property may be is life-changing so be looking for one, you may stumble across when, right away, you may not, but don't give up because one can change your life. For sure.
Jesse (8m 27s): And what was the, I mean, flexibility, you mentioned that there w what are the other appeals that you have with private lenders, as opposed to institutional institutional lenders for what you're trying to do?
Sam (8m 38s): Yeah. So private lenders are, you know, their flexibilities by far the biggest one. So, you know, if I'm buying an apartment complex, I'll go to private lenders and they'll put 20% down. And then the other 80% is institutional. Whether it be, you know, government money, Fannie, or Freddie, or whether it be, you know, bank money, but they're, they're going to be in second position. Then the private lender is okay with that. It's, you know, most hard money lenders or other institutions won't want to be in second position. They're going to want to be in first position to be most secured. So they're flexible because you have a relationship with them.
There are people that, you know, or people that, you know, know that understand real estate that don't usually, they don't have millions. It's usually it's, you know, I just had a student the other day that was like, I can't find a private lender. And then all, you know, all of a sudden he was talking with a real estate agent that he was trying to buy houses from. And that agent said they always want to do invest, but they don't have the time or knowledge. And they had an extra 150 green, you know, they didn't have millions, but they took some out of the stock market and they had that and they're willing to invest with them because they knew them. So it just comes from different sources. It usually doesn't come from a rich uncle or even a rich friend of your dad like minded, but, you know, there's a ton of different places.
You can find them. And they're just flexible. They're understanding. I think a couple of the second deal I did, we couldn't pay back. The private lender has full amount plus interest. So he let us roll that into the next deal. And just things like that. There's flexibility being second position on terms, and I'm on lengths of things. And, you know, when you're dealing with somebody that they have relationship with built with, you can talk about that when you're dealing with these bigger institutions, they're just a number on a spreadsheet to them. They don't give a, they don't give a crap if you had an issue or not.
Jesse (10m 10s): Yeah. I feel like when you're dealing with private lenders, if the deal goes sideways, God forbid there, you know, you want to work with the person, the person typically wants to work with you where it's the bank. Like you said, if you're just a number on a spreadsheet there, you know, they can be a little bit more aggressive and saying, yeah, sorry, like this, we're going to take this action X. That might be pretty detrimental to your investment in terms of the, the, what you described there. So the 20% down from a private lender and then the balance from say an institutional lenders. So that to me is a very similar or very common for a short-term kind of, you're basically trying to stabilize an asset or you could potentially be flipping it.
How do you look at the capital structure when you're dealing with more of a longer term, hold on your real estate.
Sam (10m 54s): So everything, and we've done this a few times now, so I own six, six apartment complexes, and I've done this on three of them and three of them in the process of doing this. So like, what I've done in the past is for one of my second apartment complex, I bought it. No, nothing big. I haven't done any huge deals yet. This was a 32 unit. So what we ended up doing was we bought it for 1.1 million. So we've got 20% down from our private lender. So he lend us 20% down, which I guess is 220 grand. We got an $880,000 mortgage from the bank.
So it was worth a little bit more than that when he bought it. So there's equity built in, but we improve the building over the next couple of years. You know, we increased cashflow by raising rent. We use some of that to fix up the property and we, you know, got efficient with the expenses and managing and just took care of everything and just kind of turn the building. Wasn't a nightmare, but we turned it around relatively quickly and just two years. And we were paying the private lender a little bit out of cashflow. And then two years later, it appraised for 1.5 million. So we took some equity out.
We refinanced at 80% and paid him back as two 20 plus interest. And now we own it and we own it. Long-term and, you know, we have a one point had a one point, you know, one, something million dollar note on it. It was worth 1.5. And then two years later, which was last year, just the price for 2 million. So it just kind of shows you that you, you get one of these assets and you can force the value in force appreciation by being efficient and raising rents. You can create so much equity so fast that you can do these short term. I call them short term burst deals in two or three years.
You can, you can reposition an asset and create enough equity and value by you controlling the asset properly to get enough to pay him back plus interest and move on to the next one. It's just kind of a rinse and repeat thing. I haven't, you know, done the syndication route where you're raising 20% from, you know, lenders that you're going to pay back over the next, however many years or, or anything like that. But mine's a little bit more of that, you know, smaller scale. But if you do it enough, you know, like I said, I got 40 million that I own a hundred percent of you can, you can scale pretty quickly.
Jesse (12m 57s): Yeah, for sure. I mean, there's good money to be made. And both strategies might find the, like you said, almost a, like a, a variation of the burst strategy where you are buying, holding, or refinancing, renting all the RS. But if you do the syndication route, it's basically the same thing. I, the only difference would be an equity portion coming from LPs. So we, we did something very similar recently, and it is just a larger version of buying that single family house and, and doing a, doing a burst strategy with, so in terms of the, where you kind of see the market right now, obviously we're in a time right now, it's Q2 20, 22 interest rates have continued to go up.
How do you look at the risk of your deals in terms of interest rate, what you typically keep in reserve? Like how, w from a risk standpoint, how do you, how do you view your, your real estate acquisitions?
Sam (13m 51s): Yeah. Interest rates have gone up way more than I thought they would way quicker, but even, even with that, I'm not, not overly concerned. A majority of my portfolio, we have tied up at, at 10 year arms, you know, tenure. So the rate's not going to just, I guess for eight more years now, we locked them in a couple of years ago. So majority of it is eight is eight more years of our current rates. Modem is non-recourse with some government and funding, but as far as going forward with the current purchase, I'm just keeping that into account interest rates are going to be a little bit higher.
If we do a deal now, or we have a three-year arm or something that probably going to be a little bit higher, but I don't think they're going to be substantially higher. And now that my portfolio has got to a point where I'm just trying to add good assets to it, I'm not worried about, you know, they're all good deals. They all cashflow on their own, but I'm just looking at it as more of a portfolio that I'm going to have for 20 years. So a little bit of interest rates, a little bit higher on the portion of the portfolio right now, isn't extremely concerning to me. I don't love it, but also going with higher interest rates, rents more rents going up every, I think I heard the other day or read something rent's going up every year in the past, like 90 years, except 2008 or 2009, like one is the only year rent's ever not gone up.
So with increase interest rates, you also have increased expenses. We're getting more efficient in management with property, with software, with things like that. So you can offset some of that extra interest on that. You'll be paying with a higher, with a little bit higher interest rate, but you can offset that with just being smart and efficient and just scaling and not worrying about, you know, having to spend a little bit more. I feel like if your deal hinges on 50 basis points, you'd probably buy in too deep. Anyway, I understand this gone up more than that recently, but in the, in the commercial game with a small local banks who I deal with, it's it hasn't gone up.
It hasn't gone up near what the residential has. That's right. Not to get too into a, you probably know this better than I do, but the, the residential, the mortgage that people hear about this going up like crazy is based on the ten-year treasury, what, what we borrow at the small local banks that I deal with. And part of the reason it's based on the fed funds rate, and that's barely gone up. So they're kind of based on two different things. And, you know, you can take advantage of one while the other one's, you know, doing something. And so there, there's always some way to be flexible and get around it. I, I'm not thinking that you're not going to be able to invest in real estate because interest rates are too high, but that's kind of how I look at it.
W what do you think about that?
Jesse (16m 10s): Yeah, I have very similar view. I think the 50 basis points comment, I think it actually is accurate because even though rates have gone up higher, if you're doing an analysis and underwriting a deal and say, you're playing Monday morning quarterback, and you're in the deal now, and rates have gone up. If you didn't, if you didn't have some sort of sensitivity analysis that gave you a bit of a range, you don't underwrite a deal and go, okay, I can't go higher than this. You give yourself a little bit of padding. So you, yeah. Even with the padding, you might be, you might be within 75 bips or 50 BEPS.
And it, like you said, if that's going to kill your deal, then you've got bigger problems to worry about. I think the, the different approach that we're taking is just looking at things banks, when we're doing refinances or bef before LTV loan to value was a lot bigger piece of the pie. Now, debt service coverage ratio is which makes sense, right there. They're being cognizant about how much you have in cashflow. And it kind of, I think every once in a while, every five, 10 years, we need a little bit of a jolt in the real estate industry because we start getting away from the fundamentals and then we kind of need to be brought back that cashflow is, is a key aspect of what we do.
So I think, you know, provided that we don't go into a global pandemic again, which is kind of, I only laugh. It's, you know, it's not funny, but only ironic in the sense that we always say, like, you know, caveat this, as long as this doesn't happen, it will be okay. Now that we have seen something very intense, like the last two years, I think investors will be a little bit more prudent, but provided that we don't have anything crazy geopolitically going forward. I think that it's not unhealthy to have interest rates go up a little bit and values of cool off, especially in some of the major markets, you know what I didn't even ask.
What a, which market are you currently investing in right now? We're
Sam (17m 58s): St. Louis, Missouri, everything. Everything's here within an hour, hour and a half of a, of St. Louis on the Missouri side. So yeah, everything's here local in the Midwest, not the most exciting city, but it's a great city to own rental properties in and invest in is, is pretty stable. You don't get the swings. So it's, it's a good place to be.
Jesse (18m 16s): Yeah, for sure. What, switch gears a little bit here and talk about this presence on social media. It's pretty fascinating to me, especially in our space because, well, I guess any space you get all these quotation gurus online and posting random stuff, and just kind of filtering through a lot of that. I saw the content you were posting really interesting, engaging educational. You kind of go through some of the deals. We'll put a link up for listeners to check you out on Instagram. And I assume you, you know, you have a link for YouTube, but talk a little bit about that, that journey on social media as it relates to real estate.
Sam (18m 52s): Yeah. So I just started posting a little bit on Facebook about what I was doing, you know, and drummed up a pretty good amount of, you know, interest from just friends and family and people that didn't know that I was investing in real estate. They just thought I had that full, you know, my full-time job. And so that kind of started to get some traction and, you know, it didn't really think a ton of it. Then I went full-time in real estate in 2018 and was focused on growing my rental portfolio and growing, you know, the flipping company and doing all that for a good year and a half, two years and occasionally posting on social media.
And then we got those businesses to a pretty stable place being my business partner, Lucas, and kind of had the idea of you run those, keep those going. I'm going to try to, you know, get into this education space and try to educate people what you're doing, because the minimal exposure I had was just inundated with people. How did you do it? Can you teach me how to do it? How do you do it? You know, so I thought, well, let's, let's try to, you know, make a social media about it and try to maybe create some type of course or mentorship. So I just started by just giving away as much as I could for free on YouTube and then Instagram and slowly getting some traction.
And then Pope did Tik TOK and got made fun of for a while. But I posted on Tik TOK once a day for 30 days and said, I'm just going to give it a shot. And this was back in 2020 middle to end of 2020, and then that blew up and then everything else kind of just followed from there. You know, ticktack saying is it all starts on Tik TOK? And for me, it kind of did that kind of gave me the credibility to grow the other platforms. And like, what you said is what I do. I just try to post informational stuff. I don't overreact. I could have a bigger following if I was a, fearmonger not going to name any names, but the people that have had that YouTube thumbnails for five years in a row saying the world's ending and the market's going to crash, eventually they're going to be right.
But you know, those people that do that negativity and that just kind of drove me crazy. And also I knew somebody that had done three bird deals and wrote a bird book. So I was just like, come on. So anyway, so I decided to, to teach and go in a little bit more and go full-time into it. And the last I've been doing social media for about years. And as you alluded to, you've got a decent following on tic-tac YouTube and Instagram, and just trying to provide as much education as I can. It's fun. Obviously I can make money from it if people want, want me to educate them further, but regardless, it's just a good place to, you know, be creative and have fun and teach people and show them that there is another path out there that real estate can be fun.
And it's a, it's a good thing to invest in and so great way to get free eyeballs.
Jesse (21m 13s): So I don't think I connected with you on Tik TOK, but what was that 30 days like, was that just I'm going to post some deals, some, some tip, but what did that 30 days look like?
Sam (21m 22s): I just, I just was posting and at the time my Instagram was probably like 500. My YouTube was probably like a thousand, I don't know. And I just wasn't getting as much traction on them. So I thought let's hop on Tik TOK. I had somebody told me that people were talking about real estate. I thought it was just a place for people to dance and you know, what it's turned into now, craziness. But so I got on not early, but kind of early. And then I just posted once a day for 30 days. And I think my fourth video got a hundred thousand views and I was like, holy cow, it was like a 15, 22nd video. You know, it makes sense now that people can scroll and see, you know, five different people in one minute, the only platform that really allows for that.
But yeah, and then just kind of got some traction there and then other social media started to grow and then it's kind of the staple. I, I don't even, it's insane. I have 1.5 million followers on Tik TOK, and it's just like, that is like a city. And then when it does bleed over to the other platforms and now, yeah, and now that tic-tacs allowing for longer videos and things like that, I'm trying to leverage it to, to, to push people towards the other social media platforms. Cause tic Tacs fine and all, but you know, in five minutes, someone probably sees 50 different people on Tik TOK in five minutes.
They've see probably 10 people on Instagram in five minutes. You just, usually one people on YouTube and same with podcasts. So the goal is to push people to the longer form content, to warm them up and teach them more. But just taking advantage of what's out there. And it's a lot easier to make a 32nd video than an engaging 30 minute podcast. So that's, that's what I was doing for a while and still do.
Jesse (22m 53s): Yeah. And it's, you know, like we're talking right now, if we probably end up putting this on YouTube, you know, it's one thing to have this story. Some people, you know, you, I find a lot of people just like people are visual learners. I find we, we remember stories better. You have this long form aspect of, of Sam prim they'll remember certain aspects, but you know, like at some point in this conversation, we said, DSCR, you know, that's a 32nd video for tech doc or for Instagram. Right. But you can't get the, well, you can only get so much information out there in the short form. So that makes sense that you kind of capture them there, bring them over to longer form content.
So in terms of the educational stuff, what type of, what type of stuff are you putting out there? You mentioned the course that you had.
Sam (23m 34s): Yeah. So Joe, I have a, I have a mentorship currently, you know, it's a lot of different things that go and it, but basically it's everything or, you know, everything I can put into that content about creating a rental portfolio using other people's money. There's 250 videos I put in there because no one likes to sit down. No one has an hour free time, or usually they don't. So I spent about eight months making five to 10 minute clips of every single step of the way. So someone, if they got a free 10 minutes can just watch to my videos and learn a little bit or poke around and see.
So there's that, there's a closed Facebook group. There's weekly mentorship calls, group mentorship calls, and then all the resources you'll need. So it's pretty in depth and it's pretty comprehensive. You know, we just launched it about six months ago, had a little over 500 people sign up. So it's, it's not, it's it's for people that are willing to take action. We'd one of the questions is making sure that they're willing to take action. We just don't want to take people's money just to take their money. If they're willing to take action and it's a good fit for you, but it's been fun. And it's just kind of one of the trickle down effects of getting a lot of eyeballs, a certain amount of those people will want we'll happily give you money to teach them further.
You know, we're not holding a gun for anybody's dad to sign up. So it's, it's been, it's been a fun thing that I don't really push a ton. A lot of people don't even know I have it that follow me on social media. So I kind of like it that way.
Jesse (24m 50s): Yeah. I mean, it's also too, it's a reflection of, of yourself. So this idea of just, you know, signing up a million people in the short term is, you know, a lot of people do it, but if it's something that you you're trying to build and you want it to be quality, it makes sense that you want people to actually be in there engaged because unfortunately, a lot of people, you know, we've all been guilty of it, but there are a lot of people that consume a lot of great content, but never take any action with it. Whether it's a finance real estate need, it could be anything. So it's, it's definitely one of those things you want to have that action piece connected to the actual consumption of, of information.
Want to just hop back to the real estate side of things. So, one thing that we talk about with a lot of guesses, their process for acquisition now more than ever off-market deals are, seem to be the route that a lot of people are going in terms of finding properties. We'll see if that changes with the changing environment out there. What's your process when you're looking to acquire properties. And maybe you could talk about if, if it has evolved when, since you started out.
Sam (25m 54s): Yeah, it has. For sure. So at first, when I was, you know, just doing this on the side, I was, you know, buying things, certain things were on market, you know, back in 2015, 16, it was a little more common to find some of these on market deals. So that's what I did at first. And then through some local wholesalers, you know, people that were out there doing the work themselves and, and drumming up the deals and bringing them to me. And then we, you know, went full-time and have our house flipping company now. So we have five full-time buyers. That's all they do every day. They buy between 30 and 60 houses a year and they go and find the deals and drum up and talk to other wholesalers and connectors and real estate agents and lawyers and senior care facilities and all those kinds of things we buy.
We bought 252 houses last year. And I think like 165 of them were through no marketing spend all just through networking and our, and you know, going to find people. And then we also do the, do the advertising. You know, we got Facebook and AdWords and SEO and all those. So we do a mixture of, you know, you know, actual ads and then a mixture of networking for the sort of the houses. But for the apartments, that's a little bit different, you know, we've done some mailers specifically to owners, but we're, we got most of our deals. I've just been dealing with local brokers and, you know, local people that are wholesale on those deals.
And, you know, people that come across these cause you know, the commercial space is a little bit different. An agent can get something and you kind of have a pocket listing and put shell it out. They don't have to blast it to everybody like they do on the residential side. So yeah, just getting to know people and networking our last three apartments we bought from the same broker that he brought to us first because we were able to perform on one. So relationship-based, I guess is the key to what we've done. It takes time, but it takes time upfront. You'd be friendly and get to know them, offer value. Then you get a gravy train of deals coming. And yet it takes a little bit of time, but our last three deals I've been through one guy.
I mean, we'll probably buy 20 apartments from him in the next 10 years. So that's well worth it. I'm spending some time, you know, you can flood the market with advertising. That's an option, but not everybody has the money or knowledge to do that. So anybody can go network and market with people and, and, you know, come across deals that way.
Jesse (27m 56s): Yeah. And it's beneficial for him as well. Right. You have a qualified buyer and he knows that when he has that pocket listing, that you're going to be one he shows. I think it's, it's just, it's interesting to see the different approaches people take. Like for, you know, a lot of people come in with mailers. I found with our market it's, hasn't been, as we haven't had seen that much advantage or that much output from mailers, but I still call direct. I'm a broker by trade. So it's a little different in the sense that, you know, I get the free quote freebies of CoStar Altice, a bunch of different software pieces that when I need to find a corporate search for a numbered company, it's something fairly easy for me to do.
Whereas I know, you know, for a private investor to do that, they have to scale their business fairly, fairly big, but a lot of this stuff, depending on which state or province, if you're in Canada, in terms of, you know, where you're finding information, it's a lot of this is publicly available for on the apartment side as well. So you can usually enough elbow grease and you can find a name for a person, but you're absolutely right. It's a different animal on the commercial side, but in terms of making those relationships, I think, you know, just going back to your educational aspect, I think stuff like that is, what's so valuable in education.
And one thing is, okay, you can say connect with a good broker, but there are aspects of, you know, making sure that you sound like, you know, what you're talking about and you know, do's, and don'ts when you're trying to connect with the brokerage community. And not that they're, you know, we're this, you know, just geniuses, it's just the fact that you want to be speaking our language. And there's a couple of red flags that just jump out right away. When brokers hear somebody talk that, you know, you can, you lose credibility fairly quickly, but if you do the opposite, you know, it's a, it's a list an off-market listing then I'll definitely want to get out and, you know, give to somebody that if they sound like they know what they're talking about.
Sam (29m 40s): Yeah. I agree. Hundred percent like that. The education is, is just huge. And it's obviously something I believe in it's something I practice and I pay a lot of money every single year to be in a couple of masterminds and some subscription services. But it's, you know, they say you can't buy time, but you can like time, you can buy time by being more efficient and effective. If, if you know, you took 10 years to learn how to do what you do. And you know, we're putting a lot of that in this pocket. Someone keynote can spend listened to, you know, 10 hours of your podcast and get two years worth of knowledge and information.
So they can be more efficient and effective. So whether it's free or paid. And I take part in this, in all my businesses and every aspect, I'm writing a book right now, and I got a ghost writer helping me write it, like taking other people's information. So you can be, and their knowledge and experience. So you can be more efficient and effective and kind of take that group path and have less headaches and, you know, do more in less time you are buying time. So yeah, that's huge. That goes along with the lingo that you're talking about and just general, you know, just having somebody keep you in the lanes and keep you out of the gutters is huge, hugely important.
So yeah, I fully believe in it and sell it obviously, but also take part in it. And pretty much every business I have.
Jesse (30m 51s): Yeah. Well, it's a great community be in. I find that there's a lot of like-minded people. And generally speaking for the most part, everybody is pretty encouraging when you get into this business. And I, you know, I assume it's similar for other industries, but one thing I've always loved with the real estate industry is that if you are hustling and, and you are outwardly showing that you're interested, older individuals in our industry do want to do nothing but help you. I've found that through my career is because they see a little bit of themselves in you. I want, you know, when they're 50, 60 plus, and they see a younger version of themselves kind of doing their thing.
So reaching out to those people is, is something that, you know, if you can add value, it's something that I always encourage for people to do.
Sam (31m 31s): Yeah. Don't, don't underestimate vanity. I see it all the time. They're, they're willing to help. They really are those older people, they a hundred percent want to help. They see themselves in you, but they're also like, Hey, this is what I did. Look at how cool I am and look, here's the secrets that I did. And I figured out, and look at me, I did this, you know, look up to me and it's, it's everybody has it as natural. I'm not trying to dog on anybody. I have it, you have it everybody. But if, you know, people will, some people have a little bit more banning than others, but having, you know, people, you know, be able to say, look what I did and have you be like, wow, that that's something and that's real.
And that, that goes along with people wanting to help you're right. Real estate investors are surprisingly helpful in my opinion, compared a lot of other industries.
Jesse (32m 10s): Yeah, for sure. And you're absolutely right on the vanity side, I've found that even on the podcast and it's, and again, it's not to say that in a negative way, but I get a lot more honey from people I reach out to, especially on the commercial real estate side and, and the academic side, when I said, Hey, I just read your last paper, you know, that you wrote on, you know, commercial real estate prices and their effect on X. And all of a sudden you're like, oh, read my work. Okay. Like, you know, I would test it. So yeah, definitely. That's a good aspect.
I think any, any time in life, you can kind of a tickle or a, you know, a warmup through the vanities angle or a little bit of the stroke in the ego. I think it, you know, it helps Sam. We're coming up to the end here. We've got a few questions at the end. We ask every guest. So if you're cool with that, I'll, I'll send them your way. All right. All right, Sam, what you know, talking about mentorship, what is something that you would recommend or encourage for a young person getting into our industry, whether that's, you know, investing or commercial real estate as a, as a profession, you know, even on the institutional side,
Sam (33m 19s): Just take advantage of all the free resources out there, your podcasts. Those is a ton of social media stuff. I'm on YouTube and Instagram and even Tik TOK. Now, like we kind of alluded to, but just take advantage of all the free stuff out there. You can learn so much for free if you're willing to spend a little bit of time and energy on it. So take advantage of the free stuff out there, and then that'll guide you to pay stuff if you want. But also get out and network, go to these meetups, go to meet people, go grab lunch with someone it's so much different commenting on somebody's Instagram or joining a Facebook group and chatting then getting in your car, driving, going to a meetup, meeting, other people that got in their car and drove and went to that meetup.
Those people are so much more valuable to connect with than somebody you just met online. So do the online research, but go meet people, talk to people because those people are the people that you want to know. And you, one connection probably will eventually change your life. You just gotta meet that connection. So go connect with people in person. And if you're young, like you said, man, people like to take you under their wing, especially if you're super young and just wanting to get into it in green, you don't even have to act like, you know what you're talking about. As long as they know that you're green and you don't act like, you know what you're talking about, you'd be shocked at how many people will help you.
Jesse (34m 31s): Yeah. It's almost an advantage if you act like you don't really know what you're talking about, they want to, they want to help you out. So speaking of resources, what's something, a podcast or book that you're reading right now that you could share with listeners.
Sam (34m 44s): Yeah. I just talk on that. I love listening to podcasts and listened into books and kind of getting, I usually get my active information and active knowledge and, you know, from, you know, masterminds or podcasts or YouTube like this, but my overall like mindset stuff comes from more books and things like that. A book that I just read again for the second time that I, I really, really like is a pitch. Anything, if anybody's ever read a pitch, anything's a good one. And then eat that frog,
Jesse (35m 13s): Oren Klaff right. Pitch anything,
Sam (35m 15s): And then eat it just about, you know, conversations and how you can kind of not control the other person, but you can kind of lead the conversation to where you want and lead the relationship to, to, you know, something that's beneficial for everybody. And then also eat that. Frog's a really good, simple one that I kind of liked. It's just about, if you get the, you get the hardest thing over at the beginning of the day and everything else, it's not just like, you're done with the hard thing. It's like, you got momentum, you got the energy from it. And then everything else seems easy. You get, if you wait until the end of the day, do the hard thing, you won't do it. Or you do at the end of the day.
If you do the hard thing at the beginning of the day, you get literally twice as much done. So just suck it up and do it. So that's that's I really liked that book.
Jesse (35m 52s): Yeah. We'll put links to both of those. I've, you know, I can't even, it was probably three, four years ago. I read, eat that frog and I was so confused. Cause a buddy sent it to me and I was like, what is this? I don't get the, you read the book. And you're like, yeah, it makes a lot of sense. No, I mean the, the, the title, when I first saw it, I was like, what am I getting into? But yeah, it's basically getting, getting that, you know, that toughest thing out of your day and then setting yourself up for, you know, for the rest of the day, week a year. That's awesome. We'll put a couple links to those last question. We'd like to ask all of our guests just cause I'm a bit of a petrol head.
First car make and model
Sam (36m 26s): First car make a T at 1993. Stick-shift Toyota Corolla.
Jesse (36m 31s): I like how you say stick, stick, shift. I listened to this econ talk one of my favorite podcasts and they call it a, a millennial security device.
Sam (36m 39s): Yeah. I've heard that too. That that's true. That's true. That a lot of, not a lot of people can, can find those these days.
Jesse (36m 46s): Awesome. We'll say for those that want to reach out, we alluded to it throughout the whole podcast, but working the working, they get to you. What's your handle for Instagram? Tik TOK or YouTube.
Sam (36m 57s): Yeah, they're all. It's all the same. It's same faster freedom. So my name and then faster freedom is my brand. So same fastest freedom on Tik TOK, YouTube, Instagram, check out the stuff. If you like it, shoot me a follower and shoot me a message on Instagram. I, I try to get to as many as I can and I'll usually get to them within a day or two if I don't get them right away. So shoot me a message. If you have any questions, I'd love to help you out.
Jesse (37m 17s): My guest today has been Sam prim Sam, thanks for being part of working capital.
Sam (37m 21s): Thank you. I appreciate being on.
Jesse (37m 30s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Emily Hamilton Emily Hamilton is a Senior Research Fellow and Director of the Urbanity Project at the Mercatus Center at George Mason University. Emily’s research focuses on urban economics and land-use policy.
In this episode we talked about:
-Emily’s Bio & Background
-Land use regulation
-The evolution of zoning regulations
-Single Family Housing Ownership
-Housing Regulations Challenges
-Affordable Housing
-Rent Control
-Vacancy Decontrol
-Policy Restrictions
-Accessory Apartments
-BANANA - Build Absolutely Nothing -Anywhere Near Anybody
-Resources and Lessons Learned
Useful links:
Book: “Green Metropolis” by David Owen
https://www.mercatus.org/scholars/emily-hamilton
@ebwhamilton Twitter
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name is Jesper galley and you're listening to working capital the real estate podcast. My special guest today is Emily Hamilton. Emily is a senior research fellow and director of their abandon the project at the Mercatus center at George Mason university.
Emily's research focuses on urban economics and land use policy. And she joins us today to talk about housing in the United States and a little bit more broadly in general, in Canadian and other north American markets. Emily has, how's it going today?
Emily (48s): Good. Thanks for having me, Jessie.
Jesse (50s): Yeah. Thank you so much for, for joining the podcast for listeners that aren't, aren't familiar with your work at Emily. Maybe you could give us a little bit of a high level description of how you got into the space that you're in right now, as it pertains to, you know, economics land use policy and the like
Emily (1m 9s): Sure. Yeah, I'm an economist studying mostly the effects of land use regulations, local zoning roles and their effect on housing affordability. I first got interested in this policy area when I wound up in an internship in the planning department of my hometown in Colorado, before that I really had not been aware that all of these local zoning roles have such a large role of shaping what our cities and neighborhoods look like.
But once you learn about all the intricacies of rules, like parking requirements and height limits and setback requirements, it's really changes. I think how, how we see the built world around us.
Jesse (1m 60s): So I've always been fascinated with urban economics, as it relates to the work we do in commercial real estate. A triumph of the city was, was a book that was recommended to me a few years ago. I thought it was another interesting avenue into how these policies that you're describing or that you research play into the actions of individuals. And I guess economics in general, how that, how people kind of adapt and the incentives that we set up, how people use those incentives and collectively make certain decisions.
Maybe you could give us a little bit of a background of land use regulation in general. You know, we didn't invent the wheel and suddenly somebody is like, you need three meters or four feet to build a that there. So what was kind of the evolution of, of a lot of the modern policies that, that we see?
Emily (2m 49s): Sure. In the U S context, the first zoning regulation was implemented in New York city. There were land use regulations prior to the New York ordinance, but that's the first one that looks like what we think of as a complete zoning ordinance today. And that was in 1916 in New York. But when that went into effect, there were already people in other localities across the U S thinking about implementing these types of, of land use restrictions and the spread very quickly across the country.
After that land use ordinances started off being focused primarily on Euclidean zoning. So separating different types of land uses from each other, having office districts and industrial districts and residential districts, but got much more binding over time to the point that in the 1940s, fifties, sixties, we see much more focus on single family zoning and large lot single family zoning becoming the kind of defacto primary land use designation in, in localities across the country
Jesse (4m 15s): And the, the restrictions or the zoning itself. It sounds very similar to kind of the local environment that we have in, in my area in Toronto. But I think across the, across the country here and across the United States, the, the push for these different types of zonings at the, when they first started was the push primarily from a government standpoint, was it from a, you know, a developer standpoint who, what was the thrust or the lobbyists that were pushing for these initial zoning ordinances?
Emily (4m 47s): In the New York context, there was an organization called the fifth avenue commission that was made up primarily of the owners of very fancy department stores on fifth avenue. And they were concerned that garment workers who worked in factories, making clothing, primarily Jewish immigrants were spending too much time near their fancy department stores because these garment manufacturing buildings were right up next to these department stores because the manufacturers wanted to be able to see what was going on in the department stores.
You know, what, what do people want what's selling? What should we be making? So they pushed the, the fifth avenue commission pushed for zoning in an effort to prevent the factory workers from being, from working so close to where their stores were. And this is something that's really a common thread throughout zoning is we're separating land uses directly, but we're separating people on the basis of their income or whatever background factors people have indirectly.
Jesse (6m 7s): So you could sorry, go ahead.
Emily (6m 10s): Oh, no, no, please.
Jesse (6m 12s): So I was just going to say, you can have what seems to be an innocuous regulation that would have a disparate income on, on, you know, different types of people, different classes of people, like you said, income or, or other classifications.
Emily (6m 25s): Exactly. Yeah. Us lawyers refer to this as being facially neutral, that it doesn't look like these regulations are enforcing segregation on the basis of race or income, but they are indirectly. Hmm. And then following the fifth avenues commission or concurrent with the fifth avenues commissions work and efforts to implement this stoning ordinance in New York city, there was also a lot of work in the federal level led by the Hoover administration initially in the U S to support the adoption of zoning rules across the country.
And that really became ingrained in, in federal housing policy, following world war two, when the federal government limited its underwriting of mortgages to locations that implemented land use regulations that met with federal standards. And that included single-family zoning as one, one factor that the federal government saw as lowering risks of mortgage default.
Jesse (7m 50s): So I'm curious about that because there is one distinction. I mean, there's a few distinctions between the Canadian and us context when it comes to real estate. One of the big ones is the fact that if any main Freddie Mac, you have government agencies that do encourage home ownership, where in Canada or crown corporations, they don't encourage home ownership. They encourage affordable housing, a very European take of, of the U S version. I'm curious though that the impetus to have that type of housing policy or the result of that housing policy, I know through Bush, through Clinton, the percentage of home owners have, has gone up and down.
It's kind of, I think in the 70% area in that time, I'm not sure what it is today, but was there a reason that there was, there was such favoritism to single family housing and ownership in the states? Was that just something in the DNA, you know, as a country,
Emily (8m 46s): I wish I wish I had a better answer to why that is such an important part of housing policy in us history. Perhaps it goes all the way back to kind of Jeffersonian ideal. So a nation of landowners, but it, yes, it, it goes very far back in, in us housing policy that there is a federal objective of encouraging and subsidizing home ownership rather than the broader lens of government policies that support housing affordability, regardless of whether it's rented or owned.
Jesse (9m 33s): So like all regulation, I feel like most of the time it be gets more regulation and then that regulation gets more regulation. Where do you see the w what do you see the state of regulation? I didn't know. It's a huge question because there's so many different states with different regulation, but are there a couple areas that you focus in your research that you think these are, these are some of the biggest issues or the biggest challenges or problems with housing regulation in the states or land use regulations?
Emily (10m 5s): Yeah. Well, I think one place where we really see the, the issue of regulation, begetting more regulation is in inclusionary zoning. I'm not sure what that looks like, or if there's a comparable policy in Canadian cities, but in the U S it's becoming more and more common for localities to require a certain percentage of units in a new development to be affordable to households, making a certain level of income, is that being implemented in Canada.
Jesse (10m 39s): And I'm not sure if this would tie in. I find a lot of times they're similar things with different names, but a lot of, you know, if you're, if you are buying a, an apartment building, tearing it down and putting up condos, you have to rental replace that you have rental replacement there, as there is a certain percentage of new developments that need to be affordable housing, like you're saying, and then some, some good and not so good policy outcomes of that, you know, cause then it's, you know, sometimes you have the lottery system of people that, you know, how you determine what's affordable, not, and is not affordable sounds, you know, similar or scary sounds easy.
It's, you know, this amount of income, but then what happens when you have more people than, than units available. So, yeah, I think, I think we're, we're very similar on that front.
Emily (11m 25s): Yeah. What I've studied inclusionary zoning in the Washington DC region. And what I found is that localities that have adopted this policy have experienced faster rising market rate housing than what they could have expected without the policy. So this policy that's intended to help housing affordability is making the problem worse for all the households that don't get to benefit from the inclusionary zoning units.
And similarly, those are generally allocated by lottery here. I wouldn't say that inclusionary zoning is one of the primary regulations to worry about. I think that minimum lot size requirements and in general, having a very small amount of, of land area in many localities where multi-family housing can be built are, are the primary causes of housing affordability problems in the U S but we can just see with inclusionary zoning that the, as you say, regulation breeds more regulation and it becomes this web that gets harder and harder to untangle as opposed to tackling the exclusionary zoning rules more directly.
Jesse (12m 58s): Yeah, I was reading today. I think it is being proposed like usually very seemingly at least my point of view, not to get political, but seemingly radical ideas that our, our government has talked about. Basically not allowing or putting more a moratorium on foreign investment in real estate in Canada. And what I'm curious about is you have these regulations and the actually actual ability to create affordable housing. I'm not sure if you're aware of it, or if there are other American cities that are similar, but in Toronto we call it the shadow rental market, it's condo ownership and where somebody like you and I might buy a condo and rent that condo because a pretty insane stat to me is that 90% of the, or 85% of the rental stock in Toronto in the greater Toronto area, you know, 3 million in GT, even more people, 85% of that rental stock was built prior to 1990 or sorry, 1970.
So we have extremely old rental stock. We cannot build enough multi-family and it's reflected in the pricing. And when we put these government policies in, and this is where I think it's like a lot of U S cities where we put these government policies and, and say, you got to build a certain amount of affordable housing, but at the same time, you won't allow, you know, David and Janet that own a house just outside of Toronto, like have a rental in their basement. You know, that regulation is more cumbersome where you can call the one affordable housing, but you could easily say that you can unlock affordable housing and other ways from a regulatory standpoint, any thoughts on that?
Emily (14m 36s): Yeah, absolutely. Sometimes people in the U S call it capital a affordable housing. When we're talking about housing that is designated to be affordable to people, making a certain income level. Versus I often prefer to talk about housing affordability, which is just having an abundance of housing that fits within people's budgets comfortably and allows them to live in a place where they have access to their own best opportunities, as opposed to housing.
That's set aside on the basis of your exact income.
Jesse (15m 17s): Yeah. Now we had a Richard Epstein on from NYU. I think he's at Hoover now, but he was basically giving us a history of the New York rental or rent control. And it was at the time, I think we're right in the Biden presidency was talking about the eviction moratoriums and a lot of the listeners who are investors, you know, there's that frustration at that time. One thing I love about the states is that it's exactly that you have different states. If you like policies in Florida, you can go to Florida. If you like plot policies in Washington, you can go to Washington in the Canadian context.
We're pretty uniform when it comes to rent control. I'm pretty sure every province has some version of, of rent control policies. Has your work touched at all into kind of the, the actual policies as it pertains to landlord and tenants within, within locales?
Emily (16m 10s): No. I have not done a lot of research on tenant landlord law generally, or rent control more specifically, but I am familiar with, with some of the research, particularly in the bay area on rent control. What's been the case. There is, it seems that rent control does have benefits for reducing displacement among households in rent controlled apartments, unsurprisingly.
But this comes at the cost of reducing the overall supply of rental housing by both discouraging investment in new rental properties, and also encouraging the conversion of apartment buildings to condos. So sometimes when, when people are creating policy, they think that, well, as long as we don't apply rent control to new construction, we won't affect a supply, but there are always ways to reduce the supply of rental housing, if you give landlords a motivation to do so.
Jesse (17m 30s): Yeah, that has been, it's been a policy I know in some states, but also up here that, you know, that caveat, you know, we're going to have rent control or rent stabilization, but we're going to let you build, you know, new construction is not going to be it's, it's not going to apply to new construction. And for, from at least as best I can tell that really doesn't make developers feel, give them the warm and fuzzy, because it just gives them the idea that so wait, you can put that policy in place and take it away just as quickly.
Emily (17m 58s): Exactly. Yeah. Now there haven't been a couple of cases in the U S where reforms on the supply side have been paired with relatively liberal rent stabilization laws. So for example, the state of Oregon passed a statewide law that applies to many of its localities, replacing single families owning with two to four unit zoning, depending on the exact situation of the locality.
And that was paired with rent stabilization that I believe is limited to CPI the rate of inflation plus 5%. So that's pretty, you know, it's going,
Jesse (18m 46s): I was going to say, we would take that all day.
Emily (18m 48s): Yeah. Yeah. That's going to stand in the way of some rental increases that landlords would, would want to do, but not a lot. So it's relatively minor rent stabilization in exchange for liberalization of some local zoning rules.
Jesse (19m 8s): Yeah. It's always fascinating to me where, I mean, that example to me, I would, I would take that every day of the week with us right now, the way our rental stabilization works is that we are pretty much a CPI, inflation, inflator, or numbers, really all, you can raise it by. And the only time you could really mark to market your rents or, you know, have them, you know, if you had a tenant for a long time, that was under market, the only way you can move that up is if a tenant vacates. So you are pretty much stuck until you have a vacancy and to further complicate that once your tenant is done their term and they're on month to month, you can not just the victim if they choose to stay.
So we're in a weird position where, and I have, I have sympathy as a landlord, as an investor. I have sympathy for individuals and their security of having a, having a home and having a place. But it also, you know, like everything where the policy has to these outcomes that you don't expect. And, you know, part of that is, is maybe people not following the rules explicitly or doing other things because, you know, they're, they're not investing in upgrades to their buildings and, and the likes.
So yeah, it's, it's definitely one of those complicated things, but we would definitely, we would definitely take that over kind of what we have right now, which is, I think as of 20, 22, this year, we're allowed to raise rent 1.2%. So, I mean, you look at the world that's kind of happening around us. It's not, it's not a really significant increase. Yeah.
Emily (20m 46s): Yeah. New York state recently reformed their rent control policy and set big limits on vacancy decontrol. And one thing that we're seeing now in New York city is some building owners are requiring new tenants to go through brokers and to pay a several thousand dollar fee to, to start renting an apartment.
So it's kind of like key money from, from the old day.
Jesse (21m 22s): Yeah. And for those that don't know, when you say vacancy decontrol, you're talking about what, what kind of, I was alluding to there that, that when a, a unit becomes vacant, you can now capture that higher rent with a Newton. Is that right?
Emily (21m 36s): That's right. Yes. There are still some conditions. I believe where with a certain level of renovations buildings can, or units can go back up to, to market rate, but there, it's very difficult now to increase rates even when, when you get a new tenant in New York city.
Jesse (22m 0s): Yeah. And in fairness, I should, I should have been clear. You reminded me, we call them AGI as above guideline increases. You have to show that you've done enough work that, you know, shows that we can raise above the posted guideline. But it's funny you say key money. I mean, that is exactly what I'm talking about from, from an economics point of view where a very similar thing it was, I'm not sure if you're familiar, but in, on the brokerage side, when office real estate was really crazy, three, four years ago, and people tenants or couldn't find space fast enough, we were, I think 1.7% vacant.
What started to happen was subleases where most institutional landlords don't allow you to profit. Once they achieved their rent, they couldn't profit. So suddenly furniture that would probably cost 5,000 was costing 500,000. So, you know what I mean? It would be like one of those things where, okay, here's the lease deal. And here's the side agreement for furniture for a hundred thousand. And it's really, you look at the value of furniture is pretty much nil after it gets used for seven years.
Emily (22m 59s): Right? Exactly. And one thing we see in the U S context is that the places where rent stabilization laws and tenant protections more broadly are the strongest regions like New York, Boston, San Francisco, these are probably the parts of the country where it's worst to be a tenant or someone looking for a new apartment, even though on paper, it might look like they offer a lot of benefits to tenants.
Jesse (23m 33s): Yeah, no, that's a great point. It's again, it really goes back to a lot of these policies. I find it, you know, anytime a government policy happens, I feel like there should be a committee that just analyzes the things that you don't expect to be an implication of the policy, because oftentimes it seems like the exact opposite is the outcome of the intent.
Emily (23m 53s): Yeah, definitely.
Jesse (23m 54s): So why don't we move? We move over to a little bit of on the policy side, the work that you do, you know, you're, you're looking at urban economics, you're looking at land use regulation from a policy prescription outcome. Are there certain things that you think are more effective than others or certain things that you've researched that you find is in the literature that is really a path forward for, you know, for the states or, you know, by, by extension other markets?
Emily (24m 26s): Yeah. In the U S there's been a lot of recent focus on allowing a little bit more density in single family neighborhoods. And with very good reason, as we talked about this is often the largest zoning designation at least of a residential land in us cities. And we, we talked about its history of being a tool for segregating residents on the basis of their income directly and by race or background indirectly.
But in, in some cases it's difficult for, to, to craft these reforms in such a way that they actually lead to a lot of new housing getting built. So for example, there's been a lot of work to permit accessory dwelling units in the U S this has been really successful in some cases in Los Angeles, perhaps most notably following a lot of state-level reforms that required localities across California to make it easier to build accessory dwelling units.
They're really taking off in LA and in some other parts of the state, but we see a lot of accessory dwelling unit knit ordinances at both the state and the local level that are not getting units built because they place a lot of limits on how these units can be built. And in some cases make it really hard to finance these units.
I am more optimistic about reducing minimum lot size as a tool to get more housing being built in, in areas that are currently zoned for single family housing relative to allowing ADU or duplexes or triplexes or fourplexes on these lots in part, because there are so many ways to make it difficult to build those additional units on a lot.
And in part, because I'm reducing minimum lot size and allowing a single lot to be subdivided into more, lots fits very naturally with a lot of home builders and home buyers or renters model as compared to something like ADU use or duplexes that are going to require some changes to the, the home building industry and what people are expecting.
Not that those, those changes would be bad by any extent, I think duplexes are wonderful, just they're not, they haven't been proven to lead to a lot of new housing construction in the U S context in many cases.
Jesse (27m 32s): So I'm curious about that when you say the, the minimum lot size, a lot of the regulation that we have. I mean, one, when you want to say, add density to a site, a lot of times, you know, parking requirements, you may need a variance. You may need to actually go to a committee of adjustments. Then the other piece of it is, you know, certain areas will have X time coverage that they're allowed to have on a certain site. So when you say reduce the lot size, and are you talking, so you have this single family, you know, say it's half an acre, are we talking about severances where you could separate and have different uses for that for different severed pieces?
Emily (28m 10s): Yes. In, in the U S context, it's usually called subdivision. So splitting that say half acre, lot into, you know, four, 5,000 square foot lots.
Jesse (28m 25s): Okay. And, and that, so just to back up your first point there on accessory apartments, I think we've one of the first rental properties I bought was in close to the university of Waterloo for, for anybody that's, it's about an hour and a half west of Toronto. And I remember we had an accessory apartment attached to the single family home. And I remember, you know, we have other apartment buildings that we own now, but I remember at the time that I had to do more to get that approved, or like the annual maintenance on that of fire code, exit egress, you know, the, the licensing fee for that accessory apartment unit.
But I guess the alternative is, is worse. If you, if you don't even have, we're not even allowed to actually have the accessory apartments.
Emily (29m 11s): Right. Certainly I live in Washington DC and here the big barrier on building accessory apartments is that the natural place to put them is in the basements of DC row houses. But there have to be a certain ceiling height met in order for a basement to be a legal place for one of these, even if it has like its own front door, it is, seems to be the perfect location for a little, but if the ceiling's not tall enough, it won't get permitted there.
And it costs over a hundred thousand dollars generally to dig out the basement to raise the ceiling height, which is just a lot of investment in what we want to see as an easy, low cost way to add a housing unit.
Jesse (30m 3s): Yeah. I think it gets back to the parental aspect of government. It's. I mean, I come from the commercial real estate world, so it's easy for me to say, we're so used to this idea of contracting adults. You know, if I want a five foot ceiling, you know, I have signed an agreement for five foot ceiling, but, you know, I always picture like John Stossel and like 2020 when I was a kid where like, you know, you've got to protect the consumer. So there's like this balance of individuals that, you know, the governments that wants to protect, but also have the ability to have consumer demand be met, whatever that demand is.
Emily (30m 36s): Certainly. Yeah. And I think there's very much a role for governments to set some safety standards in housing, particularly with things that are hard to observe, like, you know, the, the building being, being sound, not at risk of collapse or anything, but with things like ceiling Heights, that's very easy for a prospective tenant to observe assuming they can, can visit the, the apartment where at least the landlord would be required to disclose ceiling Heights below a certain height.
But that's something that people can very much decide if it's worth it to them to save some money on rent by having an apartment that's maybe not as ideal as, as all of us would like, or if they want to pay more to live elsewhere.
Jesse (31m 35s): Yeah. I, it just gets back to this idea of the government is so, so far removed from, you know, when you have a regulation that says this, this, this, that needs to be two inches taller to conform to, to, you know, to the rules in that area. And you know, on the other side, you have a mechanic in that shop saying, I work here every day. This is the way it should be, or that is acceptable. You know, for that context, I wanted to touch base on this before, before we end the podcast, what is the state of, well, I've heard a new one.
I don't know if I was listening to you on the podcast, but nimbyism not in my backyard. This kind of, you know, seems to be every, no matter what city you go to, there's some aspect of this, but was it you, that was talking about banana?
Emily (32m 20s): I'm not sure
Jesse (32m 21s): You're
Emily (32m 22s): Familiar, familiar with,
Jesse (32m 23s): Could you, could you define that or just tell our listeners what that term means?
Emily (32m 27s): Yes. A banana means build absolutely nothing anywhere near anyone. And we, we see this, Catherine Einstein is a professor in, in the Boston area and she and her colleagues wrote a great book called neighborhood defenders, which talks about nimbyism going beyond just people, opposing things, right near their house in their almost literally in their backyard or that are, are going to have a big effect on their immediate area and moving towards the broader goal of, of stopping development more broadly, when we see demands for things like growth caps on a locality's general population as a whole, that gets into banana territory,
Jesse (33m 26s): Go ahead. Caps. I've actually never heard of that term. Is that the, for the actual, like the real estate stock or, or the individual amount of people? Okay.
Emily (33m 35s): Stock of housing, Boulder, Colorado has a famous one here.
Jesse (33m 40s): Wow. So the, okay, so the nimbyism piece, I live in an area in Toronto that is if 30 years ago, or even less than that, it was a very industrial area, not particularly great in terms of crime. This is in the east end of Toronto. And now it is a very bougie area you're in queen east. It's kind of, a lot of boutique shops are in this area. And it seems like the individuals that were living there 20, 25 years ago slowly shifted more and more east and are kind of getting to that point where 15 years ago, a lot of people that moved into this area, they wanted the inexpensive housing, but now, you know, they want it built for them.
But now that it's built for them, they don't want any more building for them. So how do we, you know, what is the solution to these type of PO or these types of outcomes, because it's just seems no matter what happens when you go into an area and gentrify, it just seems that the people that end up getting comfortable in that area, you know, it, then the buck stops with them from their point of view.
Emily (34m 44s): Yes, certainly a problem in, in many us cities as well. I think the, the solution is to move land, use decisions up to higher levels of government, perhaps a provincial level in Canada, because when land use decisions are made, particularly at a neighborhood level, the, the benefits of new housing being built are very far off.
They're not going to go to the people who live in that neighborhood. They're going to go to the people who are going to live in say a new apartment building, who, who knows where they live right now. And they're going to go to the people who build the apartment building and firms who can hire workers, because they have a place to live that they can afford in that area. Whereas at the local level, the costs of housing construction are very visible and highly concentrated in the people, particularly who live right next to that new development.
So at higher levels of, of government, it, it's easier for people to see that we need new housing and we need to weigh the benefits of that new housing against the costs, not just consider the costs alone.
Jesse (36m 7s): You know, that's, that's pretty fascinating in that if, if you're a more free market oriented kind of person in real estate, and it's very counterintuitive to you because it's almost like you for, for most decisions, at least from my kind of my view is that it's better to have it at the, at the most granular level. But it sounds like in this case, it's, it's kind of similar to political capture that yes, that is the case. You should have it granular, except once these people move in, they're captured by their own, whatever it is, like the, they, they just, they don't want any more.
And it's, I think it's a very human thing. You know, they have their, their situation, but, you know, when it, before they moved in yeah. Build, you know, for my house that is in that area. So it seems like it's almost, it is like a bit of capture that the people that end up moving to these areas and gentrifying them, they don't want anything else to happen after, you know, they, they close on their dealer, you know, they're living there for a few years.
Emily (37m 3s): Yeah, that's right. And what we've seen with some state level reforms in the U S is state governments setting limits on the extent to which local governments can block housing construction. So essentially the state government is protecting individual property owners rights from some local level limits. So in a way it's devolving decision-making to an even more local level down to the individual property owner.
Jesse (37m 35s): Yeah. That's great. It's also this idea of like a lot of these, these groups that are consider themselves these kind of community activist groups, oftentimes politically are left leaning. And that's one of the things that triumph of the city I thought was, was so compelling in that book was talking about how, how much more green cities are to rural areas. It's very counterintuitive because when somebody thinks of the city, I think of the godfather reunion was just, or a series was on TV. And I, to your point of Jewish immigrants, Italians, too, where you look at these tenements in New York, that's what you think of, oh, it must be a very polluted, very bad area.
Where if you look at the output, I guess, per acre of, of greenhouse gas emissions, it's much, much worse outside of the city.
Emily (38m 22s): Yes, that's right. And unfortunately, in, in the U S I'm sure in Canada, too, the places where carbon emissions per person are lowest, are also places where it's extremely difficult to build more housing and therefore extremely difficult for more people to live in these places where they would be using less carbon.
Jesse (38m 46s): Yeah. And, and we have, we have a lot of things in land is one of them, but yeah, it would definitely be, be the case as well. Well, I want to be mindful of the time here before we let our guests go. We typically ask four questions, they're softballs, so don't worry. And, and then we'll, we'll, we'll connect our listeners to wherever they can kind of reach out to find your work and go from there. So if you're okay, I'll kick us off.
Emily (39m 12s): Yeah. Sounds good.
Jesse (39m 14s): So since you're in the academic space as well, maybe this will pertain not just to the real estate industry, but what's your advice for younger individuals that want to get into our industry, and maybe let's focus it on a, on a academic point of view, a academic stream. If somebody wants to get into research or wants to get into the type of work you do, you know, what, what type of things would you encourage them to do while they're, you know, say pre pre college or in college?
Emily (39m 41s): I would definitely recommend internships in, so either in the field where they want to work, or if they're interested in, in academia in say a think tank or in working with a professor, for example, at their university over the summer, both as a, a good way to make the connections that they would need to get a job in that field later. And as a way to, to try it out without making a big commitment, like signing up for grad school.
Jesse (40m 19s): Yeah. Which is which that is a, what is a podcast or book that you are really digging or recommending right now?
Emily (40m 27s): Well, on the topic of the environmental efficiency of urban living, I'd recommend the green metropolis by David Owen
Jesse (40m 38s): Pretty much. Okay. And we'll put a link up to that. One thing that you know, now in your career, whether it's business real estate academics, that you wish you knew when you, when you started out,
Emily (40m 53s): I wish that I had gotten more involved in Twitter earlier in my career. Housing. Twitter is such a great resource for, for learning about the industry. Particularly from, from my standpoint, as I'm reading, I'm studying the effects of land use regulations. It's really helpful to be able to follow home builders, infill developers on Twitter and see how these regulations are affecting their work.
Jesse (41m 26s): You're also in Washington DC, which I think Twitter is just table stakes. Okay. Emily first car make and model
Emily (41m 34s): Honda accord.
Jesse (41m 35s): Oh, that was a quick answer. Perfect. I feel like that question. I always ask that because I w I like Barry Ritholtz on a master's of business and Bloomberg, and that's the last question. And it's funny how we're now phasing into the point where people are like, that's a bit of an offensive question, like with the younger generation, as we're getting to the point where, like, we, we don't drive cars, so I'm like
Emily (41m 56s): No longer on a car.
Jesse (41m 58s): Oh, there you go. Fair enough. So Emily work in people reach out aside from a Google search to, to take a look at your work or, you know, see what you're up to.
Emily (42m 8s): Well, by most of my work is available@mercatus.org, where I have a scholar page and links to my, my research in shorter form writings there. And as I mentioned, I am very into housing, Twitter, and I'm on there at E B w Hamilton.
Jesse (42m 27s): My guest today has been Emily Hamilton, Emily, thanks for being part of working capital.
Emily (42m 32s): Thanks so much, Jesse.
Jesse (42m 35s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.
Ben Lapidus is a partner and Chief Financial Officer for Spartan Investment Group LLC, where he has applied his finance and business development skills to construct a portfolio of over $300M assets under management from scratch, build the corporate finance backbone for the organization, and organized over $100M of debt capital from the firm. Ben is also a co-founder and host of the Best Ever Conference and the managing partner of Indigo Ownerships LLC, where he sponsored 40+ single family and multifamily Real estate transactions.
In this episode we talked about:
* Ben’s Bio & Background
* Spartan Investment Group
* First Steps in Real Estate Space
* Transition from Single Family Houses to Real Big Deals
* Best Ever Conference Evolution and Partnership
* First Deal Details
* Money or Wisdom?
* Building a Team
* Risk Navigation
* Real Estate Market Outlook
* Mentorship, Resources and Lessons Learned
Useful links:
Carlo Rovelli books
Ben@spartan-investors.com
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, welcome to working capital the real estate podcast. My guest today is Ben Lapidus. Ben is a partner and chief financial officer for Spartan investment group, LLC, where he has applied his finance and business development skills to acquire the company's current portfolio, build the corporate finance backbone for the firm and organize hundreds of million dollars of debt capital.
Ben is also the founder and host of the nation, the national best ever real estate investing conference and managing partner of indigo ownerships, LLC, where he sponsored 40 plus single family and multifamily real estate transactions. Ben, how you doing today?
Ben (56s): Doing awesome. Thanks for having Jesse.
Jesse (58s): Well, thanks for coming on. And before we jump into kind of the background and where you're working right now, for those that don't know, I think a lot of our listeners do know, but the best ever real estate investing conference, can you just let listeners know what you did the best ever? I guess it's now not just a conference, it's kind of a whole company in general, but if you could just let listeners that don't know what that is. Just kind of give a little bit of a bio there.
Ben (1m 20s): Yeah. The best ever conference it's turned into a world and an experience, a Disneyland, all of its own for real estate investors. It brings together over 1500 real estate investors, syndicators and operators. Every year. It matches over half a billion of unplaced capital and over 50 billion of assets under management from active operators, 96% of attendees have done at least one commercial deal in the last six months. So it's a really frothy, active community. If people come together at the beginning of every year to learn about what's ahead in the economic conditions to network with each other, learn from each other, get deals done and party with each other.
It's an awesome time.
Jesse (1m 53s): That's awesome. So the, the last one that you had, when was that and where was it?
Ben (1m 58s): Yeah, it was in February this year, 2022 in Denver, Colorado, as it's been for the last six years, we are picking up our roots and next year it's gonna be March 8th through 10th in salt lake city, first time outside of Denver.
Jesse (2m 11s): Awesome. That's great. Well, thanks for coming on. Like I said, at the outset, so you, in your current role right now, our CFO of Spartan investment group and what are you guys typically doing there? I think we talked a little bit before the show and I've listened to you on other podcasts, but a lot of it correct me if I'm wrong is self storage syndication. Is there a multi-family as well in that what's that company all about?
Ben (2m 34s): Yeah. So we started off as an opportunity to stick commercial real estate investor, meaning that we were more into the business of real estate. Then we will set class. However, we found ourselves through a very intentional decision making process, being proactive as opposed to reactive with self storage assets. So along the way, we did pick up some workforce housing in RV camps. Specifically, we have some retail, we have some industrial, but that's all minor compared to our growing self storage portfolio. At this stage, with that half a billion assets under management self storage is our main focus.
It just so happens that where we buy what we buy typically conveys with other types of asset classes, we've owned a carwash before as an example. So yeah,
Jesse (3m 15s): I was just watching the last season of breaking bad. So the carwash, the carwash aspect of it, it's funny because I'll, I'll look out on like different cash businesses that are tangentially related to real estate and car washes and laundromats seem to come up time and time again.
Ben (3m 30s): Yeah.
Jesse (3m 31s): So you, you did when you're in school, you're at Rutgers finance and economics. Take us back for, from that time in your life and going into what you're doing right now. Was it a fairly logical step to go into real estate? How did you move into the space?
Ben (3m 47s): Yeah, no, not at all. Do you want you all to short the 32nd answer Jesse or the three minute answer
Jesse (3m 51s): You can give the three minute answer. All
Ben (3m 53s): Right. All right. Cool. So yeah, Rutgers, I went into finance thinking that I was going to be an investment banker or some other type of front office wall street, Jackie, you know, I grew up in north Jersey. So I thought that was the only path laid out for me that came to a head in 2009. I had offers from Goldman Sachs and Citibank and crap. I can't even roll UBS. And then 2009 happened and they all disappeared. And the only thing that was left was Barclays capital just bought Lehman brothers. So I went to go work for their fixed income business, doing credit, exotic credit derivatives as an intern.
I still hadn't finished school yet and found out that that life was not for me. It was not fun. And I tried every which way to try to make it fun. I shadowed wealth management, I'd shadowed FX and commodities and equities and research, both debt and equity, investment banking. I shadowed every type of front office investment banking job I could find. And I could not find any place that I enjoyed outside of the quantitative aspects. I didn't enjoy the culture. I didn't love the significance of the work.
So I quit. And I went and started the study abroad company in Costa Rica, which has a huge about face. I'll just kind of gloss. Over that three years later, we were doing $2 million a year in revenue, bringing environmental engineering, renewable energy engineering students from 10 different countries, 80 different universities to Costa Rica to learn about sustainability, renewable energy engineering. We were doing about $2 million a year in revenue until hormones and ego got in the way things fell apart. And I had to move on. So I took my winnings, my small winnings from that business, got myself a job in ad tech where I learned about big data.
And along the way, started investing in single family houses. The company that I worked for was one of the very first unicorns a decade ago, and it made a lot of VPs close to me millionaires overnight when it IPO at six months after I started. And so they heard about what I was doing. He started throwing cash at me. I started accidentally syndicating when I was 23, 24 years old, and I acquired several million dollars, a single family multifamily real estate. I took my net worth from 800 bucks to half a million dollars using other people's money in about two years, which was an accident, but it was hugely meaningful because I was able to take that net worth balance sheet and start doing significant things with it.
So when I realized that I was talented at real estate components of it, not all things real estate, certainly just components of it. And I met my wife and I wanted to leave the city to move out to Denver. I knew that the work that I had built up in ad tech was not going to last in this city. And so I wanted to commit myself to what I was good at, which was this real estate investing world. So in 2016, I started the best ever conference to make a name for myself by way of that, I found my current business partners and the three of us have built a awesome self storage syndication and development engine.
That is smart enough, I believe to navigate the world to have
Jesse (6m 37s): So not dissimilar from a lot of people that get into real estate. Usually typically not a straightforward path as sounds like some somewhat similar here. How was that transition from going and being into the world of single family housing to actually doing larger deals? Was there one thing that led to another in terms of it was one big deal, one opportunity, or was that a process that kind of developed over time?
Ben (6m 59s): Yeah, I would say it was a light switch, which is, there is no path to commercial real estate. There is no barrier to entry, artificial or preexisting barrier to entry. The barrier to entry is artificial and it's in your mindset. So I, I had acquired for single families when I had a buddy at my work when I was 22, 23 years old, it was like, Hey, I have a friend that's doing a skill share class here in New York city about how to buy a $7 million building for $15,000. I was like, that's a catchy title. I'm going to check that out. This is back in the day when Skillshare was in person, like it wasn't digital is like their early business model.
So I went and I was one of like five other people. And the guy giving that class was Joe Fairless in 2012. If you're familiar with Joe Fairless has got one of the top three podcasts in commercial real estate investing due to acquired a 2 billion multifamily portfolio in the last five, five or six years, he's got an awesome business. And so I took that class and the one thing that I walked away from it was, oh, I can go do this right now. I don't have to build up to this. There's no difference in figuring this out versus what I've already done other than scale. That's the only thing. And I can scale. I have that. I have that, you know, confidence that's typically associated with white men who haven't had any adversity presented to them.
I, I can figure this out. So that's, that's what I took away from that interaction. And Joe and I have become good friends. We started the best ever conference together in, in 2016. So that, that was the biggest thing was just that mindset switch.
Jesse (8m 21s): So for, I mean, there'll be a number of listeners that know what the best ever is or best ever conference. How did that partnership? You said there was two other partners. So yourself with Joe, you know, I remember seeing the YouTube videos years ago. So I was curious what started first? Was it the conference that started first? Was it the, the content that was uploaded to social media? How did that kind of become what it is today? Cause it's, it's massive today.
Ben (8m 47s): Yeah. So let me clarify. I've got two partners in Spartan investment group that have nothing to do with best ever conference. The three of us run smart investment group best ever as a is a hundred percent owned by Joe Fairless. We, he started that in 2013. The very first thing was the podcast and the podcast was the nucleus of his entire economic engine in all of the values. He supplies that the community and, and other investors from that, we had been friends since 2012. When I moved to Denver, I said, Hey, Joe, you've got this podcast, you've got this blossoming syndication business.
I'm trying to make a splash for myself. I've got this experience running study abroad companies. I can, I can build good event experiences. So we decided to marry it together. It's his brand, but specifically on the conference, we, we run that together. So the, the podcast for Joe came first for me, the conference came first for both of us. The thought leadership platforms came before the successful syndication company. Joe found his partner at Ashcroft capital because of a direct result of all the work he had been doing prior to meeting his partner and same for myself.
Jesse (9m 51s): So for yourself and your two other partners in your current business, what, I'm the first deal that you did, where you had to, it wasn't bootstrapped and you had to raise outside capital or syndicate the deal. What did that deal look like? And you know, w what was the, you know, high-level details of that, that first deal?
Ben (10m 7s): It was awful. I was 24 years old. It was 2000 late, late 2013, close early 2014. I pursued a 34 unit 38 unit $1.3 million building in Richmond, Virginia, not even a building. It was five buildings on five separate parcels, not all contiguous, which made the lending environment very gnarly. As for my first deal. I had a lot of expectations that did not turn out to be reality. And I was definitely one of those frustrated, entitled young millennials, trying to try to get my cash.
The syndication process was interesting. I learned that when you ask for wisdom, you get money. When you ask for money, you get wisdom. That was pretty cool to learn about that, but I successfully raised all of the cash for that first, for that first deal. And I learned that I'm really good at real estate transactions, capital markets, underwriting, feasibility, due diligence. And I turned what was a decent deal, not an extraordinary deal, but a decent deal into a bad outcome because I'm not a great operator. At least I wasn't a great operator. I don't really like kind of using these identity claims that last forever at the time, I wasn't a good operator.
I wasn't great at construction management. I wasn't great at property management and I didn't put enough energy into asset management to kind of cover over those deficiencies. I didn't have a team. I didn't have a business. I was just doing a hustle on the side of a full-time job with another side hustle business along the way. So I made lots of mistakes and I was lucky, frankly, not skilled at getting out of that investment three years later, where my investors got an annualized return, just shy of 7%. And I made nothing over the course of three years, all that work. And I made nothing, which was a great learning lesson, not as much of a learning lesson is when I lost hundreds of thousands of dollars of my investor money, which is a much better story, but that was a great lesson as to like, don't get yourself into something, unless you plan making money.
It was a great learning opportunity, but it didn't do much else other than send me to school.
Jesse (11m 58s): So I want to go into that second quotations, better story. But before you do, can you unpack a little bit of the ask for wisdom, get money, ask for money, get wisdom piece.
Ben (12m 7s): Yeah. Yeah. I think when you're, when you're young, especially, and you don't have a track record, right? A lot of people like to tell you how it is or how it's going to be. And so I think the best way to play into that when you are looking for something substantial, when you're trying to sell something, you're trying to, you're selling a security in exchange for cash, right? And that's the same thing as selling a widget in exchange for cash. You're trying to sell something when you are learning, you want to show that I've learned, you can play that youth card very, very well.
People like to invest in young people because they know that they're going to last a very long time. A, it makes people feel good that they can, they can drive the direction of somebody so young and somebody so impressionable. It it's, it's kinda like that fulfilling mentorship quality. So when you get an investor, I did not shy away from them. You know, wanting to feel like my mentors, even though I might have taken a lot of their wisdom with a grain of salt and, and not as substantially as they would've liked, but also they just like to share their wisdom and feel like they know what they're doing.
Even as the world is rapidly changing. What I've seen is that if you're out of something or not in something at all for the last five years, you're irrelevant. It doesn't matter how much experience you have. If you have 30 years experience and you retired five years ago, you have less experience than the person who's been doing it for the last two years, as far as I'm concerned, that being said, when you're young play that youth card. So people want to tell you where you're wrong and how you could do better. And there's a bit of an Oliver twist component to that. Like, thank you, sir. Can I have some more, can I have some more of your input, even if I'm not going to take it, can I just hear you out?
I want to know more about what you have to say, and when somebody shares a part of their wisdom, they're sharing a part of themselves, and now they're invested into what you're doing. So when you ask for wisdom, you are already getting an investment from that person. You're getting an investment of their time, their knowledge, their wisdom, their energy. And so you've already started that process of them saying yes, because they're already making that investment to you. When you come out of the gate saying here's a terrible deck that nobody has audited, and that has not gone through the, the, the, the cadence of 50 iterations of past failures.
You know, here's my first try. They're going to give you that wisdom, whether or not you like it. So you might as well ask for the wisdom as opposed to asking for the cash.
Jesse (14m 20s): No, that makes a lot of sense. And if you go back, so this story where you've lost hundreds of thousands, I'm always curious about this. Cause, you know, I'm not sure one of my favorite books in the last five years of me reading in the last five years, I think it came out probably 10 or 12 years ago was thinking fast and slow. Danny Kahneman and Tversky, where it was this idea of loss, aversion, you know, gaining 20 bucks versus losing five. The loss always is more amplified. So can you talk a little bit about that, that story of, you know, you, you lost hundreds, hundreds of thousands.
This was one deal.
Ben (14m 54s): It was a few, but it was one play that I was making. So I had gotten 40 50 cashflowing units under my belt. Let's say two thirds of the multi-family a third of them, single family, small, multi kin. And all of them were going well on average, I was cashflowing over 20% with 15 year mortgages, which is like impossible today. But back in 13, 14, 15, 16 was feasible if you bought, right. In fact, I should have just bought wrong and bought a lot more stuff back then. Cause it'd be worth so much more than what it is today, but the hubris set in, right.
You know, when you're in your mid twenties and you've done this well, 20, 30 times, you start to think you can do kind of anything and it must be you again. So I, I made a decision to invest in flips instead of cash flowing assets, which is the only thing that I'd been doing at the time. But it was just too slow. I was making a hundred, 200, $300 per month per unit. And it just felt like a very slow aggregation of wealth from a cash standpoint, I was doing great on my balance sheet, but my pocket book wasn't really fattening up too much. So I wanted to, I wanted to get into flipping cause I was getting jealous of people making 2050, a hundred thousand dollars margins on one house.
So I tried a couple out and I made 20, $30,000 margins on those couple, but I had done so in a way where I had identified a turnkey model where I outsourced basically everything acquisitions, con construction, leasing design, like everything, I'd outsource everything. And so I was like, all right, well, cool. Let me go raise a fund. Now that I've tried this out with my own money and go buy three, five of these at the same time, which I did. And I made acquisition mistakes. I just, I, I, I was in Chicago land in cook county specifically, which is one of the most corrupt places.
I had one house that they had me go through 13 certificate of occupancy inspections, all of which failed every time they came up with new something new that I had to do, even though it wasn't on the original list that they had presented. When I purchased the asset, I just, I didn't know how to navigate cook county. One of the most difficult bureaucracies in America, I, I ended up selling it without the certificate of occupancy for a hundred thousand dollars, less than I planned on a hun $250,000 estimated value. So it's like a significant percentage and I had put $30,000 more into it than I had anticipated.
So I lost 120, $130,000 on that one flip. I had another flip in the same area that I lost 15 grand on. I had another flip at the same time in Richmond, Virginia, that I lost 30 grand on all at the same time. So when you tally that up, it was over 150 grand. I had lost not only a hundred percent of the capital that I had raised from an equity position for that flip fund, which I was trying to scale up to five at a time until I realized very quickly I was terrible at this, but I had also had to throw my own money, another 60 grand into it that I lost. So I lost everybody else's money and my money along the way.
I think the, the thing that was formative for me in that experience was the decision that I was going to take one of the houses that I've worked so hard to pay down to zero and get a hilar on it. Fortunately, I had done that and not only pay off a hundred percent of the capital that I lost to my investors, which I didn't have to do because it was an equity position, not a deposition, but also an annualized eight and a half percent. So all of the investors at least got their money back and beat the S and P so that the taste in their mouth was left.
Very good, better than if I had just done well from the get go, because now I've proven, even when I don't have to, I'm going to find a way to do the right thing and what matters with a good operator, a good sponsor of a deal is how do they behave? How do they act in the trying times and the difficult times when the gamma risk, the environmental risk, which has nothing to do with the operator in this case? That was me. It was, I was, I was the problem, but when the environmental risk is it, it is making it so difficult to make the ask perform. How does the sponsor perform in those trying times, not what are they doing in the good times, or the easy times when they're riding the wave, but how are they behaving in those trying times?
That's what I learned through that experience.
Jesse (18m 52s): Yeah. I think it's part of the reason that there are investors right or wrong out there. There are investors that will only invest with people that have been through some sort of downturn, whether it's, you know, now that in 2022, whether it was a pandemic, oh 7 0 8, 2001, early nineties in commercial real estate. And, you know, the list goes on where they want to have some trial and tribulation. But I really like what you said earlier about the fact that somebody that has doing or is immersed in an environment could be legal, real estate accounting for the last two, three years is going to have more subject matter expertise than somebody that has been doing it for 30 years has been out of the game for 5, 6, 7 years.
It's not to discount the fact that that person has built up a great amount of knowledge over that time. But as you know, our businesses a month to month, quarter to quarter, sometimes obviously it's a longterm business, but you need to really be into the thick of the details of, of what's going on in the market and what, you know, what's happening and what's relevant as of today.
Ben (19m 47s): So
Jesse (19m 48s): In terms of that risk, that piece there, so that environmental risks, the, the aspect of controlling the controllables, just kind of leading into how you built your team up today, so that you can kind of not only ameliorate some of the external risks, but the risks as associated with the fact that you said you were certain aspects of the deal that you were very good at others, that you're not, you were not so good at what was the plate of there to learn to shore yourself up in other areas or to hire expertise in those areas.
Ben (20m 17s): Yeah. So, so for the sake of answering this question, let's get your listeners on the same page. When, when, when you study institutional commercial real estate investing, there's three types of risks that you learn about alpha beta and gamma. I always forget which one's, which, but one of them is, has, has to do with the deal itself conditions of the specific deal. The second is the conditions of those that control the investment, the team, the operator, the sponsor, and the third is, is those risks that you can't really control as in, in the environment, the economic conditions or whatever, like jurisdiction, legal bureaucracies, whatever it might be.
So we go through a lot of different risk mitigation strategies. One of them is called a pre-mortem, which is like a post-mortem, but you pretend like you've already failed. And you come up with all of the reasons why you failed and you kind of work backwards as to what caused those things. And then we look at what are the ways to mitigate each of those failures, each of those things that cause those failures, and sometimes you can't, sometimes you have to accept them. And there's different things that you can do with risk. You can mitigate the risk by doing something active, to make that risk lessened or gone away all altogether.
And if it's gone away altogether, that's called eliminating the risk. You can also transfer the risk. You can hire somebody that can take on that risk for you. That's like hiring a securities attorney to put, put your PPM together so that you don't have securities risk. Your attorney has securities risk. We've transferred the risk in exchange for feet. The last thing you can do is you can accept that risk mitigate, eliminate transfer accept, and you can accept that risk. That's the whole point of doing your due diligence and having an underwriting file. And underwriting file is your best guest estimation of what risks might be costly to you that could cause volatility to your target returns.
When you accept those risks, it's fine to accept the risk. Just what is the, the, the, the, the spectrum of costs associated with that risk that could affect your returns. If you are aware of those risks, you package them into your underwriting and you make them transparent to your investor community. Then what's the harm in the risk being there altogether. In fact, the risk is really what brings opportunity. We shouldn't be afraid of the risk, right? We should be looking for that risk. As long as we have the rains to tame that bull, we should be looking for that risk as much as possible.
Jesse (22m 30s): So if you'd give a couple examples or say there's a couple items, so CapEx reserve, for instance, the idea of actually keeping a certain amount of capital for longer term expenses, as one say, risk mitigation tool. And then another being, let's just say, going with fixed rate, a fixed rate debt for one of your investments. So you would categorize those and you would figure out which type, which type of risk that is first of all, trying to mitigate, and what is it actually doing? So for instance, if we take fixed, you know, if we take fixed debt, you're basically saying at that point, we have the ability to have less volatility into, into our debt payments at a price, usually a higher rate.
And that would be in this case, you wouldn't be, well, I guess you would be eliminating the risk for a period of time. Is that how the kind of the framework that you would look at?
Ben (23m 22s): We, we would, we would work. We would work it a little bit more downstream from there and go backwards. So we would start with the failure. The failure would be, we are not able to hit our target returns, why debt service was higher than we expected. Why? Because interest rates went up and we got a floating rate loan. Okay. How do we either mitigate, eliminate or transfer that risk if we don't want to accept it? Well, we mitigate it by not getting a floating rate loan. We get a fixed rate loan that would be eliminating the risk altogether. We call that interest rate risk.
The other thing that we could do is we could purchase an interest rate cap. So three months ago, interest rate caps were affordable for two or three years. Now they're not. So interest rate caps are just not really a economically feasible thing to do. So that's not an option anymore. The, so here's an example. We just locked in a two 60 Sofer spread on, on a, on a loan, which with a 40 basis point floor. So it's at 3% basically today. And it will be at 3% probably until we get like more than an eighth of a point hike going on, but it's definitely gonna go up.
However, we're looking at alternatives that put our fixed rates anywhere from 4.75 to 5.5, which is much higher than it was a year or two ago. So the fact that we get to start with 3% with interest only into perpetuity, with limited recourse, with all of these other benefits, there's no interest rate cap requirements. There's no lock box. There's all these other things that are soft costs that investors just don't care about, but make it easier to operate the actual deal, because you're not focused on the administration of the nonsense that these institutional banks require.
Even though we've got floating rate interest rate risks, we're starting at 3%, which is two and a half percent of our, of our fixed rate alternative. And even if the interest rate goes above what we anticipated it to be, we've got two, three, I don't know, 12 months, 18 months, pick your, pick your prediction of having a benefit of however much cashflow along the way. So we're okay with our floating interest rate going above our fixed rate in month, 18 or month 36, or month 40, whatever it might be, however long it takes to get there because our best economic predictions and our model suggests that rates will come back down.
Eventually just will take three years, five years, six years. We're not sure, but we can go up as high as four more points. And we are satisfied with how bad things can get. Now, if we go up more than four points, we might be in a little bit of trouble, but I think a lot of folks would be in a lot of trouble, which is not a good way to, to, to, to say like, that's okay. A lot of folks are going to be in trouble, but we also have a very low debt ratio. So we're, we're comfortable that we can pay off a significant percentage of the debt to make it more, make it more palatable. If it does go up four points, it just wouldn't be ideal, but it's manageable.
Jesse (25m 60s): Yeah. No, that makes sense. So if we move over to the investor relations side of your business, what you have created today, is this more of an asset specific type of syndication that you, that you typically do? Or is this a fund model where you're having people come in and come out on a regular basis?
Ben (26m 17s): Yeah. So up until last month, it was, you get to pick your, the placement of your, of your capital. Here's one deal. You can invest into it. Here's another offering. It's a separate deal. You can invest into it. It would be based off of our acquisitions pipeline. So if we were buying a four property portfolio, we were selling securities for that for property portfolio. If we were buying one one-off investment location address, you'd be, we'd be selling a security to invest in that one deal. Today, we have produced the amount of demand for the investment vehicle and have a enough verifiable deal flow that we are comfortable with the fund.
And so we now offer a fund.
Jesse (26m 55s): Hmm. Yeah. And it seems like a logical transition for most individuals. But I find that there are, you know, you talk to investors, even listeners on the, the podcast where they were, that person that had that full-time job and kind of side hustling, even on the syndication side where you're trying to figure out where's that inflection point where you move, you leave the current job you're having, and you can do this. Full-time because it's usually from my experience, it's not like one perfect. Oh, here's the deal. That's big enough for me to leave everything. It's always a, it's always a question mark. And it's a uncomfortable decision that people do make if they do make it at that point.
Ben (27m 30s): Yeah. So it was the question like, when is it the right time to
Jesse (27m 33s): When I mean, I, my, my gut always says, it's never really the right time. It's you make a decision with the best facts that you have, but what would you answer if, you know, if somebody is out there asking, saying I have what you had back a few years back where they're trying to figure out, I want to go this way with my life. I want to actually go into the investment side of it and leave the day job, but trying to figure out what, when the right time is.
Ben (27m 57s): Yeah. I, I think to your, to your point, I think everybody's position is different. Circumstances are different. And I don't want to dictate, you know, if you have three kids versus zero kids, you're in a completely different life situation, right? So your calculus, your cost benefit analysis is going to be different, but high level, I've got two different answers. Number one, I don't believe in the burn, your boat mentality, where, you know, you burn your boat, you put your back up against the wall and you'll figure a way to fight it out. In fact, I think it's different. I think Hungary's make bad decisions. So there's a little sound for you. It don't burn your boat. Hungary's make bad decisions.
When you get hungry, you start to flail and you start to get a little bit erratic. And at least for me, when somebody said that, I was like, heck yeah, that's what I've had. That's, that's how I've behaved. When I've gotten hungry. You know, I like bought into this burn, your boat mentality. I started to make bad decisions. I started to think in the short term, not in the longterm and I wasn't playing a chess. I was playing checkers. You know, I was like trying to win today, not tomorrow. On the other hand, if you've created something comfortable enough, the idea that managing both is, is supplementing yours or your family's income.
I think it could be faulty. So if you're able to produce enough that you're not going to be hungry when you burn your boat, your W2, I think that the mental load of the distraction in and of itself is enough to limit your creativity, to limit your capacity, your bandwidth, to be more and to do more. So, but all three of us, when we got started, you know, I had a New York city gig that I had gotten to be pretty well-refined. I was only putting in like 10 hours a week into it out here in Denver, Colorado, another partner, you know, flies for an airline.
And so he's able to just like request leave. I mean, he's still like on payroll, you know, he hasn't, he like flies once a quarter, you know what I mean? And then the third guy worked for the government and the government is pretty inefficient. He was able to fly under the radar two hours a week. But for two out of the three of us, we realized that the mental load alone, not the hours committed, but the mental load alone, the distraction, the requirement of having to give yourself to somebody else at a moment's notice in exchange for paying, spending time with the people that you're collaborating with to build this thing is not worth the income.
Yes, you will be taking a step back today, but the potential of where you'll be three years from now is so much more valuable.
Jesse (30m 16s): Yeah. I couldn't agree with that more. It is interesting. And, and kind of eyeopening that when you're talking, especially when you're raising outside capital, that when something happens, you literally drop everything mentally and, and usually physically as well. But it is definitely a tool that even in my business, you know, we have clients that are pretty active and demanding, but brokerage, same thing. That's I don't think that it's the same amount of kind of mental, the mental workout you get when something really crazy happens with the investing side and you have to attend to it. So I couldn't agree with that more.
I want to be mindful of the time Ben, we have four questions. We ask every guest that comes on the kind of rapid fire. But before we get there, I ask every guest, when we come to the end here is just kind of your general outlook right now at the market. We're coming into a new year. Hopefully we're past fingers, crossed some, some pretty tumultuous times that we've had in the last 24 months. What's your general philosophy or outlook for the short to midterm? You know, whether that's opportunities you're seeing, or just generally what your thoughts are on where we're headed.
Ben (31m 15s): Yeah. It's a complicated question because it depends on where you're what asset class you're in, what your, your investment thesis is. But, you know, I like, we just had Spencer levy, who's the, it's got another title, but I'm gonna call them the global chief economist of, of CVRE, just present at, at both best ever conference. And to my company's part, investment group to the whole team. And, you know, he's all over the place. When you ask him economics based questions, he's got answers for everything, but they, they they're all over the place. So in storage, I'm just gonna speak to storage. If that's all right and storage, there's still lots of opportunity.
And, and I will explain why the first is, is everybody's scared of two things, inflation and interest rate risk inflation has more of an impact on pre negotiated contracts that lasts a lot longer. So if you've got a retail lease, that's five years with 3% packaged increases, but rate of inflation is 10%. You're going backwards by 7%, every year locked in for five years, right? You've got a multifamily contract that lasts 12 months for a lease, but inflation is going up by 1% every month.
The value of that contract is being diluted by 1%. Every month, self storage is a month to month situation. So we can change our rents whenever we want, even if we just changed them last month might not be beneficial from a business operation standpoint, but from a, a pricing elasticity standpoint, it's one of the most beneficial asset classes to be in to hedge inflation. All asset classes typically end up catching up with interest rates eventually because inflation is, is, is linked to interest rates and inflation pushes rents up, right? Like in theory, w there's more wages as a result of inflation, people have more money.
The price of goods goes up. The price of services goes up. The price of rent goes up. So it's just a matter of how fast prices adjust relative to interest. We see self storage adjusting much faster than industrial office retail and even multifamily. So that's our, that's my, my soapbox on inflation on the interest rate side, I think as long as your spreads between interest rate and cap rates still make sense, there's a play. So in retail, retail is not down for the count. Retail has a lot of opportunity and they're trading at 7%. Now there's a lot of lenders that won't lend on retail, but if you can find the debt at five, five and a half percent, there's a spread there.
So in self storage, when we've, when we got started, we were in the six, six and a quarter six and a half percent cap rate, which is, sounds really juicy today. Now we're looking at cap rates in the four, four and a half, sometimes 5% range. And when interest rates were at three and a half, 4%, there was spread. Now that the interest rates are at five, five and a quarter five and a half, sometimes under five, there's no spread. So how do you make that work? And we're starting to answer that question. Well, we're getting more aggressive with our rent growth assumptions because of inflation. We're looking at cap rate compression, but there's only so much risk you want to take on in the aggression aggressiveness of your underwriting model.
So we're, we're starting to look for other strategies. We have not paid as much attention to raw land development. Even though we have that capacity, we've done it a few times. We've never done a conversion at Spartan investment group, but there's more margin in those things. And the short term interest rates are still attractive enough in this very, very small window of time that we can make that work until we start to see things plateau. And we can figure out where, how, if, how cap rates are going to adjust relative to interest rates to see if that spread comes back. I don't
Jesse (34m 32s): Know. Yeah, no, that's a long
Ben (34m 34s): Winded answer.
Jesse (34m 35s): Yeah, that's pretty tight. Okay. So four questions. I'll kick it off right now. What is one book or resource that you could recommend for listeners that, that you've been recommending recently?
Ben (34m 46s): Everybody's talks about real estate economics business books. So I'm going to throw something else out there because I think the best investors have like a very, very they're Renaissance, men and women. So I'm going to go with the order of time by Carlo Rovelli. He is a gravitational loop theorist, and he makes physics accessible to the layman, the boundaries of physics. And I think that studying physics helps widen the creativity and the capability of an investor's mindset.
Jesse (35m 10s): That's great. I haven't heard about that. One. Love the topic though. Big Brian Green fan. Okay. So what would you tell a younger individual that's trying to get into the industry, whether it's specifically on the investment side or just real estate in general, what would be some advice you'd give them from just a mentorship perspective?
Ben (35m 32s): It depends. It depends on who they are, what they've asked me, where they're, where they're at in their life, but collaboration, beats competition. Don't try to be a hero. Don't try to be something that you're not embellish yourself, put yourself out there, have hubris, but don't let others tell you how it is either. You can recreate everything. Don't assume that just because people have doctorates or pilot certifications that they know what the heck they're doing, everybody has an adult has imposter syndrome. Everybody's figuring out their lives because if they weren't, they would get bored and they would quit.
So if they're engaged in what they do, it means that they're also figuring out what they do. So don't be intimidated, but also have a humility and learn. I don't know, here we go.
Jesse (36m 18s): There's usually a couple answers for this, but if one sticks out in your head, something that you didn't know when you first got into our industry, that you know now, and you know, you'd like to share with your younger self or again, people that are, that are breaking into the investment side of our business,
Ben (36m 34s): The investment side of our business, be intentional about your investment thesis experiment with it upfront. And then once you find something that works, eliminate all the distractions and go all in.
Jesse (36m 46s): All right, last question. This might be a, a wasted one if you're in New York for a long period of time, but a first car make and model
Ben (36m 53s): First car, man, I don't know. My car is a Ford Taurus. Is that a thing?
Jesse (37m 0s): That is a thing that, that was my family car growing up. That was our drive to Florida car for 20 hours trip. Awesome. Well, Ben, for those that would kind of want to reach out or connect with you aside from a Google search, where would you point them to?
Ben (37m 16s): Yeah, you can reach me at Ben at Spartan, hyphen investors.com.
Jesse (37m 21s): My guest today has been Ben Lapidus. Ben, thanks for being part of working capital.
Ben (37m 25s): Awesome. Thanks Jesse.
Jesse (37m 34s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Mauricio Rauld is the founder and CEO of Premier Law Group, a premier boutique securities law firm. As a nationally recognised expert on private placements, Mauricio works with elite entrepreneurs who seek to increase and protect their wealth through syndications.
In this episode we talked about:
Mauricio’s Bio & Background
Syndications
Professional Advice on Raising Capital
Deals` Structures
Limited Partnership Governance
Real Estate Syndicator Live
Dealing with Foreign Investors
Mauricio’s Thoughts on The Current Real Estate Environment
Useful links:
https://us02web.zoom.us/meeting/register/tZEpfuGhqjgrHtSg8c-e9cmaN7zyD2hlGLHr
http://www.premierlawgroup.net
Jesse Bobrowski is a Vice President and Partner of Business Development at Calvert Home Mortgage Investment based in Calgary, Alberta.
In this episode we talked about:
- Jesse’s Bio & Background
- Lending in Real Estate-
- BRRRR Strategy
- Hard Money Lenders VS Private Lenders
- Underwriting Deals
- Interest Rates and Inflation
- Resources and Lessons Learned
Useful links:
Book: The Five Dysfunctions of a Team: A Leadership Fable
https://chmic.ca
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Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time.
Jesse (23s): Ladies and gentlemen, my name's Jessica galley, and you're listening to working capital their real estate podcast. My special guest today is a another Jesse Jesse . Jesse is the vice president and partner of business development at Calvert home mortgage. We're going to talk today about burst strategies, home mortgages, anything to do with lending. We're going to go into a little bit of Jessie's background and kind of shoot from the hip. So hope you enjoy it, Jesse. How are you doing today?
Jesse B (50s): I'm doing great, Jesse. Thanks for having me along and hello to all your wonderful listeners.
Jesse (56s): Yeah, thanks for coming on. We were just chatting right before the show. It's a little sunnier here in Toronto. You are joining us from a little bit further west, and you're saying that you, you guys, you guys are snowing right now.
Jesse B (1m 10s): We are actually, it's sunny. Now we sold for the last 24 hours. So yeah, we got about half a foot of snow on the ground,
Jesse (1m 18s): Right on. So that's out in Calgary. So I think I'm not sure if we've chatted about this, the audience that we have. I always like to say it's a, it's a podcast by a Canadian for all real estate investors, because I think 60% of our listeners are in the us 40% in Canada. So maybe those in the Midwest are getting a little bit of snow as well, this time of year. But for listeners, as we do with all our guests, perhaps you can give us a little bit of a background about how you got into real estate, that journey for you and, and where you're at today and what you're doing.
Jesse B (1m 53s): Yeah, sure. I'd love to give the listener some insight into how I got here. So 16 years ago, I finished my university career. I went to a school in Ontario. I'm from Ontario, actually thunder bay, born and raised and, and finished my, my university career with a degree honors, spatular, commerce, finance, and marketing, and being from thunder bay.
There's not much opportunity for somebody to work in the finance industry. So I was looking for other places to go. This is back in 2007. I had friends in Toronto that had left on our bay. I had friends in, in Calgary and some friends in Vancouver. I grew up fishing, hunting, skiing, sledding, outdoor stuff. And everybody who was in Calgary was not only doing really well professionally, but they were enjoying the outdoors.
So it was an easy fit. I moved to Calgary, worked for a very short period of time as a proprietary trader. And during university, I bar tended at a, at a, at a, at a restaurant and I loved it. So when I moved to Calgary young professional right away, I got a bartending gig, great way to meet people, not a bad way to earn some money and also a great way to meet females at the time.
So, so got into that. And through that, there were these regular clients that came in and I got to know them and they were, they ran a syndicated mortgage lending company. And as I got to know them, they got to know me and about what I did. And, and soon I started doing some consulting work for them and learning about the business. I was super interested in this, this lending business. And this is just when the subprime mortgage crisis started to started to bubble up in the states.
So I was like, Hey, there's, what's going on here. And I very quickly learned that it's a, it's a very transparent way to do business if you're doing it right. It's very, it's, it's, it's very straightforward in terms of you're putting a mortgage on a property. That's your security. So the consulting started being working, part-time working full-time fast, forward eight years. I am looking to become a partner with these people that we couldn't agree to terms on the partnership, unfortunately, or fortunately now, and through that eight years, I met my current partners here because they were very present in the industry.
I they're, they're very thoughtful word business, business owners, and we got to talking and sure enough, I started working for them. And fast forward, six years I'm partner, we're, we're scaling this company in a very meaningful way, helping many, many borrowers and shareholders lending on a short term, real estate, residential throughout Alberta and Ontario.
Jesse (5m 16s): That's great. And it's, it's great to have you on, because we talk a lot about the traditional lending aspect of real estate, you know, your standard, what you think of as a mortgage or pretty, I guess, typical debt that you'd have on properties. And I think it would a lot of people, more people that get into our industry and more people that have been involved in an owner's field for a longer period of time, realize that there's another aspect of lending on the private side that we don't see very often. So at Calvert, can you talk a little bit about what exactly the team does there, is it focused on private?
Do you do, do you do it all? W what kind of stuff do you typically work? When,
Jesse B (5m 52s): So we are a mortgage investment corporation. We are a lender, that's all do we don't broker deals. We, we go out and we educate the market on here's the solutions that we're providing, and our solutions are very narrowly focused on people that buy, renovate, sell, or buy renovate, and refinance residential properties. Banks don't want that business. It's not profitable for them in the short term.
Not many of our industry members slash competitors want that business for very similar reasons. We've taken time to understand what real estate investors are missing in terms of service, product type, and have created products specifically to cater to them. So all we do is have that narrow focus, really try to kick ass for the borrowers by providing them the service and solutions that they need.
So a lot of times what they'll do is they'll buy a rundown house, renovate it, get it on the market. They'll buy a rundown under performing multiunit property, use our money, renovate it, get rents up, refinance it with a nice conventional loan and build a rental portfolio that way we're in it, just to provide those short-term solutions. And it has, it has been very popular for the market.
We're, we're, we're, we're solving a real problem.
Jesse (7m 33s): So let's kick off the kind of overview of the burst strategy for those that don't know. Maybe you could just give a high level of what the burst strategy is and what you typically see from the investor side, when, you know, when they're typically engaging you or when they should be engaging you and maybe, you know, talk a little bit about the best practices when it comes to finding debt for these types of, of buying flips or by rent rehab, refinance, repeat, I think I may be not in the right order, but yeah, if you could chat a little bit about that, I think the listeners would get a lot of value.
Jesse B (8m 7s): Sure. So, so there's really, yeah. There's two strategies. We'll focus on Burr. So one is buy, renovate, sell. We do a kind of that. We just, we just define that as flipping and then the other is buy renovate, rent, refinance, repeat. So what they're doing there is, again, they're identifying, we're just, we're just residential. And we like, we, we typically do four doors or less, but we're getting into learning more about really successful practitioners who are into the higher unit stuff.
And we're happy to help them when it makes sense, but what they do is they go out to the market and they identify, again, usually it's properties that are, they haven't been touched in a long time. They've been poorly managed. And in turn, there is a good opportunity to add some, add some renovation touches to increase the value, but also increase the quality of tenant and the quality of rent. So they're using our money because typically these properties are in such disarray that the banks don't even want them.
But also because they're in Sasha's rate, even if the banks do them, they're usually able to increase the value, you know, 20, 30, sometimes 40%. And it makes sense to use are more expensive that for four or 5, 6, 7, 8, 9 months. And then when the project is complete, when they've increased the rents, when they've done their renovations, they can go to a bank lender, especially with the new cm. There's a, there's a CMAC product now and insure product that is specifically for this multifamily residential stuff, where it opens a lot more options on the refinance side.
So they're able to go and, and typically get 80% loan to value. So buying something for 600, you increase the value to, to, by putting in, let's say 150 grand to a mill. Now you're 600 plus one 50, you're exiting with 80%. So 800 grand putting money back into your jeans and being able to do the next project and the project after that. So that works really well for the real estate investor, who wants to build a portfolio and build doors.
It's a lot easier said than done because building a portfolio and building doors takes really great. The business acumen, the devil's in the details always. So the administrative processes is, is critical who you're using as property managers, all that stuff comes into play. But for those that are, that are, that are executing on this strategy, they really like what we're offering in terms of allowing them to get in, do what they need to do, and also get in with little friction.
So, because we know this so well, when we see part of my language of piece of shit house, we're like, oh, show us, show us the show us the, the budget. And then we have, we're unique that we have our own internal evaluators. We hire appraisers that work for us that do the, do the value as complete. And they do that in real time, usually same day. So we're able to provide a real effort, this experience on that ad and say, yeah, here's your end value.
Here's the profit you're making. And because you're making this profit, we want to support you. So we're very, we're lower docs, but because we really understand the business, we're not saying, oh, what's going on with, with this flooring? What about how is somebody ever going to live here? No, we did it. Thanks for the budget. We know what you're doing. We may ask some clarifying questions, but typically, because we're real estate investors ourselves, I've been doing this for literally 30 years and billions of dollars and thousands of mortgages. We've seen it all and we have the expertise to help the borrower.
Jesse (12m 13s): Fair enough. So I just want to unpack a little bit about that. So for, for any listeners in the U S CMHC Canadian mortgage housing corporation, you're Fannie Mae, Freddie Mac would be your agency debt, very similar to what we use here. Now, I guess the 80% LTV on a lot of these, I guess it's like a lot of what we do now. It's really the, the, the loan to value. Oftentimes isn't the limiting factor these days, that's usually the debt service coverage, right? Yeah. So I'm curious the, well, number one, I, I question question about the product that you're mentioning, are you mentioning short-term debt and then you eventually do long-term with CMHC or is the short term product with agency debt?
Jesse B (12m 54s): No, so we're so, so the short-term product is Calvert's money. We're lending that the exit with, with, with, with a CMHC approved lender yes. Is the borrower goes and figures that out. And typically they figure it out through a really strong mortgage broker. Like that's, when we're doing the loan, that's already part of the plan we've reviewed, we've done our analysis on, and by the way, we have a Burr analyzer. That's about to be released to the market where we've done our analysis on the debt service coverage, where we're, we're clear on what the rent should be.
And in turn, the boar is really clear on provided. I execute, provided I do this. I'm going to hit what's needed for the exit. And that's really important for Burr, like a lot of, a lot of new or less sophisticated borrowers will say, yeah, I'm going to burn it. Okay. Explain us the exit. Hey, you know, it doesn't debt service, you know, your credit is really poor. You're not a great covenant. I don't think you're bankable. And, and they haven't thought of this.
So again, because of our experience, we're asking every question and making sure that they can exit. So sometimes what they think is a Burr will say, no, you should really plan on this being a flip and, and run your numbers is if it's a flip and maybe you get, maybe you prove us wrong and you can Brit, but make sure that this is a viable project with your most likely scenario.
Jesse (14m 26s): Yeah, no, that makes sense. And for, I think most listeners would know, but just for the DSCR debt service coverage ratio, that would be your net operating income over your divided, by the, the amount you have to pay to service your debt. So if you have $120,000 NOI, a hundred thousand dollars, your annual mortgage payments, you got a 1.2 is the, typically the way lenders will look at that. So I guess one of the distinctions that we've people on the show before that our hard money lenders, you hear the terms hard money lender, private lender, kind of thrown, thrown around and in conjunction with each other.
Can you distinguish if at all, between hard money lenders and private lenders?
Jesse B (15m 8s): Yeah. So the way that we're, we're a mortgage investment corporation. So we operate a fund. And within that fund, we have certain rules that we have to adhere to through securities regulators, through the various real estate regulators, through tax, through our auditors, through our board of directors, we borrow money from banks, they put rules on us. So we're a very structured lender.
We like to refer to ourselves as an alternative mortgage lender. So by alternative, there would be in terms of, in terms of, I usually go by size, there would be, there would be your tier one banks. Then there would be your, your model lines of credit unions. And those are all lending money out at prime minus right now. And then you have your B lenders. The lenders are like your, your whole Mack, your home equity banks, your, your home trusts.
And they're basically sending on a prime plus. And then there's alternative lenders. That's where we would fit in where, where we're, we're still structured. Well-governed companies that have to adhere to that governance. And then there's true privates. There's true hard money lenders that are, that are lending their own money, that, that can make their own rules.
Jesse (16m 33s): This is the uncle that does lending that it seems to work from home. You don't really know what he does
Jesse B (16m 38s): Exactly, exactly. Or like there's some, you know, some family offices that let's say the families that are worth 500 mill, they've taken a hundred mill. And they said, we're going to lend this money out on our own. And they do whatever they want. Yeah. So that would be, to me, that's the distinction of, of alternative versus private. So true, private, hard money. All we don't need docs, we'll just look at the property and lend on it. Usually that's more expensive. Usually that comes with big renewal fees and big fees.
We're, we're more of, of, of, of a, of a alternative lender just below B. So that's kind of the distinction and yes, a lot of your listeners in the states, they refer to it as hard money lenders. We, we have a lot of flexibility that a hard money lender does, but we're more consistent. The money's always there. We get here to what we say. We have, you know, we have a 40 person organization that is behind all of this Making decision from my couch.
Jesse (17m 42s): Yeah. That makes sense. I think the connotation with heart is that, you know, you're meeting on a park bench and somebody is handing you a duffel bag of cash, which is not the case. I mean, typically, but definitely with, with your company, it sounds like it is more of a structured kind of investment. Now I want to talk about the state of the market, because I think it's pretty topical right now where interest rates are at inflation rates, some of the latest hikes, but before we get there, when somebody is coming to you to do flips or to do a burst strategy, what would you say to them to make sure that they are, they are following the right guidelines to make the process as seamless as possible.
And to be able to get to identify properties that are going to work with, with a team like yours.
Jesse B (18m 26s): So the, the primary, the primary piece of advice I give general is, is own the process. This is your, this is a business you're putting your money at risk. It's amazing how many, how few people understand the comparables have asked their realtor, you know, are you just cherry pick like, like really know their numbers really know their budget, really know who they're dealing with in terms of lawyers, realtors, mortgage, brokers, us as a lender, like this is an entrepreneurial endeavor.
And to be a successful entrepreneur, you need to put your, your, your mind, heart and soul into it. And you can't just watch HGTV, call a realtor, slap a deal together. And it works out now in fairness, the, the, the, the craziness that has been the Ontario and BC market, a lot of people, this has worked for them for years, being from Alberta, where we see prices, you know, peaks and valleys every six years, basically the professionals are in it for years and years and years, the speculators are out.
So at some point in time, and we'll get into, you know, kind of what, what, what we're predicting for the market. At some point in time, there will be prices will go down how meaningful they go down, we'll find out. But, but the overall piece of advice that I have is own the process. Understand your numbers, come prepared, understand who your, who you're partnering with, and you don't have to know it all right off the bat. Like you, you still have to take action, but as you're taking action, continue to learn.
Don't just say, oh, my realtor has gotten this, like, learn from your realtor, learn from your mortgage broker, learn from your lender, learn from your contractor. Because the more of that I'll call it institutional knowledge. You can build the more successful you'll be the most successful clients that we are fortunate enough to work with. Are those people that know everything. They may, they may never swung a hammer, but they know every single cost. They know their measurements inside and out. They probably don't have a law degree, but they can challenge their lawyer and me on certain closets.
Those are the people that are going to kick ass.
Jesse (20m 51s): Awesome. So in terms of the, the actual distinction between, you mentioned it before a four unit and below five and five unit and above, which we typically classify, even though it's residential, multi, residential, or commercial, when somebody's looking to underwrite, or when somebody is coming to you to underwrite the deal, you mentioned the fact that you have flexibility. Does that mean that you guys are going to be more open on those smaller deals to look at the asset specific rather than just the individual? Because I know one of the challenges or one of the, put it put another way.
One of the benefits of doing apartment buildings, which is what my partners and I do, is that it really is less about us. And it's more about the asset. And if you can make the numbers work on the asset, you can get approvals and debt much easier. Whereas if it's single family houses or two, three units at a certain point, people seem to tap out in terms of the amount of debt they get. So how does that underwriting process look like for you? If it is more individual specific, more asset or a blend of the two,
Jesse B (21m 53s): When we're underwriting a flipper bird deal, the bulk of our underwriting is based off of profitability. If they're bringing us a profitable deal and they can, they can execute on that profitable deal. We're likely in, so we're not digging, we're not relying on the covenant. So if it's in a, if it's, if it's a good property in, in, in, in, in a location that we want to do business in which basically is any urban center or surrounding area, and they're making money and they show us that, like, let's say, let's just use a quick example.
Let's say, they're bringing us about a property that they're purchasing for 500 grand and their renovation is 50. And when it's done, it's worth six 50, and they're going to, they're going to be able to ex execute their renovations in a 60 day time period. So they're making money. We want him, we can do that deal, you know, Cheerio with as little as $20,000 down so we can lend them four 80 plus the feeds. It's always a 2% fee and, and 2% and four 80 is what is that $909,600.
So we can lend them 480,000 plus the 9,600. So essentially $490,000 on a $500,000 purchase. Let's say that let's say two to cover the renovation costs. Plus our payments is going to be around 75 grand for the, for the duration of the loan. They need to show us that they have 75 grand, 75 grand could be cash lines of credit credit cards, show us that you have the money. And based off that, we're in.
Hmm. You could, you could show, you can show almost, you can show a zero in a way you can, you can have,
Jesse (23m 42s): We receive notice of assessment for those, for those wondering yeah.
Jesse B (23m 46s): Income, you can choose zero tax return.
Jesse (23m 49s): Okay. Yeah,
Jesse B (23m 51s): You can have relative, like if you're totally delinquent on credit and you've never paid a bill, we're not, we don't want to do business with you, but if you have bruised credit, like what we define as Bruce credit is credit below 600, as long as there's rationale. And it's not like you're, you have $200,000 worth of outstanding credit consumer debt that that is maxed out. We probably want it. We're going to want to avoid that. But Bruce credit, we're fine to deal with. So we're underwriting the project. Each deal that we look at is an individual business opportunity.
And as long as you can prove to us that you have the cash to do it and it's profitable. And the means to do it. Like if you, if, when we look at your budget, we have some questions. Who's doing the work I am. Okay. What's your experience with it looks like you're doing cabinetry. What's your experience with cabinetry? I haven't been, well, you might want to think about hiring that out. So as long as you prove to us, and again, we have a lot of expertise in this that you can execute we're in.
Jesse (24m 50s): Got it. So let's move a little bit to the macro picture right now. Interest rates have gone up over the last, last few months over this. I mean, since, since the beginning of the year in Canada, in the states, we're starting to see buyers actually start making decisions for a long time. They weren't really impacting their decisions, which is kind of amazing for, for quite some time. How are you looking at the market right now in terms of a risk standpoint?
And also, do you see this, you know, put you on the spot with the crystal ball, what do you see for the future as it pertains to the lending industry?
Jesse B (25m 30s): So we see interest rates, firstly, continuing to rise. We have, we have an inflation problem that we had it two years or a year and a half ago, but we were, a lot of people were insisting. It was transitory. All inflation is transitory. It just depends on when and what measures need to be taken. Is it, is it transitory within a year or do we have a ten-year issue? So anyhow, we think rate, we, I believe rates will continue to increase probably another 50 bips next month, at least what the market's pricing in.
And then 25 basis points thereafter for the foreseeable future that increase will impact affordability. A lot of people are already stretched with their debt, with their debt servicing that will in turn impact the market. Some people may bow to the market, which is not a bad thing because right now the, for the most part Canadian real estate is too hot. It's not sustainable. So will prices go down, maybe, especially in some markets where there already is affordability issues.
Like we're seeing a lot of, a lot of markets in Ontario where, where you have relatively low wage wages versus the price of the homes. So there's already an affordability issue there. We don't think they'll go down in a big way. And the big stop gap to that is Canadians, want single family, residential housing. And right now there just isn't sufficient supply to, to make up for that demand.
You have 400,000 immigrants coming into Canada for the next every year for the next five years. Canada does really good job at bringing in economic immigrants. So people that have capital and are ready to hit the ground running with employment, most immigrants value real estate, most immigrants want single family housing. So we're where I believe we have a supply issue that is always, is at least for the foreseeable issue is just going to really backstop a big slide in real estate values.
So what, what I anticipate at least as a bit of a reset, you know, we won't see massive appreciation. We might see slight downward pressure, but what I love in terms of how Calvert has been in business for so long, we've S we've essentially only been lending in, in Ontario for two years prior to that, it was only Alberta. And in Alberta, we've managed through those peaks and valleys. So up into 2021, we had a, a market going down 2, 3, 4, 5% a year, every year for five years.
So we're ready to we're, we're ready to manage through it and help our clients manage through it and with what our clients do in terms of flipping single family, residential housing stock. We believe that when the market turns, there'll be more opportunities for our buyer right now, it's hard for them to find really good value because you have a mom and pop buyer, which typically they don't want anything to do with a piece of shit house. Now they're saying, ah, you know, why don't we buy this? We could do our own renovations in a, in a, in a balanced market where you have three months supply, which I don't know when the last time many Ontario markets have seen that your buyer's not going to buy that stuff.
Yup. So we, we anticipate slowdown of, of, of real estate appreciation, maybe even, maybe even in some markets, a bit of a downturn, but we believe that that fundamental supply issue will backstop a big downturn.
Jesse (29m 22s): Fair enough. And yeah, I think similar outlook on, on my end as well. I think we've, we've had a really good run for a long time in real estate. And you know, the idea of appreciation 15, 20, 20 5% annually is just, yeah, not a sustainable, not a sustainable business. So I think our reset for a lot of investors would be welcome with open arms and especially from an affordability point of view. But I think really the crux of it, I completely agree with you on the supply side.
And it kind of just frustrates me on the policy level that we try so many things and we don't look at the supply side that if you want affordable housing, you need supply. That's just the bottom line you have to, you can't, you can't restrict supply, but yeah, I mean, we'll see how things go. I, you know, from, from the investor, that's looking to, you know, potentially work with short-term debt. Is there anything that you would advise on that end when it comes to the idea of making sure that when you do exit that short-term debt say it's 12 months at 10 months at whatever it is that you're making sure that you're going to be able to get permanent permanent capital permanent debt for the project that you're working on?
Jesse B (30m 34s): Yeah, certainly no, certainly engage your bankers if you have bankers, but even if you have bankers engage in amaz engage a mortgage broker who has done this because they know all the bankers. So you'll want to make sure from the onset that, you know, yes, this is refinanceable, here's, who's likely to do it. Here's what the cost is likely to be. And we build that. And again, we talk about the Burr analyzer that we're going to be launching.
We're going, that's going to be a tool that you can use to take to your banks, preemptively like the right banks and the right brokers are clamoring for your business. So go out and find them, align yourself with them, give them the plan and in turn, create an extremely high likelihood that, that exits there. You cannot, we won't allow you to go into a project and not make sure it's there. You may, you know, especially the newer people may not be prepared to do that extra step and that extra homework, but it's, it's a requirement.
So align yourself with the right professionals, bankers, mortgage brokers. And as they're doing the work for you, learn from them, what does the B what is the bank looking for? Why is this particular issue with this property posing an issue? Is it zoning? Is it how many units is it location? You know, cause they're, every bank looks at these deals differently and, and sees they're the w the, the, the warts and the rainbows differently. So take time and understand what, what they're looking for, because then that'll influence the next project.
Could you go into,
Jesse (32m 14s): Got it. All right. We will put links up where people can reach it. And I'll just ask you in a second, but before we do, we have four questions. We ask every guest before we, we get off. So kind of rapid fire here.
Jesse B (32m 27s): Sounds good.
Jesse (32m 28s): Okay. What's something that, you know, now in your career, it could be a mortgages real estate and business that you wish you knew when you started in the business.
Jesse B (32m 38s): I, now that success is the combination of work ethic and time. And before I was just hoping it was purely work ethic, but man, does it take a lot of time to learn stack those wins, stack those relationships, bring the best people and knowledge around you to succeed. So time plus work ethic, not just work ethic.
Jesse (33m 7s): Perfect. What's a resource or book that you find yourself recently recommending to a, to others.
Jesse B (33m 15s): So as we're scaling this, this business, a lot of, a lot of organizational management matters is where I'm focused on leadership, mentorship, coaching five dysfunctions of a team that I read a few months ago has been amazing. Lensioni is the author's last name. He's done a few really good organizational business books. So if you're, if you're a leader, it can relate to personal matters.
Relationships, team matters, relationships, mentorship stuff. So five dysfunctions of a team is what I've been recommending a lot lately. And it's mostly because of where I'm at professionally, the things I'm going through,
Jesse (34m 0s): What would you tell a young individual that's trying to get into our business, and that can be on the mortgage side or just the real estate investing business in general,
Jesse B (34m 12s): Anything in the real estate industry is just putting yourself in positions to succeed. You're not going to hit the home run day one. You're probably going to be an admin, an analyst, a cold caller, whatever it takes, but make sure you're surrounding yourself. Make sure you're entering an organization or surrounding yourself with somebody that you believe in trust. And, and you've researched. Don't just jump into bed with antibody, be selective, but also be willing to, as they say you Chet, like if, if you're going to work for the best, they probably don't have a, the, the, the, a super high paying big responsibility job for you.
You got to prove that you deserve those opportunities.
Jesse (35m 1s): Hey, at 33, I'm still eating shit today. And a new title should be a, vice-president cool to call her. Cause at the end of the day, it's, we're still doing outreach. We're still connecting whether you want to buy, find off market deals. That call is typically not lined up, lined up for you. So that's great advice. Last question. First car, make and model
Jesse B (35m 21s): First car making model. I had a, again, thunder bay, you know, kinda rednecky town. I had a shed silver auto halftime keen 88, 2 wheel drive tires to this thing was a death trap. And we would lay, we w w we were in the middle of nowhere. So the nearest, the nearest big city to us with Minneapolis St. Paul, I remember bombing down in, in snow storms when I was 17 years old with my buddies with just enough money to get down and scalp a ticket to the Minnesota Vikings game.
And like, they're telling me to go faster and I'm like, guys, if I go faster, we're going to fly up the road with this Pete. Like this thing was a death trap and 500, or I guess it would be 600 kilometers there. 600 kilometers back somehow we made it
Jesse (36m 8s): Awesome. Yeah. That is just a large piece of steel. What would you w we have a lot of colleagues that are in thunder bay. What would be the, the American equivalent of thunder bay?
Jesse B (36m 20s): Yeah. American equivalent of thunder bay. It's like, I don't know what, what, what town of plenary is a population of 120,000? The nearest cities to that is to St. Marie to the east, which is 800 kilometers. So, so for Americans, that's 600 miles. Then the apples St. Paul to the south, which is 400 miles Winnipeg to the west, which is 600 miles.
Like in terms of geography, there's nothing similar.
Jesse (36m 54s): Yeah. I mean, culturally, I feel like a, I don't know if there'd be something in, in, in Michigan or if it would be, I don't know. It's like, it's kind of a mix of different, different cultures in thunder bay, but it's definitely,
Jesse B (37m 7s): Yeah. We spent a lot of time. So down. So south at thunder bay, there's a Duluth aloof Minnesota. Now Duluth is kind of a, for the American listeners. Duluth is a more refined prettier version of thunder bay. So imagine more blue color, less picturesque version. That's the underbanked.
Jesse (37m 31s): Yeah. You know, miss soda. That makes sense. If Fargo was filmed in Canada, which maybe, maybe it was thunder bay would probably be a good, a good spot.
Jesse B (37m 39s): Yeah. Yeah. Fargo is a really good equivalent.
Jesse (37m 42s): All right. Well, for people to reach out or connect with you, Jesse what's, where can we send them? We'll put the, we'll put everything we talked about in the show notes in any of the links, but yeah. Just let the listeners know and we'll put that up there.
Jesse B (37m 54s): Yeah. So we have a great website with, with all the tools that, that a real estate investor would need in terms of, for flip and Britain Burr financing@chmic.ca. So Calvert, Google cower, home mortgage take you to our website. My contact information is there. I'm happy to, to discuss anything. I have an amazing team of underwriters and business development, people that can, that can point you in whatever direction needed. We also have a really great Instagram account ICU due to Jessie.
I follow you personally, but our Instagram account is just to provide knowledge to real estate investors. So we're doing tips for flips economic reports. We're, we're releasing tools. We've just written. We've just wrote a white paper on the, on the benefits to the, the macro economy on real estate investing. So please follow us on Instagram at Calvert home mortgage.
Jesse (38m 51s): My guest today has been Jesse Jesse. Thanks for being part of working capital.
Jesse B (38m 57s): Thank you.
Jesse (39m 5s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse, for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.
Peter Linneman is an author of the Linneman Letter, the former Professor of Real Estate, Finance, and Public Policy at the Wharton School of Business. Previously listed as one of the top 25 most influential people in commercial Real Estate.
In this episode we talked about:
- Real Estate Finance and Investments Book
- Valuation of Real Estate assets
- Inflation in Real Estate
- Relationship between corporates and interest rates
- Peter’s thoughts on Real Estate Asset Classes
- Overview of Retail Real Estate
- Office Market
- Future of Commercial Real Estate Industry
- Advice to Real Estate Newcomers
- Resources and Lessons Learned
Useful links:
https://www.linnemanassociates.com
Books: Factfulness : Ten Reasons We're Wrong About The World - And Why Things Are Better Than You Think by Hans Rosling
Rational Optimist by Matt Ridley
Youtube: https://www.youtube.com/watch?v=jbkSRLYSojo&t=3s
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jessica gal, and you're listening to working capital the real estate podcast, a special, special guests today. We just chatted about this. If you don't know him by now, I don't know if you want to know him.
And that is Dr. Peter Lindemann. He's the author of the Lindemann letter, the former professor real estate and finance and public policy at the Wharton school of business. And he was previously listed as one of the top 25, most influential people in commercial real estate. Peter, how you doing?
Peter (49s): I'm doing great. I just got back from Egypt. So my background is a long lasting quality piece of real estate. The Luxor, temple, and luck soar. So good reminder that great real estate lasts like four or 5,000 years.
Jesse (1m 6s): There's a book I'm reading right now and it's on the evolution of skyscrapers and it goes back to the pyramids. It goes back to the, the renderings and the Bible of places that may be existed. Architecturally looks sound, but that is a, it's fantastic to see how we've come from there to where we're at today. And, and, and the drive for humans to build up. Hasn't seemed to wane in any way
Peter (1m 28s): When you see this stuff from three, four or 5,000 years ago. Yo okay. They got it.
Jesse (1m 35s): Yeah. Well, thanks so much for coming on. I, I think this is a real treat for listeners, for anybody watching the video. I'm holding up my real estate and finance and investment book written by the doctor, Peter Lindemann. And I mean, if you're in the real estate industry in any capacity, you will have to have come across this book. I think this, for me, it was second year of the MBA in Toronto and it was just chock full of amazing things. This thing. How long has it been now? When, when was this first published?
Peter (2m 5s): Oh, gee probably 16 years ago or 17 years ago was the first edition it's come to be referred to as the blue Bible. I don't know if that's a good description. It came about very oddly. And then I was teaching my real estate finance investment course for a number of years and I never had a book that I could find that I really liked. So I was teaching my own stuff, but I assigned a book to students because they needed something. So we finally recorded my lectures and after a lot of work and a lot of down additions, that's what came out of it.
Jesse (2m 40s): Yeah. Well, it's great. It's funny. I'd like, you know, you go through a time period where you're like, okay, I got to get rid of these books. Usually the textbooks are the first to go, but I've hung on to this one for a long time, just because I've actually kind of gone back to it. And now that we're at the stage in the career where we're hiring younger individuals, you know, this is something where, you know, they're probably reading in school, but it's definitely something that they can use as a resource.
Peter (3m 4s): Well, and one of the other things nice, is this a nice color? So while it's on your bookshelf, it looks good.
Jesse (3m 10s): Yeah. Yeah. It's not a, it's not that old school. Just topes. Well, you know what? There was a, so we chatted a little bit earlier. You were on a podcast that I recommend a hunter Thompson cashflow connections podcast. And there was something that I was driving in the car, listening to this podcast. And I had to write down because I was just like, you know what? This is it, it was something you said, and it was just an insight. And maybe we could use it kind of as a springboard for this conversation because that conversation did talk a lot about the economics of real estate and where we find ourselves today.
And what you said was demand as loosely described as real GDP growth is up 3% and goods as loosely described by industrial output are down by 1% and services as loosely proxied by employment is 1% short. Demand is up. Supply is down prices. Go up. Can you break that down for us? What we're talking about here?
Peter (4m 7s): Yeah. I mean, I think you broke it down really well. I think this there's very real inflation. The very real inflation started to occur. Let's just do a quick review. 20, 22 years ago, things are shut down. Like a third of the economy is shut. Not just slow shut. And then another third is really slow, but not shut. And then another third is working well, when you shut things, there are ramifications of that.
So for example, two years ago, the price of oil is like five, $10 a barrel. So what do you do with the tar sands? Shut them down. What do you do with the fracking? Shut them down because they aren't even close to break. Even. I'm just taking those as dramatic examples. Then what happens is fortunately the economy I'm talking about the us, but I think the Canadian pretty similar by very late 20 and then through 21 starts growing and it grew faster in its comeback.
Then supply came back. Now that's not surprising when you think about it because things are really awful. Do you expect supply to lead demand? No. Common sense says I wait to see if things are really there before I expand and bring on capacity. So what you've got is real GDP, kind of a crude metric of us demand up 3.2% versus pre COVID not annually.
The two years since COVID began and goods, output is down 1%, as you're saying, and employment is down 1%. And as you said, you don't have to be a genius to figure out supply down 1% from where it was in 2019, demand up three and a half percent prices are up. Now, you're going to have a long discussion of which prices and how much, some more than others. It's that simple.
When will price inflation, moderate, pretty simple. When supply catches up now there's this notion that we have to cool demand. And I asked people, would we be better off if we had no inflation right now? And GDP was also down 1% over those two years, by the way, if real GDP was down 1% and industrial output was down 1% and employment was down 1%. You think we'd have much inflation right now?
No. Would we be better off? Absolutely not. We'd be four and a half percent worse off. So you go, okay. It's a good thing. In fact, no is a good thing. It's a staggeringly amazing thing that after the last two years where we shut down huge plus in the economy, political division, COVID killing millions of people, many more, getting sick absenteeism at work, social unrest, a war now, I mean, name all this stuff that's happening.
And we're three and a half percent or 3.2% larger as an economy than before. That's amazing but left to its own devices. It would have been up about five and a half percent. So demands, not overheated. If, if real GDP was up 10%, then I'd say that's overheated. We can't do that. But we can do five to five and a half percent over a two year period. We've only done three. And at 3.2% under heated, we still need demand to keep driving forward.
We don't want to slow down demand. We want to encourage supply. So if we were going to do policies, the kind of policies we need are, and I'm just giving as an example, I'm not proposing them. Gee, you drill an oil well this year, or you start pumping from a well that isn't pumping. You could write it off in a year, right? You think you get more expiration with that as an incentive, or if you hire somebody net, net, you net, net expand your employment, you get a $4,000 tax credit.
Or if you come back to work after not having work for six, six months, I'm all of these. I'm just making up. As examples, you get a $2,000 tax credit is an individual. You think we'd bring back more late. Do you think we bring back more capacity? And as we did, what would happen to prices they go down. So I don't think this is about demand. It is in some tautological sense. It's about supply has made an amazing recovery from a shutdown, but still legs.
And I don't know how a lot of Terry policy gets us to bring back capacity faster and that's a real activity, so to screen. So that's how I see it. And it has some ramifications for real estate. Your, your construction costs are really going up, right? I mean, that's not an imagination, but on the other hand, so are your rents, so are your property values and you have to take the whole menu.
It's like when you played cards and you got three ACEs and a two and a three, Hey, that's a pretty good hand. You got three ACEs, be happy. Don't don't gripe about gee. I should have forays. Right? All things considered pretty good here.
Jesse (9m 48s): So when it comes to real estate, from the point of view of a couple of variables, there's, there's inflation in the general economy that people just seem to be continuing to worry about time and time. Again, this time it's different as Howard marks will, would, you know, titles each one of his chapters in his latest book. But what I'm curious about is from a real estate perspective, we have the valuation of the real estate asset, and we have those prices in our markets and a lot of other major markets in north America going up. And the concern is that these cap rates get compressed and compressed.
How much lower can these cap rates get compressed? What I'm curious about is it the going to be the valuation that gets out of control or will it be the affordability from a rent perspective that you see as the governing the governor? So to speak on in that dynamic,
Peter (10m 36s): Ultimately it's the fundamentals. And that would go to the mortar. The rent side price is just an outcome, right? Price is a comp bow. You know, the value of a property is the combination of the supply and demand for space, right? Namely income and occupant or retina occupancy and the supply and demand for money to buy income streams, right? And they don't necessarily always align. We're in a period where list supplying demand for space.
Retina occupancy is in quite good shape unless you were in senior housing, unless you're in hospitality, still lagging, unless you're in bad retail, unless you're in office where you don't know if people are coming back to the office. But if you're in apartments and warehouse and good retail, quite good Retin-A occupancy side. Now on the capital side, what's happened is QE one, QE two QE three.
After the financial crisis put unprecedented amounts of money into the system. And you saw coming out in 2014, 15, 16, 17, 18, 19, and that money searching for a home pushed down cap rates. And everybody kept saying, oh, cap rates are going to go up cap rates. But I kept saying, no, the weight of money is going to push it down. Now we've even put in a lot more money. In addition into this system, what do you think happens when that money comes out?
When that money comes out, it's got to find a home. So for example, we have record personal cash holdings. We have record corporate cash holdings. We have record dry private equity capitals. We have direct record, dry uncommitted, money, sovereign wealth and pensions vis-a-vis real estate. And we have record unused bank reserves. What do you think happens when they may still be at record levels, but a little lower record levels?
And the answer is that money's going to find a home and it's going to find it buying cash streams. Some of that is on the stock market. Some of it is real estate. Some of it is gold. And I think cap rates go down now, do they go down every day? No. And people say, well, how much lower they can? Can they go? Things can always go 2% lower. This is one of the things that you remember when you learned about penny stocks. And somebody said, how can you lose? They only cost a penny and you'd go, well, they could go to a half a penny, right?
They could go to a quarter of a penny. So how can the cap rate go lower than 3.7? Well, it can go to 3.6. It can go to 3.5. And the reason is the weight of money. So what do I mean by the weight of money? The example I use scope, the thought experiment. We've done a lot of statistical work on this that I won't go into saying, let them in, let her it's other stuff we've written, but here's the thought experiment. Very simple. Suppose I told you a year from now $4 trillion.
I don't care if it's Canadian or us $4 trillion. In addition to the amount already invested is trying to invest in apartment buildings. Okay. Well, you think will happen to cap rates. They'll go down. By the way, you didn't ask what's the economy like you didn't ask. What are interest rates get in, say, as the yield curve inverted, you simply said, well, that kind of money. It's got to find it. It's going to bid up the values bed down, cap rates.
Now flip that thought experiment. Suppose I told you that a year from now a trillion dollars is exiting apartment buildings. By the way, you could apply this to any property category. And you'd say, wow, that's going to be a problem. A trillion dollars trying to get out is going to crush values. And you go, you didn't know what interest rates were when you made that insight. You didn't know what the economy was. The point is the weight of money and we have put unprecedented amounts of money and it hasn't really come out yet to speak of.
And it will, and it will be asset price inflation, not con goes to the services.
Jesse (15m 5s): So question on that, we've had a economist on the show before of maybe on the one side, closer to the Austrian school, the other side, the modern monetary theory MMT. And for listeners, I would just look up both of those to learn a little bit more. But this idea that when the great financial crisis was happening, there was a number of economists that were saying, you're putting money into the economy, like your example, 4 trillion, 5 trillion that is going to cause inflation, no matter what, however, what was happening was it was sitting on balance sheets of banks. It wasn't getting into the economy.
And I always think about Milton Friedman's. I think it was his Nobel part of it was this velocity of money. You can't just go into the Connie. It actually has to move to create some form of inflation. So, so in this example, could you talk a little bit about when you say the 4 trillion in the market, does that mean on bank's balance sheets? Does that mean it's it's circulating, are those necessary conditions?
Peter (15m 60s): Yeah. At this moment, the same thing happened that I happened after , which is the amount of money going into the banks skyrocketed and the velocity with which they used it. So that in the beginning, there was no notable effect on the economy. It just kept the ship steady, if you will. And then the money started coming out slowly. Well actually slowly, just a little more rapidly than it did before.
And remember the modern banking system is not set up to lend you money to buy a Milky way is set up to have a, an investment firm by the company that makes Milky way, right. It's set up for that. And that's why as 2014 through 19 occurred the money chase assets rather than goods and services. Right? And so I think that's, what's going to happen again by enlarge the money, went into the system to keep it afloat in the way you described it, to make sure there was liquidity.
I think it did it well. And now what will happen over the next few years is it will come out. Will all of it come out? No, the velocity dropped, but as some of it starts coming in, when if I put a ton in beyond whatever you have, even if only a thousand pounds of it come out. So a lot of weight, right? A lot of weight, if I put a hundred tons in even of only a thousand pounds come out, it's still a lot of weight.
It's not much compared to what went into your point about velocity, but it's more than would have otherwise been there. And I think it will chase primarily assets now would include single family homes in that as an asset, right? It's a real ass.
Jesse (17m 55s): Now when it comes to the economy itself, well, you know what, let's back up for a second. I did have somebody from my office. They said, you know, you have to ask, I told them I was having you on. And he said, ask him about the relationship between cap rates and interest rates. Cause we talk a lot about that spread in our industry quite a bit basically. Is it a significant piece of what you guys look at over, over the longterm? How is it tracked? You know, and you mentioned earlier that Lindemann letter, we'll put a link up to that as well, but I'm just curious in the work that you do, how important that relationship is.
If at all,
Peter (18m 29s): If there's a relationship, it would be important. However, having studied it, we can't find a relationship other than that. So I'll give you, for example, in, I think it's the, I can't remember if it's 40 years of 45 years, basically the 10 year treasury yield has fallen by 600 basis points. And the cap rate fell by 300. That's hardly one to one. Then if you look at the micro history of that movement, it's all over the place.
That is to say the spread movements in the spread, basically swamp, the general downward decline, right? That'd be the spreads are all over the place over history. Then go one step further and I'll give another example. We looked at it very sophisticated. Statistically, can't find it. Can't find the correlation. Now, by the way, if you said the interest rate 10 year treasury went from 2.3% today to 14% tomorrow, that would probably have an impact, but that's not likely to happen.
If you said it went from 2.3 to 2.9 or 3.2 or back down to 1.6, by the way we saw it go from 1.6 to 2.3, what happened to cap rates? They went down. If anything, why? Because of the way the money, not the caused the interest rates went up and there was this not interest rates going up causing price, cap rates go down. It's just no relationship. I'll give you the other that captures it. If you look at 2007, cap rates were essentially identical to 2019, okay.
2007, 2019 and 2007, the long and the short rate were above 5%. And in 2019, the short rate, what I'm doing from memory was 2.5 or 2.6. And the long rate was 3.2. How can that be? If it's interest rates that are causing them, that interest rates are 200 basis points higher and you still have the same cap rate that should tell you something, right? And in fact, we've seen periods where there's a flight to quality.
When there's a flight to quality interest rates go down and cap rates go up well so much for the step relationship. It just doesn't exist. At least in the relevant parameters, at least that we can find, or that I've seen. One other thing I'd add about interest rates that I kind of tell friends and clients to call them down. Let's assume let's just assume that a year from now, we're sitting here and the long rates at 3.2% and the short rates at 2.5%.
Okay. A lot of interest rate movement upward. Okay. Is that a disaster? No, that's 2019. That's 2019. Those interest rates I just described we 2019, if we'd have had this conversation in 2019, you would have said, how much longer can these low interest rates last, right? You wouldn't be referring to them as high. I'm sure you had that conversation with people.
Right? So to understand that even a big interest rate movement back is simply to 2019, which by the way, most real estate people said, thank you very much. This is pretty cheap money because it is, we then had a fire sale where the government gave money away. If you were willing to borrow. And the biggest borrower of course, was the U S government biggest borrow in the world during that was the us government. They subsidized you as government and they subsidized borrowers.
Well, if they stopped subsidizing borrowers, that hurts far worse. It helps lenders. It helps savers and it hurts debtors, but it's not like one's more noble than the other, a dollar gain by one or lost by the other washes primarily. So I don't get hung up on that balance. Sheets are pretty sane. And so he just had to have a bit of context. And by the way, telling the us government that their money isn't free is not the worst thing we could do because they're like little children.
If Candy's free, the little children are given candy for free. Right. And he said, whoa, you got to slow down. You got to buy, you got to buy that. Right. Slows them down. That's Congress, if you give them or the system, if you give it free money, guess what they use it like it's free. Yeah.
Jesse (23m 27s): So when it comes to, when it comes to like speaking of washes, when it comes to the other asset classes that we deal with in commercial real estate, retail, industrial multi Rez office space, what we had in our office, which was not dissimilar. I think now we're at 85 locations, 85 major markets. And what we had in our headquarters was during COVID. We almost were revenue was down top-line was down, but it was close. And what happened was we had industrial and multi Raz really were the darlings of the industry.
And they, they kind of made up for retailer, like you said, not, you know, grocery store anchored or really good retail. And on the other side, the office, so office and retail was the drag. Those other two asset classes came up and, you know, picked up the slack. Do you see this trend? Continuing? What are your thoughts on, on the various asset class classes moving forward?
Peter (24m 24s): Okay. Real quick multifamily. In December, 2020, I wrote a piece we're entering the golden era of multifamily investing. And it was because spreads were big capital was available to borrow debt was being given away a because of the subsidy rent unoccupancy are good and going to get a lot better. Well, pro that happened in the last 15 months, it's still has legs, but some of the gold is already been harvested.
All right. So it's not like we're in a bad period for multifamily, but we're in a golden period, but a lot of the gold has already been harvested. Retinol, occupancy look good going forward, demographics. So good fundamental under supply of housing, multi, especially single. And so it has good fundamentals. It can be overbuilt, but then you go to industrial and industrial took me a while to figure out, I think I finally figured it out. Normally you would think if GDP I'm using it as a crude measure of demand, if it grew by two and a half percent, we'd need about two and a half percent more warehouse because two and a half percent of more GDP, two and a half percent more boxes, right.
Just kind of crudely. And that had kind of been a good rule of thumb. We always did more precisely, but as a rule of thumb. And then what happened is we'd see two and a half percent of growth of GDP and 4% growth in warehouse and demand. Didn't say, well, that's odd. Can't last. And then the next year you'd see the same thing, 2016, then the next thing in 70 next thing in 1819, you kept seeing, I finally figured out that if you buy that shirt in a store, it takes one third of the warehouse space that if you buy it online, because an online facility has wider aisles, more staging areas, small box handling, rather than big box handling, lot more loading in and out needed a lot more moving around than let's move a box here or there let's move a pallet.
So online sales use about three times the amount of space. Well that me and this two and a half generates four is about the right math. And given the growth of online, that's going to continue for a number of years. So when does the rent and occupancy balance, when we start building for four and a half percent and demand grows it for four and a half percent, well, that's not going to happen for another couple of years. So the rent unoccupancy fundamentals there look pretty good.
Even as we build more and more the real risks, there are two, one, a lot of online sales don't make money. And a lot of retailers realize that during the pandemic. So are they still going to be so aggressive selling online? And if not, it gets closer to the two and a half generates two and a half. And the other is everyone. Somebody wakes up whole bunch of people wake up at Amazon saying, how do we get it from three times, the amount of footage needed for an online sale to two times.
And if they do that, it changes the math. You then go to retail. I've never wanted to own bad retail. I've always wanted to own good retail. If you own good retail, you're constantly having to reinvent it through its entire history. But if it's a great location and you have a core of good retailers, it's a dynamic business. It's a hard grinded out business. I love the dynamics of great retail. And in fact, online sales have been flat for the last year high, but flat while brick retail is getting record sales and as online gets back to trend, then the trend will continue.
And, but I like good retail. Why would I like bad retail? I mean, it just, and I remember Al Talman long time, kind of one of the gods of the industry, certainly one of the gods of retail, I don't know, 30 years ago, 35 years ago said you can't buy bad retail, cheaply enough to make it work. And that's because even if you get it for almost nothing, your rent cannot be cut low enough to change the price of Cheerios.
And if you can't change the price of Cheerios people, aren't going to shop there. And if they're not going to shop there, you don't have good retail. Right. So good retail. I like the outlook for hotels making a comeback. Weakest part is if you're highly dependent on Chinese tourists, kind of a, what a two-star three-star Chinese tourists. They're not coming back for another couple of years. And if that was your sweet zone was playing to them, that that's going to still be, that's going to be the slowest recovery, but it looks like this summer pending another surge, absent another surge, going to be a great summer and into the fall.
Jesse (29m 47s): So before we get to office, I just, I just had a question, a question on retail. You know, whether it's north America in general, whether it's American or, or a Canadian, I think it's 32, 33 square foot of retail per capita. I think something like that, we're not much better in Canada than the U S obviously the European countries have not built as much. Do you see that there's this conversation or has been over the last two years that, you know, a lot of these potentially multi-family or retail, you know, lower tier areas are going to be re developed repurpose whether it's industrial or whether, you know, whether it's multi rise.
Is that something you do see, you know, developers actually looking at that
Peter (30m 28s): It's the pandemic probably sped it up because it pushed so many retailers that we're going to go out of business, out of business. The thing that kept them from shutting, I mean, we looked at doing some of those deals. The problem is you have one tenant paying $2 a foot. So even though they're only selling $114, they actually make profit in the store at, at $2 a foot rent. And that's because the lease was signed 30 years ago with auctions, right.
I'm being extreme, but you get the point and nobody else wants to be there, but I can't buy it, shut it down and build apartments. Or I can't do anything with it. That happens over time. That will happen over time. So, absolutely. And this notion that we have too much retail reminds me, remember, you're old enough. You remember how you would drive by the old industrial areas of America. And you just see these empty warehouses, these empty 1920s, 1910s, 1940s buildings that works counted as empty industrial, but they weren't empty industrial.
They were just empty space. And if you wanted to call them industrial column industrial, but it's not real. If you got rid of the space in retail, that's irrelevant. It was once retail, but it's irrelevant. Just like that old factory that shut in 1972 was irrelevant as industrial space. The amount of footage we has have goes way down. Now, that's not to say it gets to the right amount, but it goes way down in the same way the old industrial did.
That's what we ought to have. We ought to have. If people are really carefully, they've created a new class obsolete, real estate of any type, right? And then you'd see the retail stock go down. You'd see the industrial stock go down. Although the industrial has kind of run its course, those old old buildings have been dealt with over the last 20 years.
Jesse (32m 38s): So the wild card office space we've seen, we track all the, the major markets we have seen pretty much every U S market has come back from a cell phone data that we have into the major cities. We are a little bit slower just because our government policies have been, they are what they are. We'll not get into a political thing here. But what we have seen is a lot of these markets, a huge increase in the percentage of the office market being subleased space.
Now we're starting to see that trend go the other way, starting to come back down and what I, what we've seen in the markets that we are in here is that really good positioned office space in major cities continue. And it looks like the outcome look as positive, potentially not the same for the suburban area. What are your thoughts on, on the office? Just philosophically first and then maybe some of the data that you're seeing.
Peter (33m 33s): Oh, I totally agree with your view. I think people have a fall. People fell in love with this fantasy that I don't have to be work. I don't have to be at work. I don't have to be answerable. I'm self-motivated to work at home. If you're really honest, you have to be pretty highly, self-motivated pretty disciplined. Have a good work environment and be able to control your schedule pretty effectively. Well, there are people like that. Those are the people who are already working at home. Those are the people who are working from the airport.
Those were the people who were working while they were on the road, et cetera. I've well having said that, I'm always amazed that when I fly back from Europe, which I do quite a bit and I'm in business class. So these are quote, a lot of worker types. And when you're flying from Europe to the United States, it's a Workday, right? It's not night. It's not like when you go the other direction and it's night look around and see what people, these business people, these hard working disciplined people are doing as they fly from Europe to the United States about a third sleep and, and, and all of it, about 10% of the others.
Do nothing, read a book or watch a movie. Well, this is a work day for God's sake. So I'm sitting there working away, working away where Kiawah and I realized most people don't have that discipline. I'm not saying I'm great. I'm just saying they don't have that discipline. The other variant of that, that I like to point out to people is I think Ricky is a brilliant writer comedian. And he created the office in many things. We created the office, both the British and us version. And it was built around the notion that it's really hard to get people to work while they're at the office.
If you think it's really hard working while you got them at the office, what do you think Ricky do? Surveys is show working from home would look like, I mean, let's be honest, right? And people would go back now and give you the last reason. I think people go back and it's self preservation. There's tipping points here. And if nobody's at the office, what's the point of week going to the office, right? I mean, if all I'm going to do is go to the office and sit alone and not interact and be around people.
There's no advantage then is a whole lot of people get there and there's advantages. And then as more than the majority are there, I got to be there because otherwise, I don't know what they're saying about me. And I don't know who's getting the plum assignments so it can flip from if nobody's there. There's absolutely no reason to go there. But basically everybody, when I say everybody, I mean, everybody all at 2019, basically everybody's there like it or not.
I got to be there to protect myself. And self-defense is an amazing instinct of our species. And that's what ultimately is going to bring us back.
Jesse (36m 43s): I had a number of people early in the pandemic. They, you know, they knew, I worked in commercial real estate. We specialize for the most part in an office. And they were like, you know, what are your thoughts on the, on, you know, the pandemic. It turns out, you know, the zoom calls all this, you know, we, you can work from home. And my response was always, if you're in my industry and you don't know that this was a secular trend that was happening happening long before, COVID this idea of agile offices, you know, working for, and we needed kind of a kick in the butt to get the technology where we needed.
I don't think you've been kind of paying attention to the market. I think my outlook is that it's, it's a general positive thing, but you know, I'm a, I'm the perfect candidate as a commercial broker that I sh I should be able to work at home all day. No problem. And I can, but like you said, as motivated as I am being around my team, being accountable to them, physically seeing them being in the space, having just a different idea of my TVs over here, you know, versus my couches over here versus I'm in the office. And I'm in a different mode that it seemed like a insignificant thing at the beginning of COVID I've come to realize it's a, it's a crucial part of how I work.
Peter (37m 49s): So one of the things I say to people I'm old, I'm 71. One of the things I say to people is I'm not sure that this zoom wouldn't be better if you couldn't see me, because I'm not that good looking okay. And that's called a conference call now. Yes, it wasn't encrypted. And yes. So I'm not trying to say technology. Hasn't made it better, easier for you to get a lot of viewers all in, at once and so forth and so on versus a conference call.
But we were doing from 2011 to 2019, we were doing quarterly economic updates for our subscribers. That would have like 500 people on old old-fashioned phone hookup. We didn't have big problems. And I didn't get a lot of people saying, oh, I'm going to commit suicide because I didn't see your lovely face. And let's be honest. You're a good looking guy. I'm not, there are a few people we're looking at, but most of us, it doesn't add to the conversation.
Jesse (38m 57s): Yeah. I'll be happy if I look like that at 71, Peter. So don't sell yourself short. We've got about 10 minutes left here. I want to be a little mindful of your time. But before, before we wrap up, maybe you could kind of provide a little bit of insights, crystal ball for us. You know, what you think the future holds for the commercial real estate industry. And maybe you could kind of couch that with this idea of, you know, people talking about the potential next recession, interest rates going up political unrest.
W what are your thoughts?
Peter (39m 29s): Okay. If we don't have a huge re occurrence of some very bad version of COVID, right? 'cause that's, that's, we shut down to varying degrees. Okay. If we don't have NATO somehow dragged into the Ukrainian situation, which could be very violent and, and really escalate. And we don't have a political reaction like we did in 1971, when Nixon introduced wage and price controls, the U S economy is going to do terrific for the next four or 5, 6, 7 years.
Most of the excesses that existed, not saying all most got white washed out of the system in 20 20, 20, 21, it was kind of a reset, kind of a reboot. We got a new base zero, and I think we get 5, 6, 7 years of runway, unless we do something. We, as a species, do something that really is harmful and COVID would fit that the, the NATO being dragged in militarily and wage and price control.
I saw wage and price controls. When I was just out of college, destroy an economy, I mean, overnight destroy an economy, and it would do it. It could, it would do it again. That's the biggest risk I see to the economy, because I think that's more possible than the COVID being huge or the, or the NATO, but they're all possible short of that. The economy is going to do just fine. And I'll give you my reaction. And I've only started saying this.
I don't know if I set it on hunters, which is a true story, by the way, I'll tell you when I'm lying. True story is I had lunch with a friend about three, four weeks ago. And he said, you know, Peter, I follow you and smart and all this stuff. Great, wonderful. But interest rates going to go up and inflation and the divided Congress and Ukraine. And by the way, he went on to name like six sings.
Each of them, very real. It's not like these out of touch. Each of them is a very real chance that our education system is, is, you know, shambles, you know, and so forth. And he said, therefore, I don't see the U S economy has a future. I don't see how we come back from this one. I just don't see how we grow from it. And I said, Bob was named Bob. I said, Bob, anytime in my life, any intelligent person could have laid out six to seven big challenges that existed at that moment.
And the next word shouldn't be there for it should be. And yet we grew and I'll come back to what we just went through. Imagine in 2019, we had this conversation and we were completely Pressy. And you would have said, Peter, we're going to have COVID, we're going to have a shutdown of a third of the economy. We're going to have riots in our cities. We're going to have Congress, can't get along.
We're going to have a highly contentious election. They're going to be in the Capitol building. What have I missed? Right. Inflation oil prices at a hundred and whatever, a barrel, excuse me. And you would've said therefore, in 2019, if you were completely prescient, you just said, therefore, we can't grow. I'd come back to you and say, Jesse grew three and a half percent. In spite of imagine what we do when we only have a short list of those things.
So I think if I had one message, that's it. And therefore, if you're in the real estate business, you're in the business of satisfying that growth, right? That's what our business is when you come down to it, you're in the business. And so, you know, could there be a bad period, then there's been bad periods. The amazing thing is how short they are and how shallow they are. They don't seem short while they're going on. It's like when you have the flu or COVID, it doesn't seem like short when you got, but when you look back, it's a blip and it doesn't seem that minor.
But when it's done, I had two hip replacements and it was not fun as you're doing it. But, you know, in the big scheme of life, there was nothing particularly same with the economy and its downs.
Jesse (44m 22s): I like that in spite of not therefore. And the reason I was laughing is because I remember two, two and a half years ago being in an office and we were talking, it was right at the pinnacle of coworking and we work. And we just said to the other brokers were like, I don't understand how they can continue to do this. And we said, well, barring, any geopolitical event or global pandemic. I swear to God, somebody said this in the meeting, you know, then, you know, we'll see what happens. And then what happens a year later? And it turns out that, you know, we worked a little bit of a different story, but the office market looks like it's coming back.
Coworking looks like it's going through a shift. But I really liked that in spite of that is a glass half full.
Peter (45m 2s): That would be, if I had one message, I'd hope everybody would take one message. It's not, therefore it's in spite of. And by the way, think about your, I was alive when wage and price controls are going on. Nixon resigned in disgrace. This is the person who had been the speaker of the house a couple of years prior to that is suddenly the president. And by the way, you know, we had just finished Vietnam and, and, and inflation is high and taxes are high.
And we grew over, you know, when you kind of, holy cow, this is a powerful machine. It's an insight of machine. Not as therefore machine. Now, obviously if you get a, therefore, if you get a Venezuela, right. That's, that's when it becomes a, therefore we aren't a Venezuela.
Jesse (45m 55s): Yeah. Well, hopefully we're not, we're not tracking the Boulevard here in Canada or the U S but Peter, in terms of, so I want to wrap up, I want to give listeners a way to reach out. Or if, if anybody wants to connect online before we do, we typically ask our guests a couple of questions, I'm going to make these brief. So if you're okay, I'll send these off to you. They're pretty, they're pretty straight forward.
Peter (46m 18s): Okay, great.
Jesse (46m 19s): For younger individuals getting into our industry, what advice would you give to them?
Peter (46m 24s): Reed, Reed, and then whatever you do read more and then whatever you do read. And the only thing I footnote read to include real podcasts like yours, all right. Real thought podcasts, not just, not just political rant podcast, right? Real podcasts. I try to start every morning while I'm doing a little exercise, listening to a podcast outside of my expertise. And so I would include serious podcast in the read category.
You just want to attain knowledge. You want to attain judgment through others. You want to hear what people who are, they may not be smarter than you, but they've got a different set of experiences. They've got a different set of expertise. They're not necessarily right. Get as much of that as you can, and start building your own tapestry of knowledge and insight, which is all these little stuff. I mean, I really need all of these little threads coming together.
Jesse (47m 26s): So the second ties into the first what's a book. I mean, you, you are the author in our industry. What's a book you would recommend for anybody in our industry or outside in general.
Peter (47m 35s): Well, I mean, it's, self-serving that to a young person, it is self-serving, but I would say my book, real estate, finance and investments, if you were to say, this is also self-serving, but I also believe it in they're going to be dramatic changes in how long people live. So Albert Ratner and Mike Rosen, and I have a book coming out in September called degrade age reboot, and it's going to change. It's going to change. I love to come back as it comes out and talk to you with Dr.
Mike. But when it comes out, it will give you insights on what's going on in modern medicine and what it means for our society. And I give you just a snippet, right? A very tiny little snippet. Imagine genetic engineering could eliminate fat, excess fat. Okay. First of all, medical expenditures would go way down healthcare expenditures. We'd have some number like two to $3 trillion more to spend on other stuff.
What do you want to spend it on? Not to mention that. And I'm just being simple on that one. And there's hundreds of you on that one. Gee, I'd want to short WeightWatchers and go long. And Haagen-Dazs because of anything I eat doesn't cause fat because of the genetic engineering, then bring it on Haagen dies. Right? So, I mean, there's so that now, if you said to me a great book that any there's two books that I would recommend that anybody thoughtful and intelligent, I think should be aware of.
One is called fat fullness, F a C T F U L N ESS, by Hans roster. He's now deceased. That's about three years old. And it's an amazing book that talks about how our images of the world are locked in and not reflective of reality. And the reality is generally much better than we think. And the other along the similar lines, but very different is the rational optimist by Matthew Ridley.
And that's probably about eight, nine years old. But the theme of it is the typical person watching this lives massively better than the king of France, you know, in the 14 hundreds. And you go, wow. You know, I live better than the person who resided in Versailles and he gives much more coaching examples. The other thing I would do, I was a big Hans Rosling fan.
There's an amazing YouTube about four minutes long. And if you put in Han's Rosslyn, F R O S L I N G the world growth explained in four minutes or something like that, it's a four minute video that will leave you feeling good at the end.
Jesse (50m 36s): Yeah. We'll put a link up to that. I think I've seen this one before,
Peter (50m 41s): So, but those would be the two books I would kind of think everybody could read.
Jesse (50m 46s): That's great. Okay. Peter, we're at the end here. Our last quick question, I ask every guest, it's usually more interesting with the, the older guests first car make and model.
Peter (50m 55s): Well, wait, first of all, you asking me, I'm not an old guy. Car was a 19 staff and the American motors corporation, green grim.
Jesse (51m 9s): There's a cottage industry. Now of guys collecting those cars, the gremlins.
Peter (51m 13s): Yeah. Mine fell apart. At some point I got, but I got a good, I don't know, eight years out of it, or seven years out of it, something like that seven years, I guess I got out. So it works.
Jesse (51m 24s): Peter. I really will have to have you back on. I really appreciate the, the conversation today for, for any listeners, aside from the website and the Lindemann letter. Is there any other place that you would kind of point them to online?
Peter (51m 37s): That would be the main place go to Lindemann and associates. You've got links to all the stuff we do there, including our charity, our education charity in Kenya, which is a big part of my wife's denies life. And I take a look at that. It's pretty amazing what these kids do. It's hard. It lifts your spirits and keeps you positive. But yeah, that was just going to lend them and associates you'll you'll find us and feel free to get in touch. Thank you.
Jesse (52m 6s): My guest today has been Peter Lindemann, Peter, thanks for being part of working capital.
Peter (52m 9s): My pleasure.
Jesse (52m 18s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
...
Ryan Webster and Warren Dresner are Co-founders of Equity Yield Group. Equity Yield Group is a real estate investment firm specializing in institutional grade, A/B class multifamily assets in great markets, sourced, qualified, and managed by an experienced team.
In this episode we talked about:
- Ryan
s and Warrens Bio & Background - Real Estate Investment
- Real Estate Classes
- Definition of Equity Yield Group
- The Process of Evolution as an Investor
- Deal Specifics: from Negotiating to Financing
- Raising Capital
- Communicating with Investors Strategy
- Philosophy on Pre-Deal and Ongoing Communication
- Reporting Aspects
- Key Metrics of Pre-Deal Stage
- Deal Structuring
- Disposition in Real Estate
- Underwriting
- Asset and Local Management
- Geography of Deals
- How to Build a Team
- Investment Philosophy
- Mentorship, Resources and Lessons Learned
Useful links:
http://www.justicemap.org
https://equityyieldgroup.com
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, you're listening to working capital the real estate podcast. My name's Jesse for galley and with me today are Ryan Webster and Warren Dresner. They are co-founders of equity yield group equity yield group is a real estate investment firm specializing in institutional grade a and B class multi-family assets in great markets, sourced, qualified and managed by their experience team, guys.
How's it going?
Warren (45s): Great. How are you Jesse?
Jesse (47s): I'm doing fantastic. We've got a bright and sunny day in Toronto. So the snow's gone and hopefully this continues for listeners you're joining us. I think we talked just before the show Miami and it was Iowa Right on. So for listeners that don't have a bit of a background of what you guys do. Maybe we could kind of take it back to the beginning. You know, we want to talk about how you founded this company and get into some of the great deals that you've you've done so far.
But before we do that, maybe you could just provide a little bit of a background about individually, how you got started in real estate, if the path was traditional or if it was not. And then eventually how you guys kind of teamed up to create a degree at this company.
Ryan (1m 33s): Yeah, no, absolutely say I've been in real estate a long time, a real estate professional and an entrepreneur prior to founding equity yield group. I own an operator construction and development company for transitioning into a multi-family acquisitions and working with equity yield group and more in near.
Warren (1m 54s): So I think my perf is probably traditional but different to Ryan's. So I'm from Australia originally been investing in real estate since 2010, largely single family homes. When I moved to the U S 2019, I discovered multi-family and started investing in multi-family as a passive investor, invested in a number of syndications, got to know the industry that way, and then decided I wanted to get more active in this space. And that's when I met Ryan and we'd formed equity yield group, and we started acquiring large multi-family units and, and operating them ourselves.
Jesse (2m 34s): So when, when did you start requiring units? What year was that?
Warren (2m 39s): Equity? Your group? 20. 20.
Jesse (2m 41s): Okay. So fairly recently.
Warren (2m 44s): Yeah.
Jesse (2m 44s): So in terms of the, the kind of foray into real estate, did you have a investing career? I know, you know, Ryan, you just mentioned a little bit of the background there, but was it, you know, where are you familiar with investments years before? Or was this something that, you know, you teaming together was really the, this started of kind of an investment career, like the deals you're talking about syndications and multi-family deals.
Ryan (3m 9s): Yeah, I won't speak for Warren, but as far as a real estate investment, you know, something that I was familiar with and it was, it was working in just in a different capacity and different business model and the, you know, build and sell as opposed to buy and hold.
Warren (3m 24s): I didn't mention it before, but my background's in finance and insurance. So I was comfortable with complex financial structures and investments, not only on my own account and single family homes, but just through a corporate career. Ryan with that construction background as well, was quite familiar with debt structures and complicated capital stacks that go with construction. So together we, I feel like we had a lot of combined knowledge that really helped. So it made it a lot easier to start looking at our own properties.
Jesse (3m 56s): So when you did start looking at your own properties, what was the impetus for multifamily, you know, the array of different residential and commercial real estate classes? What was it about multi-family
Ryan (4m 8s): For me, it was really kind of stability and, you know, a real low risk profile and great risks, gesture returns having been on the other side of that risk profile on the development side, where you have, you know, high levels of, of execution risk, as well as market volatility, risk, and, and hoping that you're gonna hit the timing, your project and the interest isn't going to eat through your profits. You know, the advantage that came with buying stabilized cash flowing assets, and it really provides peace of mind for me and for our investors being able to deliver solid risk adjusted returns
Jesse (4m 47s): In terms of the actual structure that you use. I know from the outset, the sorry, definition of equity yield group, or kind of what you guys do specializing in an institutional grade, how do you define institutional grade, you know, as opposed to family offices or high net worth individuals, what does that definition for, for your team?
Ryan (5m 8s): Yeah, so we buy, you know, late model product. We really prefer, you know, nineties to mid two thousands, but nothing older than the 1985. And, you know, we look for greater than a hundred units, really nothing less than $20 million, but preferably in this, you know, 50 to a hundred million dollar transaction range, but more than that is really the location in the market. We're shopping and in very strong markets with, with great fundamentals that are going to support a strong business plan
Jesse (5m 41s): And Warren, anything, you know, from your, from your vantage point to add on to that.
Warren (5m 47s): No. So, so Ryan summarize it pretty well. I mean, we use this word institutional quality. We really mean better quality assets. We can get into it in a moment, I guess, but whenever we're buying one of these properties, we need to finance it somehow through debt and equity syndicators, we traditionally raise equity from high net worth individuals. Something we also focused our efforts on is raising the money from institutions and institutions are great because they can write a really big check.
And it seems like an easiest solution, but they're tricky because they've got their own appetite and these institutions they're very sophisticated companies. They like to look in the stronger markets, the larger markets, and they prefer the newer assets as well. So we described to what our criteria is that we like to buy later model product in these strong markets in the Southeast, but actually that's exactly what the appetite is of these institutions as well. So I guess that word can apply to both our strategy, but also some of the sources of equity that we're using to buy these products
Jesse (6m 52s): And Warren, what was it, your finance background that assisted or helped in terms of the actual financing side?
Warren (7m 1s): I think it's both of us actually. I think Ryan was very familiar with, with complicated debt structures and how we use brokers as well. A mortgage broker who's really useful. I can access both debt and equity. So I think, I think honestly it's both of our backgrounds that made it familiar to us
Jesse (7m 18s): Now for the average listener. I mean, we have everything that spans from people that have a few units to thousands of units. The team here is obviously I think from the communication we've had, it's been currently invested in over 2000 units for those on the, you know, the smaller size, you know, how does that happen? You know, you kind of alluded it to alluded to it here where you're talking about people writing large checks, but you know, for the average investor, that's trying to take a syndication business and grow it. You don't just start at 2000. So what was that evolution like when you know, what, what would be your suggestion or advice to, to grow to that size if that's the goal of the, of the investor?
Ryan (7m 57s): Yeah, I mean, it's really, it's a business and you gotta start there. You've got to start with, with a plan and a fundamental understanding of, you know, how the business runs when you're dealing with a larger scale properties and then how you want your business internally to run. And, you know, Warren and I set out with a, with a focus of not only providing quality investments and investing in quality properties and projects, but about providing a quality customer experience.
So we're real big on consistent and transparent communication with our investors being accessible to our investors. So not only do they know what to expect with the level of investments that we provide them, but with working with us
Jesse (8m 44s): In terms of the deal you recently did. So I believe it's a $26 million acquisition. And that was like, we've been talking about you utilizing institutional capital. Can you tell us a little about that deal? Just, you know, the deal specifics, how it came together, you know, whether that, you know, from the actual negotiations to the financing, what did that look
Warren (9m 4s): Like? Should I jump in?
Ryan (9m 5s): Yeah, you can go ahead and talk about that.
Warren (9m 7s): Oh, that one is in Sarasota, Florida, which is a market just south of Tampa. The market fundamentals were amazing. So we actually had purchased that one. We closed early 20, 21 on that one. It all starts with the market. We loved the market. There was so much growth in Florida, so much growth around Tampa, so much growth in Sarasota specifically. So the market was outstanding. That particular asset is 148 units. It was built in 2016.
So it's actually a really new product. What was unique about it was, although it was only five years old, the interiors looked a lot older. I guess the developers didn't spend a lot of money on it. There was a real opportunity to clean up the kitchens and, and do a light to moderate rehab and value add project. So we loved it because it was newer, which meant that was a cleaner asset, but there was a real value add upside for us, for the investors. And so that one was $26 million.
We ended up, I think about six or $7 million came from an institution. And then we raised around four and a half million ourselves from high net worth individuals.
Jesse (10m 18s): So are you raising the capital on a fun level where it is committed capital or you raising it during, you know, the, the very stressful, potentially stressful conditional periods of the deal? How D how do you structure that, that chicken and egg? We talk about quite a bit on the show
Warren (10m 35s): Up until now. We've been doing it asset by asset. So in that stressful four week period, we've talked about creating a fund and that's something that's potentially on the agenda for this year.
Jesse (10m 45s): And what's your strategy when it comes to communicating with investors, let's maybe break that up between pre deal when you're actually in the fundraising mode. And then when you were actually with investors in a deal, and, you know, you're going through your process, whether that is value add, or in this case, sounds like it was pretty much a cut and dry. He didn't, it wasn't like you were doing a massive build-out. So those two types of communication, pre deal and ongoing what's, what's your philosophy on that?
Warren (11m 15s): You go ahead, Ryan.
Ryan (11m 17s): Yeah. Again, it's really centered around, you know, transparency. And from an operation standpoint, we, we tend to be very in tune with, with the details of, of not only the business plan, but the day-to-day operations executions. I plan. So when we're raising capital, you know, it's about putting together a presentation that, that gives investors, all the details about what we like about the project itself, the, the market, you know, why we think it's going to do well and how we're going to take it from a, to B without taking up hours and hours of their time.
And then post-closing, it's really about consistency. We send out monthly updates on the 15th of every month to our investors, that kind of track our KPIs from our initial business plan against the performance of the asset, as well as sending out the entire financial reporting package. If investors want to dig in, you know, very granularly, it it's all there and available to them.
Jesse (12m 16s): So when it comes down to the reporting, I mean, some investors there they're large enough where the accounting standards start to matter quite a bit, audited financial statements. You mentioned institutional investors, are you at that level of granularity or is this, you know, unaudited P and L's and balance sheet of what's going on with the project?
Ryan (12m 36s): Now, our financials are pretty detailed and very clean, and actually got, got a great compliment from our CPA and tax accountant this year. She said, it was know, these are the cleanest financials that ever reviewed this beer. And, you know, I love working with you guys because of that. And it helps not only with the institutional equity, but with the lenders as well. And even operationally, if you don't have clean books and you, you can't, you know, take a look at a profit and loss statement and understand what goes into it, it makes it very difficult to run the business.
Jesse (13m 7s): So I'm going to ask a seemingly granular question, but I, I, I'm just curious because we're all in the same business, and I'm curious how you deal with this, but before I do, I just have a question on the key key fundamentals are key metrics that you look at pre deal, whether that's internal rate of return equity, multiple, what do you find is the one that you have the most success communicating to investors, or you find that they request or moves? You know, they're asking, I want to see this specific metric.
Is there one that is head and shoulders above another? Or is it more, you have a bunch of different tools at your disposal?
Ryan (13m 46s): I mean, as far as return metrics, it's a return profile on different investors are looking for different things. So, you know, we, we provide cash on cash return equity, multiple IRR and average annualized return. So depending on which particular metric, the individual investor is attuned to, you know, we have it available for all of them. But as a general statement, you know, we are looking for some sort of current cashflow in all of our, our projects. So we can have that, that drip along the way of cashflow out, along with the appreciation.
Jesse (14m 21s): And when you are structuring these, these deals, it's a little different than the last guest we have we had on because there were more in the value add world. So you actually have these things spinning off capital in the first, you know, the first couple of years, it sounds like in that, in that strategy, are you still using a traditional preferred return and split of, of anything above that? Do you guys use a different, a different strategy or structure? What do you find that you've had success with?
Ryan (14m 49s): Yeah, we typically provide an 8% preferred return to really provide that, that alignment of interests with, with our LP investors. And then, then we typically go to a 70, 30 split, and then depending on the project, we may have a series of waterfalls after that at IRR hurdles.
Jesse (15m 8s): Okay. And for the granular question, I'm curious, because one of our investors that actually asked about this the, the other day, and it's the, the communication that comes with fees, but not just fees, but actually the return metrics in your first year. And you guys are aware that, you know, there's a bit of a J curve when it comes to the return metrics, because the investors put down a hundred thousand, two 50, a million, whatever their LP investment is. But that first year comes with quite a bit of fees associated with it. So the return in year two and three will look different than your one.
Is that a conversation that, that you have, or a communication that you have investors ask about after that first year, I have found that, you know, they're somewhat underwhelmed in the first year of operation until you, you communicate that piece of the, of the puzzle for them. And I find now it's in my, you know, upfront communication right away to talk about how these fees are gonna impact your one, you know, and any thoughts on that?
Ryan (16m 6s): Yeah. We've never had that question. And I think partly because, you know, a lot of our investors are sophisticated and understand how these larger projects run. And the second piece is, you know, in our investor deck and presentation, we break down the, the sources and uses and, and display all the fees in there. And then we break out, you know, cash on cash return on an annual projected basis. So there's really nothing, you know, in that year, one year two, that's missing projections. You know, we lay out the projections for the project on an annual basis
Jesse (16m 38s): When it comes to disposition. One unique difference between our Canadian listeners and us listeners is that the 10 31 exchange does not exist for the Canucks. And for, you know, south the border, you, you guys utilize that is your strategy on disposition to find different assets, or is it an actual full-out sale pay back investors? What do you find is the, for your investors? What are, what are you doing in that, on that front?
Ryan (17m 7s): And it really depends on the projects, but you know, right now with, you know, the bonus depreciation, you know, a lot of our investors are replacing capital and that bonus depreciation offsets, you know, the capital gains there. So the 10 31 isn't always necessary or a required vehicle to offset that gain. But the other tough part about the 10 31 is you are on the clock. You have to find an asset, you have to find something to place that capital in and depending on the market and the timing, you know, there may be a limited number of qualified assets available.
Jesse (17m 47s): And do you have a limited amount of time that, or a time period where these assets are, are held? You know, are you telling investors that, you know, we like to have a capital event in three years, five, seven, whatever that may be.
Ryan (18m 1s): Yeah. We underwrite to a five-year hold due to the strength of the markets we invest in. It's not on a realistic to, to make an exit. And in the two to three year span, we like to keep our projections conservative and just run everything out to, to a five-year. However, you know, we may refi and hang on exit in seven, we may sell in two. It really depend on asset performance in market conditions.
Jesse (18m 26s): Yeah, that makes sense. In terms of the, the actual underwriting from a stress test perspective, obviously, or seemingly obvious that the, the interest rate environment is going to be changing in the upcoming months, it has changed over the last few months. Has anything changed in the way that you underwrite in terms of certain sensitivities that you have when you're looking at properties, whether that's geographic or just loan to value that the interest rates are potentially affecting, how are you, how are you analyzing with in our current environment?
Ryan (19m 0s): Yeah, absolutely. I think that's a great relevant topic. Warren, you want to dig into that one?
Warren (19m 5s): So there are probably two aspects that we're paying much closer attention to at the moment. The first is if we're using floating rate debt where underwriting the forward interest rate curve. So if we can get focused on rate today on that debt, we're actually looking at what the forward projections are from the fed. And then we're assuming that next year, the interest rate might be 5% the year after it might be 5.5%. So it definitely allowing to that increased cost of debt service.
That's the first aspect. The second is at refi were very sensitive to the fact that proceeds available at refi have been driven by loan to value up until this point, interest rates have been so low that most lenders are constrained by LTB rather than debt service coverage ratio. DSCR we think that's going to change going forward. So on all of the deals that we're underwriting, when we look at proceeds available at refi were paying close attention to the projected DSCR in year two or year three.
And we're using that metric to determine how many, how much proceeds are going to be available. And what we're finding is that, whereas in the past, we may have assumed that we were going to get a 75% agency loan and refi. Now it's looking like we might only be able to qualify for a 60% LTV or a 55% LTV loan, and that completely changes the return profile of the deal. So it's a, it's a real, a key factor that we're paying much closer attention to just in the last three months.
Jesse (20m 40s): And are, are you agnostic to the type of debt, whether it's agency debt or, or not, or do you, do you have a,
Warren (20m 49s): We, we want non-recourse debt within that at steel specific we'll look at fixed rate, floating rate, bridge debt agency debt. Whatever's going to make the most sense for the deal.
Jesse (21m 2s): Fair enough. So a good segue to the actual underwriting, or, sorry, the actual asset management of the, of the properties that you have in terms of the operational side of things, is this something that you have in hosts, the actual property management, and then I guess at the higher level would be asset management from your company. What does that relationship look like for your deals?
Ryan (21m 23s): Yeah, so we use a third party property manager that handles the day-to-day operations, and then we handle the asset management piece in house and really focused on, on managing the, the manager and execution of the business plan and tracking that, you know, daily and weekly, as far as are we on track for this particular metric? Have there been any shifts in the market that are going to impact our future projections
Jesse (21m 49s): When it comes to the local management? What's the process for when you have say out-of-state properties that you're buying, where you're not as familiar with the companies that are working there, is this something where you roll up your sleeves and figure out who the, the best company is to manage these? Or is this done quarterbacked all from one location?
Ryan (22m 9s): So, yeah, we work with one property management company. We have a great relationship with them. They performed phenomenally, and there's, there's an alignment of culture between our group and theirs, which we like it to the point where, you know, we won't really invest in, in markets that they don't manage it.
Jesse (22m 26s): Now, when it comes to those markets, I know we mentioned, or we talked before Florida, Carolinas, Texas, are these the key markets that you're looking at right now? Are there any others? And what's that process that you go through to figure out which areas that you want to be investing in?
Ryan (22m 43s): Yeah, no, absolutely. Those are our key focus areas at the moment. But you have to remember that you we're, we're investing a real estate, but we're buying a business that comes with that real estate and you need the fundamentals of the market to be able to support the growth of that business. You know, a lot of the markets across the Southeast and Texas, the key thing is population growth and net migration that that's driving demand pressure in these markets. And then the next thing is, you know, supply, we look for areas that are supply constrained that don't have a lot of units coming online or projected units coming online.
And then the next component is, is really affordability, income, income, growth, and employment.
Jesse (23m 28s): That all makes sense when it comes to the, the team itself. You know, you're building this business, you're finding property management, asset management, obviously there's other stakeholders and members of your team. You kind of alluded before in terms of brokers, you, how important is building the team properly from the outset. And is there any, you know, are there any tips or any advice you'd give investors that are in the process of either building out a team or adjusting a current team that they have, that they want to improve on?
Ryan (23m 57s): Yeah. And the, and this comes back to building and running a business. You know, if you don't have that relevant business or management experience, I wouldn't let that deter you, but, but understand it's going to be a learning curve and there's going to be some on the job learning that comes with that. And I think the classic advice is, you know, be, you know, slow to hire, hire the right people and quick to fire. If there's a problem in, someone's not performing and you, you've tried to manage their performance, aren't able to, you know, don't hang onto them any longer than need to.
They're going to become a detriment to the growth of your business. And as far as hiring goes, you really spend some time defining what are the roles and responsibilities you're trying to hire to do you have the systems and procedures in place where you can bring this person in and they can execute on those rules and responsibilities. And then once you have that back into, okay, who's the ideal person for this role and for the company and who can I work with on a daily basis.
Jesse (24m 60s): Yeah. Right. I couldn't agree with you more on that. I think the there's this conventional wisdom, or there's this idea that real estate investing, isn't a business. And, you know, for those that are familiar with the book, the E-Myth, it's been recommended on the show a few times of actually building your business. For some reason, investors seem to think we're all supposed to be, you know, just kind of shooting from the hip when the reality is it's no different than any other business. You're S you create a team, you create systems and then you really get efficiency out of it. So couldn't agree with you more on that.
I'd be remiss if we didn't touch on the current environment that we are in, or the one that we just laugh. It's been an unprecedented last 24 months, you know, myself working in more broadly commercial real estate. So office retail, industrial, as well as multi raise everything's been affected in some, in some respect, what is your view I'd like to hear from both of you of how we are coming out of this, what we, you know, what you are seeing as the likely outcome in terms of the real estate market over the next few months, and maybe you could talk a little bit about the, the last 24 months and how that's changed your investment philosophy if it has at all.
Ryan (26m 11s): Yeah, absolutely. You know, the, the philosophy hasn't really changed that we're, we're very big fundamental investors that we invest in the strength of the market, and then find the best opportunity in that market. We can, and then build the strongest team we can to, to execute on the business plan. But the things are, are going to change here with the debt market. There's no question about that, but I think the outlook for, for multi-family specifically is still pretty positive, especially in these, you know, the Southeast and in Texas, where you have this, this continued demand pressure from inbound migration.
And the other component is, you know, on the demand side, interest rates also affect the home buyers and the retail consumer. So I think there's a lot of individuals that maybe we'll be looking for, you know, purchasing their first home. That'll be priced out of the market as interest rates come up. And that will continue to drive the demand pressure on, on the multifamily side with that, you know, the supply side is going to be constrained by interest rates as well. It's going to be expensive to build a new product.
Lumber prices have been up and down pretty dramatically over the last six months, but have definitely been higher than historicals, which increase, you know, the cost to build combined with supply chain issues, not only on the material side, but, but the labor side, skilled labor is a problem here in the United States and will continue to be a problem in the United States, which makes replacement product more expensive. And, and I don't see a solution to the housing supply problem. And I, I see, you know, as long as you're investing in, in these markets where the demand pressure's there and you're not hitting an affordability component, that's the next piece that you have to look at?
It's yeah. Rents are moving. Yeah. Demand pressures. High supply is constrained. Rents are moving dramatically. And in some cases, you know, like Tampa saw 32% rent growth last year, which is just ridiculous, but you can't see that back to back year, over year before people can't afford to live anymore. So with that, you have to look at the diversity employment market, wage growth and the cost of living,
Jesse (28m 23s): Or in thoughts,
Warren (28m 25s): I guess just another part of your question about the last 24 months. I think something we really learned, which has reaffirmed our strategy is that with COVID the industry as a whole performed really well, but a lot of that was because of all the money that flowed into the states to provide rental assistance. So one thing we've noticed is that demographics matter. And if you are in a smaller market, if you're in an older property, you're probably more likely to have a tenant base that's reliant on rental assistance.
Who's chosen over the last 24 months or had to over the last 24 months, not pay rent. We haven't seen that at our properties. And I think that's kind of reaffirmed our strategy that if we stick to these strong growing markets, if we stick to these newer assets, we can avoid that demographic and our bad debt tends to be lower. So that was something that we, we never really set out thinking bad debt first, but it's something we really noticed that it's been an issue.
Industry-wide I think that the industry has been fine, but we're starting to say people who are not paying rent, who are, who have been reliant on this rental assistance. And now that it's dried up not able to pay rent. So it's something we've learned over the last 24 months, but like I said, it's actually reaffirmed our strategy, which we're quite happy with.
Jesse (29m 51s): Yeah, no, that makes a lot of sense. I think it's a, it's a common, a common view right now for, for investors. And, and like you said, that as a whole, we, the market did perform pretty robustly, but definitely a dislocation in certain areas, whether that's office retail specific type of office or retail, but looks like, you know, there it is positive the way we're going. You know, especially Canada, we took a little longer, hopefully fingers crossed. Everything is moving in the same direction. There's big contrast when you're flying to Orlando from Toronto and just the, the environment.
So hopefully that, that all moves in the right direction. So we're coming up to the end here. We asked four questions to all the guests and I'll start with those. And at the end, we can talk a little bit about how people can reach out to you and you know, where they can go to connect and whether that's investing in a deal, or basically just trying to reach out or seeing, seeing where you are in social. But before we get that, we have four questions. We ask everybody. So if you're ready, I'll kick them off. So what is something that, you know, now in your real estate career that you wish you had had known when you started out
Warren (31m 2s): Passive? I guess for me, it's real estate is a get rich, slow scheme. So it's time in the market that matters. So I would, what I wish I had known is that I should have started 10 years before I did.
Jesse (31m 16s): That's great time, time in the, or so we're not timing the market time in the market.
Ryan (31m 21s): Absolutely. You know, looking back even the last 12 months. And I think a lot of people do suffer from the analysis paralysis and especially people looking to jump into real estate and get your first deal done. You know, I look back 12 months ago, there were deals that, that we passed on that, that, you know, didn't make sense or were a little tighter than we liked. You know, demographic, strongly area was strongly like the property, but it was, it was the basis and the pricing, we couldn't make sense of.
There's a lot of those deals looking back now that I wish we just would've bought, we'd probably be selling them right now.
Jesse (31m 58s): Fair enough. All right. Number two. Any advice for individuals or younger professionals trying to get into the commercial real estate space? You know, maybe from the framework of mentorship, would, what advice would you have for, for those individuals?
Warren (32m 14s): I would say surround yourself with people who are doing it, who are one or two steps ahead of you? I think we kind of alluded to this in the conversation earlier about going big. It's actually not that much more difficult to go big than to go small. It's all about the size of your thinking. So I think surround yourself with people who are doing bigger deals and you'll realize that you can as well.
Ryan (32m 37s): Yeah, absolutely. And to add to that, it is a unique industry in the sense that I don't know any other industry where you have a willingness of people further down the path to reach back and help the people walking the same path.
Jesse (32m 53s): Yeah. That's a great point. I think we're a pretty spoiled in our industry and it's not a, I don't think we've ever talked about that on the show about, or if we have, it's been a while about how many people there are in our industry that are more than willing to help a younger person out. If anything, they just, they see a little bit of them in the younger individuals and, and they want to help. So, I mean, it makes a lot of sense. Number three, for us, is there any tool resource that can be software, a book that you're utilizing now where you you'd recommend to listeners it could be real estate or business in general,
Warren (33m 27s): Something, something I like it it's a website that we're using. It's called justice maps.org. I don't know if you've seen that Jesse, but it's, we use it basically to look at incomes. It breaks down incomes by, I dunno if it's zip code or even more refined than that, but we don't just rely on what CoStar reports in a radius. We actually map out the specific location of the property and look at incomes all around it. So justice maps.org.
Jesse (33m 54s): Okay. We'll put that in the show notes. It's it's funny. You mentioned that one specifically. I think it was literally yesterday. I ordered a book off of Amazon that had that in there, and I never saw that before justice, but I've heard of like, familiar are a similar type of websites, but it's funny. They specifically mentioned that and it was like a multi-family acquisition book. So we'll definitely put a link for that. Anything, anything for you, Ryan?
Ryan (34m 17s): Yeah, I think I'm kind of relevant to the time sphere and we touched on, on the debt market, but we're looking at the chat and financials website, you know, every day pulling the, the forward interest rate curve forward treasuries. And so for, and, and we use that to underwrite, you know, month over month, our forward debt service, as well as the price interest rate caps.
Jesse (34m 39s): Yeah, that makes sense. All right. The last one listeners know I stole this boat two years ago from a masters of business and Bloomberg first car make and model.
Warren (34m 48s): So I don't, I don't know if the names of the cars are different in Australia, but it was a proton. I think it might've been,
Jesse (34m 55s): I think that that is, I think that is it Nissan or it's not. I know exactly what you're talking about. That is hilarious. That is the first proton we've had on the show. I can tell you that much. How about you, Ryan?
Ryan (35m 7s): Yeah, that's a little more domestic. Had a Chevy Beretta. It was a manual transmission. Five speed.
Jesse (35m 18s): Love it. All right, guys. Well, I appreciate that in terms of where people can reach out to you or for those looking for opportunities, or just generally want to connect on social media, where can we send them to?
Warren (35m 29s): The easiest for us is probably to go to our website equity yield group.com. You can connect with us there. You sign up for our newsletter, keep in touch that way, but that's probably easiest equity yield group.com.
Jesse (35m 43s): Anything else to add Ryan?
Ryan (35m 45s): No, that's really the place to find us. I'm excited to sign up for newsletter. You can schedule a call with us. If you have questions about investing in real estate, if you're interested in investing alongside us and one of our future projects, you can register via an investor intake form there.
Jesse (36m 1s): My guest today has been Ryan and Warren from equity yield group, guys. Thanks for being part of working capital. Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one.
Take care.
Kevin Erdmann is the author of "Shut Out: How a Housing Shortage Caused the Great Recession and Crippled Our Economy" and "Building from the Ground Up: Reclaiming the American Housing Boom". His work has appeared in the Wall Street Journal, Barron's, the National Review, USA Today, and Politico, and it has been featured on C-SPAN. Some of his papers and articles published with the support of the Mercatus Center at George Mason University can be found at https://www.mercatus.org/scholars/kevin-erdmann . He tweets as @KAErdmann.
In this episode we talked about:
• Kevin`s Bio & Background
• Great Financial Crisis and America’s Housing Boom
• Post Crisis Period in Real Estate
• View on Housing Bubble
• Unlocking Affordable Housing Policy
• “What are Landlords good for?”
• Real Estate Trends 2022
Useful links:
https://twitter.com/kaerdmann
https://www.idiosyncraticwhisk.com/2022/03/16-part-series-on-housing-affordability.html
https://www.mercatus.org/scholars/kevin-erdmann
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jessica galley, and you're listening to working capital the real estate podcast. My guest today is Kevin Erdmann. Kevin is a former small businessman and a researcher in hosing monetary policy and financial markets.
In 2015, Kevin began to reconsider a range of evidence contradicting commonly held beliefs about the pre 2007 American housing boom, his first book shutout along with several extensions to his research, which were published with the support of the Mercatus center at George Mason university, where he continued to develop a revolutionary new approach to the practical rules of housing debt and money in recent American trends. I caught the attention or he caught my attention recently reading an article and the article was entitled.
What are landlords good for? And I thought that was an interesting question. So here we are today, Kevin, how you doing?
Kevin (1m 11s): Great. It's great. Thanks for having me.
Jesse (1m 13s): Yeah. Well thank you for coming on. We were talking a little bit before the show, a little bit about your background and kind of that first article that I saw. And I was like, well, you know what? It sounds like something that the listeners would get, get a lot of good information, especially since we kind of tackle real estate from the investor's perspective, but also an economic perspective. So thanks again, I guess, you know, we always start with a little bit of a, a history lesson on our guests are a little bit of a background, so maybe you could kick us off and talk a little bit about, you know, your past roles and how you kind of came into the world, the world of real estate and economics.
Kevin (1m 53s): I, yeah, it really is all sort of an accident. I was a, as you mentioned, I was a small business owner and back around 2010, 2011, I went back to school to get a graduate degree in finance. And I was sort of making my way toward a new career in finance. And in the meantime was just doing sort of personal research. And in, in the process of doing what I thought would be sort of a week or two week or month long dive into home builders and whether they might be a good investment back in 2015, in 2016, you know, sort of background research, I just kept running into oddities and the data that just completely contradicted the conventional wisdom about what had happened leading up to 2008, you know, that were compelling enough that I, you know, turned into two months in three months and really it was six or seven or eight months into the, into that research before I really Paul the, this whole sort of closed access to the idea, whole limited supply problem into the sort of the center of this story.
Originally, the first things were just re you know, finding national data on credit and that sort of thing, just, you know, there, there was, there was no sign in the national data back in that period of, of there being this, they lose of credit going to unqualified homeowners and that sort of thing. And so anyway, just all of this, all of these points kept building up to the point where I just accidentally sort of had this tiger by the tail of this story to tell, but for some reason, nobody else had discovered, and, and the book just comes out of the accident of learning this stuff and realizing it was important enough to, to shares.
So here I am six years into that week-long projects
Jesse (3m 50s): For where you formerly in the research world at that point, you said you were doing a graduate degree with, did that just kind of coincidentally that happened at the same time, or was that prompted by, by your research in, in your graduate degree?
Kevin (4m 3s): Yeah, no, I was just, you know, I managed some personal money and I was just intending to go back and, you know, go into transition away from small business ownership to some sort of career in finance. And just this story was so compelling. It drew me into what really, I suppose now as a career in public policy. So although there definitely are a lot of lessons for it, for investors and homeowners and everybody else.
Jesse (4m 27s): Yeah. We're finding more and more, everything seems to be interrelated. So, you know, for the person taking a look at this from the outside, you hear a million different stories after the great financial crisis after the housing boom in oh six, you know, what was it? Well, I guess, to back up, what is the general perception from your point of view that people had, or the story that they told themselves about that time period? And what were you finding that, you know, was the first telltale to you that there's some contradictions here?
Kevin (5m 0s): I mean, the first things that I found were, again, like I said, just that there really is very little evidence, you know, for instance, the typical, the median home homeowner in 2005 or six had a higher relative income compared to renters than they had had in say 1995, there wasn't this surge of unqualified homeowners, their average homeowner in 2005 and six had, you know, tended to have like education was becoming a more important factor.
So ownership among high school graduates was relatively level or declining in homeownership, you know, among college graduates and people with professional degrees and that's where home ownership was rising. So those were the initial sort of data points. But eventually what I realized is, you know, really what we have is a supply problem. There's key cities, which I call the closed access to these, which mainly is Boston, New York city San now LA those, those metropolitan areas that, you know, the character of our economy is basically becoming dominated by the fact that those cities aren't willing and able to grow as fast as the economy should grow.
And so what happens anytime there's any sort of growth, whether it's growth in credit access or just incomes, just productivity, there's this increasing bidding war to get into these limited locations. And so what happens is the price of housing skyrockets as a result of that. And so looking at that, there seems to be just an, for some reason, a bias toward blaming demand side factors on that too much money, too much credit speculators.
You know, today we we've sort of killed the marginal home buyer market. So today we blame private equity and foreign buyers and corporate buyers and corporate landlords. And, but all along, it's just not enough supply price can go up for two reasons, not enough supply or too much demand and all along, even back then, the problem is not enough. And instead we have this recurring intuition to say, oh, everyone else has too much money. And that's why I can't afford important things anymore.
And, and so, yeah, it's, you know, it's, it's a simple story thing. The houses are expensive because we don't have enough of them and you just have to look at it. You know, it's not hard to understand. You just have to look at it and accept that as a potential conclusion. And then the rest, the rest of the story sort of tells itself.
Jesse (7m 43s): So at the time, or even ex post the, you know, after, after the, the crisis years after we, you have movies coming out, you have people, you know, writing articles specifically on this writing books, you know, a lot of what the, I would say the general public was told was there was a lot of available credit. There was access to a lot of money. The money was very cheap, you know, somewhat similar to what we're hearing right now, fast forward this many years, but there was also this, this conversation or this theme that there was excess building, that there was an oversupply of housing.
And, you know, what was it about this story that was so compelling for people to adopt? If, if you know, you're saying the cases, the data just does, did not, or does not bear it out.
Kevin (8m 36s): I mean, it's a, it's a good question. I, I mean, today, you know, to me, it's getting, it's been, it's sort of easy for me to tell the story as time passes, because to continue holding onto that conventional wisdom gets harder and harder over time, right? Like I made today, we're in this weird political environment where, you know, mortgage growth growth has actually been, you know, dead for a decade and barely has started growing again in the last couple quarters.
And so how exactly are lower are low mortgage rates, you know, the, the, to blame for rising home prices, it's cashed by like everybody knows this, you see papers or stories in every paper about cash buyers coming in and 20 bids over asking and all this stuff. And so people with mortgages can't even get in on the process because they, they can't get an appraisal high enough to get their mortgage funded. So, you know, at some points that it just becomes absurd to, to blame credit for it.
You know, it's not quite as absurd back then, but effectively the same disconnects are, are in play and in the newer, but building from the ground at that, I know some of the data about, you know, for instance, in a, in a market like Arizona, which was, you know, a poster child was sort of a bubble city. You know, the, the conventional story is there was all this money flooding into housing through the credit channels that led to a bunch of excess building, or actually first that led to prices skyrocketing because of all this credit.
And then that led to overbuilding too many housing, too many houses. And then that all collapsed of its own weight. But it, it happened in the opposite order of that. The first thing that happened was there was a lot of new building because Phoenix was taking in all these people that didn't have houses in LA that would have preferred to live in LA. So the first thing that happened is there's a bunch of new building in Phoenix, but then they, they sort of reached their local limit. So then you see prices start to sky rocket and Phoenix in 2004 and five borrowing, you know, per capita debt in Arizona is still pretty normal until late 2005.
And then finally, when house prices in starts peaked at the end of 2005, then you finally start to see debt start to raise. So everything happens in the opposite order of what, you know, what the stories seemed to tell, you know, the conventional wisdom says, but you know, it, you have to sort of dig into the numbers a little bit and, and, you know, to sort of see that come out, you know, one of the problems is there's not really a national housing market.
And I think that's where there should, there could be a national housing market, but because these supply constraints were so localized, it's very difficult to just certain information. You have to be careful about this serving information by looking at national numbers, because the market in Nashville or Omaha was much different than marketing San Francisco. And you throw all those numbers into one big basket, you know, the, the noise ends up hiding the information. So that's, that's one, you know, if you look at the national numbers, it does look like mortgages and prices were all sort of going up together.
But you know, most of the countries didn't have either a price, boom, or as construction, boom, most of you know, cities like Atlanta and Omaha and all those cities were building houses about the same rate as they have been, you know, for several years, the housing boom is in, was in places like LA that were building so few houses that even a relative boom is still an it pitiful on absolute members. And then you had a boom in places like Phoenix that are overwhelmed by the people looking for affordable place to live.
Jesse (12m 42s): And with that story, I assume, when you looked at different cities was the same story of that causality, just being exactly the opposite of what people had thought it was that, you know, interest rates, you know, if those were a factor, it was almost like gasoline at the very end to, to kind of keep fueling what had already started prior.
Kevin (13m 1s): Yeah, yeah. And so, you know, really when you get to 2007, you have what we have is a housing market or in an economy, or let's say you go back to 2005, really in 2005, the fed was, you know, pretty much, you know, we were about on target in terms of nominal GDP growth inflation. The thing we were a little out of whack on was that rent inflation had been high since the mid nineties and was still a little high, but was finally actually coming down where rent inflation was about the same as normal inflation.
So, so in 2005, what we really had was in the economy where the fed was doing their job, that we could use a few more homes, but the conventional wisdom was so powerfully sort of on the opposite side of the F you know, in the belief that we had overbuilt that there was, you know, the high prices were because of demand side stuff. So that must mean we're doing too much. And so, you know, the funny thing is housing started started to collapse in 2006.
The first thing that happened in 2006 and seven is rent inflation shoots back up again. So actually we, one of the things I go in to, in the building from the ground up narrative is it's sort of parallel to the seventies where you had inflation, but you had these oil shocks that the fed was reacting to really in 2006 and seven, what we had was a housing shock, just like the oil shocks. We got a housing supply shock because the fed itself had, had slowed down construction.
And then when rent inflation rared up in the face of this housing supply shock, the fed reacted to the inflation and say, oh, it's our job to keep inflation low. And we do that by lowering incomes. And so by 2006 and seven, we get in this vicious cycle where they're actually reacting to the shock they had. They had started, you know, instead of, instead of seeing what was happening and thinking, oh, we've gone too far. Every time they Ratched it up, you know, slow down the economy more and rent, inflation was high and housing starts kept collapsing.
Then they looked at that and they said, oh, we, we were wrong. You know, our critics were right in 2005, we must have, we must have induced too much home building because now it's 2007. And when we try to correct things, home housing starts are collapsing even more than what we thought they would. So we must've been doing too much in 2005. And what happens is by the end of 2007, they're convinced that they had made mistakes in 2005. That by now it was too late to fix. They actually solved some sort of crisis coming and they just came to believe that they couldn't do anything about it.
Really, if they had flooded the market with liquidity in 2007, that what we needed is a fed aggressive enough for housing starts to recover in 2007. And then none, none of us would be talking about any of this today and what we we'd still be blaming the banks for. Hi, we'd be having the conversation they have in Canada about housing, right? We'd still be blaming whatever for home prices and probably blaming the fed for them, not knowing that we had escaped the worst economic calamity intergeneration.
Jesse (16m 14s): So what, what policy mechanisms, so back then, we'll, we'll fast forward today in a little bit, but what policy mechanism at that point, are you going to be able to use to encourage that or discourage the, what you were talking about with Arizona, where you hit your cap, you know, very similar to Toronto or New York LA very strict laws on, you know, how much can be built, what can be built. So is it, is it are the mechanisms left at the local level rather than at the federal level? You know, what do you do at that point where you're trying to encourage, you're trying to encourage building and, and we're, we're conceding that it is a supply issue.
Kevin (16m 53s): Exactly. Yeah. So that's, you know, that's the difficult question is optimal policies aren't available. So, you know, really, it's just the case that we have these cities that are unwilling to grow at the rate that our economy should be growing. And so anytime anything good happens, you know, if things get good enough, then there's this inevitable segregation by financial means by, you know, segregation by income, you know, the people that can, you know, now there's a bidding war for those, these limited locations.
So anything that eventually leads to just a nice economy that you'd like to have is going to lead to a segregation at this inter metropolitan or area migration. And the way that migration works is housing gets more and more expensive in those cities until somebody hurts enough that they give up on living in the city, they want lived to move to these other cities. So, yeah, I mean, it's, it's sort of a weird, you know, th the second best optimal solution in that context is to slow the economy down enough, to like limit the pain of that segregation process.
That's not, you know, we need those cities to fix their problems. That's not, that's not a second best solution. You want your national economic figures to be aiming for. Right. But, but yeah, that's essentially, that's what happened is that process of segregation because of a lack of housing got so accelerated so much and became so painful that it started, you know, bleeding out into these, the cities that I call the contagion cities, which are the Phoenix, is in Florida and Arizona and Nevada and inland California, that we're taking in all these people coming out of the coastal metropolises.
And so what happened is the fed slowed down the economy enough to, to ease those segregation pressures. And then, but then, you know, instead of sort of stopping one thing I say in the band building from the ground up is they actually did succeed by mid 2007 at creating a soft landing, as good as they ever could have planned for. And that was the least satisfying, you know, conclude, you know, in expat they could get at, nobody was satisfied with that.
And so they kept pushing and pushing it to all that bad debt actually happens well past the peak of the housing boom of people in places like Arizona and Florida, that now are early entrance into this coming crisis, because they've said that, you know, for decades, they've been growing two or two and a half percent a year. And then as that as, as the economic growth in the two thousands ratcheted up and people were moving there to find affordable housing, now they're going and more like 3% a year.
And it's so much that that's adding stress to their local economies. And then suddenly from 2006 to 2008 or nine, it goes to zebra, like suddenly decades, long migration, just flattens. And so, although, you know, so many of those mortgages taking, taken out in Arizona and Florida in 2006 and seven were actually just households dealing with the financial crisis that hit them before it hit everyone else.
And instead of reacting to that with generosity, with, with the name towards stability, we just took everything that happened as a, this is another thing that's happening because of this, because of the excesses from 2005, and really for people to learn their lesson, people need to suffer those losses. You know, that was the mentality. And so, you know, that 2008 crisis was really a popular crisis that happened because nobody would for anything less damaging than that.
Jesse (20m 50s): So just on this point, I want to talk a little bit about affordable housing and policy perspective, but just before we do on that, the, the idea, you know, we're, we're in a housing bubble or, you know, we're, we're currently in a housing bubble or back then we were in a housing bubble. I know, you know, you can take the very strict in every time I would do little bit of research on this. You'd get, you know, the famous Eugene Fama and, you know, he would talk about it's, he would have such a strict definition of what a bubble could possibly be that it's like, well, it's always priced in, but this idea that asset prices are untenably high was, is that the framework that you looked at, oh 7 0 8 or even today, or do you have a different, different view on what that, that term means to you?
Kevin (21m 37s): Again, this is a great example of how looking at national numbers versus desegregated numbers is, you know, it gives you two different stories. So you can look at national numbers and, you know, from the mid nineties, till 2005 price to rent ratios, you know, take the national aggregate value of homes and divided by the national rental value of homes and priced rate ratios went up. And so it's a very easy story to tell yourself that, oh, there's all this credit it's, you know, prices are rising and, you know, all the official documents on this, like the financial crisis, that agree commission, the 500 books on the shelf at the bookstore about the crisis.
I mean, they all, they all, they all very briefly point that out and it becomes the presumption of everything to follow, you know, like the big short, like, you know, in the book, in building from the ground up, I say, you know, the big, there's nothing wrong in the big short, it's just a story about an, a growing crisis that started in 2006. And it just takes us the presumption that that crisis was inevitable or that these things happening in 2006, have anything to do with what happened in 2003 or four or five.
And so it's just that, you know, that, that presumption that, oh, prices went up for no reason. And they so surely they must have to come back down. Right. But if you desegregate by city, you know, re prices were going up where rents were going up, prices were going up where there aren't any vacancies, you know, so if you, if you do a cross sectional and regression across cities, then it's the stories reversed, but prices are totally being driven by fundamentals.
And it is funny in, in the financial crisis inquiry commission report, you know, they take, they do literally take a single paragraph to dismiss rents is an important factor in rising prices. And it, you know, with this, this logic that price to rent ratios have gone up well, the, they have three or four cities, examples of where priced rent ratios, you know, had doubled or more at which, you know, surely is so outrageous that it shows the prices are too high to those cities where LA in New York city.
So, you know, to me, the, you know, sort of reorienting the way we look at this story, imagine writing a 500 page review of the financial crisis. And based on the idea that rent is an unimportant factor in high-end housing costs in Los Angeles and New York city, right? The reason price to rent ratios are so high. Ironically, the reason price to rent ratios were so high and had gone up so much, is that the main factor that increases price to rent ratios is high rents.
I just cry across time across cities, within cities, anywhere where you compare rents and prices, price to rent ratios are always highest where rents are Heights. And I'm sure all your investor listeners understand that, you know, they're, they're not out by, you know, getting investment properties in the wealthy suburbs of the metropolitan areas, because the cause the returns on their investment are much lower there. You know, the, the investors are buying at the low end where your, where your cap rates, where your, your, your yields are higher.
It's just a systematic thing that happens across the board. So again, it's this weird, you can understand how they would make that mistake. It seems like they give price to rent ratio is a doubled over a decade that, that, that, you know, you know, you don't have it. Doesn't take a lot of analysis to say, oh yeah, the prices must be rising in spite of rinse. But the irony is actually those, you know, you go again, you go to an Omaha or a St.
Louis Price ratios hadn't changed very much at all in those cities. Now, if it was households with low incomes, getting, getting mortgages, they weren't qualified for those would be the cities you do. You think you'd see a bit of a jump in the price to rent ratios they heard, right. But no re their prices were highly throughout this entire period from the mid nineties tilts today, rent has continually become a more and more important factor determining the relative price of, of any particular house.
Jesse (26m 3s): So for the, I mean, to me, that analysis, you, you almost, it's easier to accept the former because it just, one thing is easily. You can say, okay, that follows where the other one, you have to do a little bit more digging. So for instance, if you see, especially, you know, Toronto Vancouver, where we were, where we are very similar to San Francisco LA New York, where you could from the outside valuations have gone up like crazy interest rates aside from very recently have remained very low.
And for the foreseeable future, that's the way it looked like it was going to go and rents were going up, but not at the same rate, that values were going up. And if you just looked at it, just statically that, then you could kind of see that argument. But, you know, even, you know, for where we live, we've this year, we're going to have record immigration. And I re I don't remember a law firm economics class, but I remember, you know, what moves, not just what goes up and down the supply curve, but what actually shifts the supply curve and, you know, technological innovation or immigration, where those are things that maybe they're not necessarily seen right from the outset.
But those coupled with lack of building could create this mismatch. I'm curious, the, the actual from the perspective, and then we can dive into affordable housing here from the perspective of, of affordable housing. I think in, you know, in many cities in north America, there, there is housing that is left, locked because of regulations and, you know, basement, walkouts, accessory apartments, different zoning regulation.
Is that a, is that a large portion of where you think that we could unlock affordable housing? Would that be a policy tool that, that, you know, would be at the top of the list?
Kevin (27m 48s): I think we definitely, it, it's not a situation now where there are just tons of empty units. I don't think, I mean, I think there's a lot of locked, you know, unbuilt units and some of my colleagues at Mercatus, you know, work on that, they call it the missing middle sort of, you know, there was this historically there was a, there used to be a lot more of, you know, say a family, building a duplex or triplex and living in one of the units or building a unit in the backyard, or, you know, that may be a grandparent lives in to begin with and eventually becomes a rental or whatever.
So that sort of building just hasn't been happening for decades because it was regulated away. And, but vacancies have really, you know, we really put, turn the screws tightly on mortgage lending after 2007. And so I really, what I say is there's a donut hole in the American housing market. Now, there are, you know, we're sort of maxing out our multiunit building, which is really largely limited by regulatory obstacles.
And then that the pristine credit borrowers at the high end are, are buying as much house as they want because they can get low rates. And they, you know, so they they're basically unconstrained in how much housing they went. And then there's this middle millions of households that used to be able to get mortgages that can't today. And so it's that entry level, new housing market that we just basically, you know, any given year before say 2006, the new homes built for sale at, at less than a $200,000 price point in the United States.
There were, there would be more than a half a million a year built by the last couple of years. That's down to like 70,000 a year. Now, you know, there's some inflation, it's a little bit hard to control for that, but, you know, for most of that time, home prices were lower than they had been in 2005. So, so really we, we just made it impossible for those entry level owners to induce new supply themselves. So that's the irony today is now today because there's a, you know, everyone blames demand side stuff, you know, for high home prices what's happened is because we have this donut hole in the middle of the American housing market.
No, city's been able to build enough at the Metro area level to have adequate supply over the last 12 years. And so in every city rents at the low end are going up just like Vincent. The low ended have been going up in San Francisco, in New York city for, for, you know, years before then. And now that's drawing in institutional investors. And now the narrative is, oh, institutional investors are pricing out, you know, traditional home buyers. Well, you know, we we've excluded traditional home buyers from that market 12, 13 years ago that, you know, any, anybody that can get a mortgage in those sort of markets could lower their monthly housing costs by becoming an owner versus a renter in most cities today, it becomes the low end.
The yields are very good. So, you know, especially compared to mortgage rates. So it's, it's, they're not being priced out of the market. They're being regulated out of the market. And it's good. Finally, we have institutions coming in with enough interest that it's actually inducing home builders to build entry-level units and these new build for rent neighborhoods. Now, those shouldn't be being bought by the families that are gonna live in them, but it's not the institutions that are keeping them out.
It's the, it's the FHF and the consumer finance protection bureau that are keeping them from being owners.
Jesse (31m 47s): So you talked, I mean, we started at the outset of this, basically this article that you wrote that kind of ties in here and it was called what are landlords good for? And I just wanted to, we talked a little bit about this, but I hope, hope that you can expand a little bit and I'll just quote this part here. So to understand why housing affordability policies should primarily consider rent and why the U S focus on price has proven disastrous. We need to understand the roles and incentives of three key parties, landlords financeers and tenants and quote at this particular article article was about the three services that landlords provide transactional capital and diversification as kind of the spotlight for this, this concept.
You know, you don't have to go into super granular detail here, but could you talk a little bit about what you, you know, what the aim of that article was and why the focus on, on landlords in this particular way?
Kevin (32m 45s): Yeah, well, maybe, I don't know if this is coming directly from the same point of that article, but, but I do think one of the things, you know, on that idea of focusing on rents as the core affordability issue and not prices, I think we, there's a lot of bad habits in housing analysis that I wish we could, we could move past. And one of them is treating the homeowner market as if it's a different thing than the renter market, you know, and a lot of times you get these sort of implications in the way people talk about housing as if, when somebody buys a house that, you know, somehow that's adding demand for housing as if they were living under a bridge when they weren't an owner, or, you know, when an institution buys a house that takes away supply, or, you know, as if, you know, they tear it down after they buy it.
Right. And, and another thing which I think these, these cities with the lack of supply of sort of fed into another notion, which is that either you get these outstanding, you know, excess returns, like somebody that bought a house in LA or San Francisco twenty-five years ago, that somehow that's like the goal of being a homeowner and that somebody that bought a house for 120,000 to Detroit twenty-five years ago, that may be only worth 150,000 today somehow missed out.
Or somehow that was a bad investment use. You've seen this phrase a lot that housing can be affordable, or it could investment, but can't be both. It's like, you know, the, Y w people acting wise will say this, you know, you know, sort of impart their wisdom on everyone. And it's a terrible, it's totally wrong, you know, and it, nobody goes to the stock market and says, oh, I'm only going to buy the most expensive stocks because you know, it's not, can be expensive, they're affordable or a good investment, but not both, but of course the best affordable house is the cheap house.
And you shouldn't expect to make a million dollars on it. If you sit on it for, that's the thing that's wrong, that's the thing that's out of whack. And so I think there's been way too much focus on the idea that buying a house gives you access to capital gains. And in fact, the main value to being a homeowner is that you're, that you're getting a job as a landlord, as a management company, and you have the best tenants anyone could ever ask for that never disagreed, you know, that never have any disagreements with you about how to manage the property, right?
They, if you take two years to fix the leaky window, they never complain, right. If you, if you can't afford to upgrade the kitchen exactly. When they went to, they're not going to move out on, they, they understand, you know, you have to wait until you, so they, you know, there's principal agent problems that make a landlord tenant situation, actually, you know, but by, by making the tenant and the landlord, the same person you get rid of all those costs, there's the problem with that, of that.
You can't diversify there. Now, you own this big giant asset, and that's a cost of that. But clearly for most people, the getting rid of the agency costs is, is more valuable than the lack of diversification. And so, again, that, to me, that's why the whole thing about institutions, pricing people out institutions, can't price people out. If somebody has access to credit, they will, they can outbid the institutions. It's the access to credit. That's a, and it's not that institutions have too much credit it's that we've prevented people from getting the credit that they need in order to get rid of these agency costs and be their own landlord.
So, you know, the thing is home ownership, the value of home ownership actually should be this really boring thing that it's, you know, amounts to a couple thousand dollars a year of, of being able to, you know, sort of earn the rental value of that a landlord would earn because they have to take the risk of having bad tenants, and you can earn that income without taking that risk on. And so, you know, you should be able to, you know, you should expect to be able to buy a cheap house in the city.
That's still going to be cheap in 20 years and be very happy with that investment. And in fact, that investment, as I was saying, price to rent ratios are systematically higher. The more expensive the market is. So the people were locking out of the market as homeowners. They're the people for whom being a homeowner is the most valuable that the yield on their unit is much better. You know, somebody that would love to get a mortgage to buy $150,000 house in Atlanta, that's paying, you know, they're paying 1500 a month in rent today and they could get a mortgage for 800 a month.
And the CFPB says, I don't think you're qualified for that. Right. You know, they we're preventing them from being a landlord for them is very lucrative. Like it's several hundred dollars a month in value they get from that. And so, yeah, we were basically locking out the people that, you know, the person that owns the half million dollar house in Atlanta that they're not getting as good a deal. It's still a good deal to be a homeowner for them, but it's not as good a deal as it is for the person that would like the $150,000 house.
Jesse (38m 15s): It's a compelling argument. When you say the, the, you know, when people are saying these institutional purchasers are pricing people out, they can't price people out. You know, for me, it crystallizes when I think about our industry and commercial real estate, when we have a multiple bid situation with commercial property, the nine times out of 10, it is the owner that is going to be able to pay the most for it. And it is essentially the same thing in, in, I mean, in a sense where they are purchasing and leasing back to their own company.
And it is this idea that they have all the mechanisms to be the one that can pay the most. So to your point, it kind of has a similar thread of, you know, comparing the institution that they can do everything that you are doing as the purchaser, but they can't eliminate every single tree. They can have scale, but they can eliminate every single transaction costs.
Kevin (39m 5s): Yeah, yeah. But yeah, it is very similar there. They can decide if you're, if you own it and they're the tenant, they, they have their own reasons for whether they would close the store down and, and not renew the lease or whatever. They don't care if that's a cost to you, but, but if they're their own landlord, well, now you can account for all the costs and maybe they'd stay a few more years and yeah, exactly. It's and so we, we basically regulated a bunch of American households out of being able to make that decision on the March.
Jesse (39m 39s): So we're coming up to the end of the, the time here. I think we, we definitely have to get you back on Kevin re I'm. Sure we could talk a little bit more about your book and the current situation or current, you know, place that we're in economically, but before we do, you know, give people direction on where they can go to reach out to you, maybe we talk a little bit about, you know, where you see trends are going right now with, you know, we're in the beginning and of Q1 20, 22, you know, is there anything that people should be looking out for from real estate or economics point of view that you'd like to touch on?
Kevin (40m 16s): I'd say it's a little bit the same in a little bit different than what was happening in 2004 and five. Again, it's, it's the same story in that rents are what's driving prices in a way that's much more connected and important that people are giving group credit for it. And in fact, I, one of the things I think is sort of funny about the, all these sort of public conversations happening is you get a conversation over here, you know, oh, you know, rent inflation is really high. And you know, the CPI rent inflation is lagging, but you know, the, the indexes that follow, you know, market rents on new units, they're up double digits.
And so these across the country, right? So you have that conversation that, oh, rents are through the roof. And so that conversation tends to be about oh, inflation and monetary policy. So we need to, we need to slow down the economy because people have too much money. Then there's this other conversation that, oh, prices are through the roof. And it, and it's because mortgage rates are too low. And so people are overpaying for houses and, and it's a whole totally different conversation.
But it's based on this idea that the fed controls, the interest rate, which they don't, the fed couldn't make mortgage rates 6%. If they, they, we would be trade. We would be bartering seashells for things before they could get Margaret trace to 5%, they'd have to suck every dollar out of the fact, that's what happened in 2008, they literally would have had to suck every dollar out of the economy to hit their 2% rate a target in 2008. And, and they couldn't, and they ended up creating a financial crisis.
So, but there's this idea that the fed controls that rate. And so now they have to raise rates to S to lower those prices because the prices, well, those things are related. High prices are high because rents are high and they're both high because we don't have enough supply. And, but the thing that makes it different in 2005 is that back then, it was very localized. That prices were going up in these, in these individual metropolitan areas that, that were, that specifically have local supply problems.
When we put this donut hole in the middle of the American housing buyer market. Now we've created a supply crisis in every city in the country. So rents are going up everywhere. Like they had been only going up in the coastal metropolises and those, those housing costs take on a, in fact, I got some papers that I'm, that we'll be publishing pretty soon. I've been working on this, this idea that when there's limited supply in a city, it takes a very peculiar picture.
It's the low end of the city where prices and rents get ratcheted up by that lack of supply. Because at th at the high end, people can substitute down. Like if, if you're making $200,000 a year in San Francisco, you're not going to buy the same house. You'd buy in Phoenix. What you're going to do a substitute down to a neighborhood that should, the people that live in that neighborhood should be able to making 70,000 a year, but you're taking one of their houses because you, because you're not going to spend the money. Right. So all that pressure gets pushed down, down, down and down in the market.
So all the, all the cost pressure ends up getting, getting loaded at the low end until finally somebody making $50,000 a year moves out of town because they just can't take the cost anymore, but you can see this. So for instance, in the last five or six years, rent inflation is through the roof in every city, but it's very income specific in the, in, in the neighborhoods, in a city where incomes are low, every city is seeing double digit inflation rents at the high end are pretty stable. So you get this weird market where yeah.
Prices are going up at the high end of every city. And yeah, those are, you know, somewhat related to low interest rates. So there is some, there is a little bit of, of price to rent ratio expansion at the top end, which is, you know, it's still a fundamental it's rates are low and they're low for fundamental reasons at the low end prices are going up more than that. Then they are at the high end, but it's purely a rent function. It's purely because rents are going up so much more than women.
So the irony is, yeah, there is some, some expansion in the ratios, but the, the homes where the homes whose prices have gone up the most are the homes where ratio expansion is the least important fact. It's, it's rents that are driving the places that are going up the most. That's not going to reverse overnight. Like we need to build millions of homes to stop that process. Now, I, I see again, you know, where it's second best alternatives.
We should be building a bunch of condos in New York city in LA, and we're not. So the best, second best alternative is to build whatever we can everywhere else. So, you know, we have second best, you know, we start with the second best, you know, we should be building homes or condos in LA and San Francisco. We can't. So we built, so we try to build them everywhere else. You know, that means a lot of people would be building a lot of single family homes in the suburbs and all these other cities. Now we won't let it that a lot of them do it.
So now it's like the best alternative is to let institutions build them and rent them out. So, you know, if that's the only solution we allow for ourselves, then that's the only way we're going to bring down rents and that's going to be a long drawn out process. But I certainly don't take any, Hey, I don't think anybody needs to worry about mortgage rates going to 7%, all of a sudden, and be even if mortgage rates go up a little, I don't think low rates are really what's driving the market.
So housing, I think, and real estate, General's a very interesting sector now because it really is sort of both offensive defense. You know, there's, the rents are going to keep rising until we meet the demand with adequate supply. And so there's going to be a natural continuing price appreciation. And the only way that that's going to stop is for the home builders and the, and the private equity, you know, multiunit built companies to, to do what they do and do more of it.
And so to me, there's nothing, but you know, nothing but growth ahead, either in supply or in prices. And yeah, so, you know, I'm shocked at the, you know, I think there's so much worry in the market about reliving 2008. To me, you look at some of the valuations on home builders. It's, it's just insanity. They're trading at legitimate PE ratios of two or three points on forward PE ratios. And, you know, I don't see any legitimate reason to think their earnings are going anywhere.
Jesse (47m 19s): Well, we definitely need to delve into, I guess, the, the state of the economy now and, and what we see coming down the pike, because I think it's, it's another conversation Kevin, for individuals that want to, you know, get in contact, or just want to get exposed to some of the writings that you, that you're doing. And you mentioned a couple of papers as well. I work in working people, working, you send them to online.
Kevin (47m 45s): I have my Twitter handle is K Erdman and you can see the, the papers that'll be coming out will be Mercatus papers. And so my, my scholar page at Mercatus is probably a good spot to, to dig into. And including that, that the, the post you referenced was from, was it, I forget how many parts were in that say it was a long series. I did back a couple of years ago on housing affordability.
And so that you would find in that series, that the murkiness and scholar page.
Jesse (48m 19s): Yeah. We'll put a link up to that. And we'll, we'll link the, the two books on Amazon building from the ground up and shut out. So we'll have links. If anybody's interested there, just check out the show notes
Kevin (48m 33s): In my DMS are open at Twitter. If anybody wants to home,
Jesse (48m 38s): My guest today has been Kevin Erdman. Kevin, thank you for being part of working capital.
Kevin (48m 43s): Thanks.
Jesse (48m 51s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse, for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.
Rosa Lupo is a partner in the Corporate Commercial Group based in Gowling WLG's Waterloo Region office. With nearly two decades of experience, Rosa practises in all areas of Corporate Commercial Law with an emphasis on Mergers and Acquisitions, Debt and Equity Financings, Licensing and Distribution Agreements, and Real Estate. As a member of the firm's Real Estate Group, Rosa has experience in the area of Real Estate law. She has assisted her clients with respect to the development, leasing, purchase and sale of commercial and multi-residential Real Estate projects. In this episode we talked about:
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Rosa`s Bio & Background
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The Legal Profession
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Top 5 Issues facing Landlords and Tenants in Leasing
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Subleasing vs Assignments
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Agreements to Agree
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Diversity in Real Estate
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Recommendations to younger people coming into the Commercial Real Estate Space
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Trends and Opportunities Outlook
Useful links:
rosa.lupo@gowlingwlg.com
https://gowlingwlg.com/en/
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jessica galley, and you're listening to working capital the real estate podcast. My special guest today is Rosa Lupo. Rosa is a partner in the corporate commercial group at gala links with nearly two decades of experience Rosa practices in all areas of corporate commercial law with an emphasis on mergers and acquisitions, debt and equity financing.
Rosa is also a member of the real estate group at gatherings. She has experienced in the area of real estate law. She has assisted her clients with respect to the development, leasing purchase and sale of all commercial and multi residential real estate projects. Rosa, how are you?
Rosa (55s): I'm good. How are you doing? Just,
Jesse (57s): Just happy I got through that. Unscaved your day is your day is going to go in. Well, we've got a, a unusually warm weather today in, in March, early March in Toronto.
Rosa (1m 10s): Yeah, it's pretty warm here today too, which I'm a little bit annoyed at, to be honest with you because it didn't start out warm, which is when I wanted it warm to get outside before my day started. And now that I'm stuck inside working, it's warm. So
Jesse (1m 24s): Yeah, you can have the spring
Rosa (1m 25s): In Canada,
Jesse (1m 26s): A hundred percent, a hundred percent. Well, thanks so much for coming on. Rosa. Really think that listeners will get a, a lot of good information and value in this episode. I, you know, we we'd like to have on the podcast real estate expert in experts, in different areas of real estate, whether that's accounting, legal property management. And I think with your background from a legal perspective, it would be great to have this conversation today kind of revolve around aspects of leasing when it comes to commercial properties, as well as talk a little bit about development and you know, how contracts are structured.
And basically, you know what we're thinking, the outlook looks like for real estate transactions in the near to midterm. So we're going to ask for a bit of a crystal ball there. So before we get started for those that, you know, aren't familiar with yourself, maybe you could give a little bit of a background as to how you got into the, the wild west of real estate and real estate law.
Rosa (2m 24s): Sure. That'd be great. So I have been at gasoline now for over 20 years. I'm what we call a lifer at Galileans I articled at Galileans and then returned as a first-year associate, became a partner in 2008 and am now ahead of our business law department in the Waterloo office and also our Waterloo lead on and our real estate NPG. So, and NPG is national practice group. I should probably clarify that. So, so I've been here and I've been in the region.
I grew up in wealth and I've been in the, my whole life. And as far as how I started in law, you know, lots of people give great stories about, I wanted to help people and I wanted to make a difference in the world. And I liked LA law in my teens and I, I got really hooked on that show and I thought, man, that is something I could do. And I've probably dated myself now as well saying that I watched LA law in my teens because you may not even know what show that is.
Jesse (3m 31s): Yeah. I'm, I'm aware of LA law, but some listeners might not
Rosa (3m 34s): Good. Good. So, so I watched that show of religiously and, and enjoyed the energy and, and, and I've always liked to argue and I've always liked to make a point and I've always been a person of great equilibrium. So I can always see the other side, which is a real strength in, in being a lawyer. And so I went to a business school in my undergraduate. I did an honors commerce because I wanted something real to fall back on.
And I did that. And then I took two years and I worked for two years at an advertising agency, which has nothing to do with the law. It's the wild west of business. And I did that in Toronto for a couple of years and then went to law school and also did my MBA at the same time. So I did both programs in three years instead of in four, and then came to Kitchener, Waterloo, looking for a job to article and landed at Gowling WLG.
And it had been there ever since.
Jesse (4m 41s): So for those that don't know, it's one of our largest law firms in, I think probably one largest in Canada for, for the U S listeners, trying to kind of understand, you know, the scope of the scope of the company in terms of, you know, how you came up through the legal profession. Was it something that you jumped into real estate off the hop, or did you start in, in different areas of commercial law and then move into real estate?
Rosa (5m 6s): So that's an interesting question because I didn't, I started off in the corporate commercial department. I actually went to law school thinking that I wanted to do labor and employment law. And because that's what I focused in, in my undergrad and on my honors commerce. And I thought that's what I wanted to do. And I did do it for two years and hated it. So, so didn't stay in that area and got back into corporate commercial and really had an aptitude for the real estate piece of it.
I could just, for me, it was something that made sense. You know, dirt always makes sense. We, we don't, we don't, it's not sexy calling that a, you do dirt law. It's not as sexy as saying I'm an M and a or securities lawyer, but the reality is, is that it hits every area of law. So every M and a deal that happens, somebody is either only property leasing property, every securities transaction that happens. Some entity within that corporate structure has an interest in land, either as a tenant, a landlord or an owner.
And so it actually permeates pretty much every area of law. And I just felt like I had a real aptitude towards that and it, and I kind of fell into it again, I'd love to say I had this big master plan, but I really didn't. It was a need at the office at the time when I was coming through as an associate, I really enjoyed it. And I remained there.
Jesse (6m 35s): That makes sense. So a little bit of a career pivot there. I feel like the labor, the labor lawyers are pretty active over the last two years.
Rosa (6m 42s): Yeah. I'm glad I'm not in it. Over the last two years, it has been head spinning over the last few years, for sure. The amount of changes that have come through and the amount of clients that are looking to our labor and employment group at gasoline for answers, because we, you know, everything's changing on a daily basis, what is the new law? And what's going on? And new legislation was being passed and new rules and new terms of engagement with employees and our labor and employment group has been extremely busy over the last two years.
And their head is spinning. I'm sure at this point with the latest amount of changes with COVID. And so it's an area I'm glad in right now, especially, but it has been very busy.
Jesse (7m 26s): So speaking of head spinning, we thought we'd kick this off with a little bit of a conversation about landlords and tenants and kind of the relationship between those two stakeholders. I think a lot of, a lot of our listeners are investors. And a lot of times we get caught up in the acquisition of deals and, and analyzing it from, you know, the vendor and the purchaser's point of view, but really the nuts and bolts of our industry is, is lease or lease agreements is the relationship between those stakeholders.
So you mentioned that what would be, be able to give us a framework here was top five issues facing landlords and tenants to kind of give us a little bit of a way to navigate this. So maybe I'll turn it to you. Well, first of all, you know, when you analyze or you're working with clients from a leasing perspective, you know, what are those things that you're looking out for, you know, off the hop and you know, whether you're representing the tenant or the landlord?
Rosa (8m 27s): Yeah. The interesting piece about that is that the issues are actually pretty much the top five on both sides. It's just that they, they see it in a very different way. So the reality is that the issue itself of what the two sides are facing is the same. And it's the areas that are the highly negotiated areas of a lease. And every commercial lease that we do, and the biggest one is always maintenance and repairs. And so when it comes to maintenance and repairs, the there's two questions you have to ask.
And that's the other thing that people forget to ask it's, who's doing it. And then who's paying forward because we're not always the same person and in a commercial lease, there's all sorts of things to be concerned about. So the landlord wants to make sure that base rent is, is complete profit, right? That repairs and maintenance, all of it is covered from the tenants perspective. They want to make sure that they're not getting charged to make the landlord's building pretty for the next tenant.
And, and there are things that drive that. So in, in most instances, if the tenant is a smaller tenant of a larger building, then they'll just pay their proportionate share. And they don't really have a lot of concerns. They wouldn't be doing the repairs and the maintenance, it would be the landlord doing it and passing it on in people call it off costs, you know, operating costs, people call it a cam. It's all the same thing at the end of the day. It's everything that's in addition to base rent. And so if you're a smaller tenant in a larger building, not as much concerned about it, because you know, really what the landlord's doing is maintaining the building in a reasonable manner.
And you're going to get your proportionate share where it becomes really interesting and contentious is if you're the sole tenant. So if you're the sole tenant in an industrial building, or you're the sole tenant in a distribution center, well, that becomes interesting because now there's the risk. If you're the tenant that the landlord doesn't maybe repair and maintain throughout the term and chooses to do a lot of repairs and maintenance and upgrades at the end of the term, if you're not renewing, because they would maybe want a shiny new, better building to show to prospective tenants.
And if you're not careful in the lease to deal with things like capital costs, then you could be on the hook as the tenant. And the last couple of years of your lease with these huge expenditures for repairs and maintenance, and you don't get the benefit of those. And so it's finding that balance where the landlord wants to maintain their building. They don't want the tenant to tell them when to do things because they own it, but the tenant has some risk in that and some skin in the game because they're occupying and it's finding that balance to maintain it in a prudent manner, but not to overly burdened the tenant with costs that they don't get the benefits of.
And so it is a highly negotiated term.
Jesse (11m 29s): So on that kind of demarcation between capital expenditures, which, which would not be downloaded to the tenants as opposed to a cost that that would be normal maintenance. So in, in your additional rent figure, so for instance, a landlord does a new roof say there's an office building with three tenants. It would be that, that you're saying depending on how the lease is negotiated, that you want to be careful about. If that is, if the expectation is that that's going to be downloaded to the tenants proportionately, or if it's going to be something that the landlord is going to take on, on his or her own.
Rosa (12m 6s): Right. Exactly. And, and again, it's who does it, and then who pays for it? So the landlord is probably going to repair the roof. It's not going to be up to the tenant to do it, but then how are they expensing it and how are they charging the tenants for it is the question. So if it's just a repair and the roof is exactly the same, that means that it gets expensed in the year in which you incur it. And all of those costs go to that tenant. If they're in the last year of their lease, they're not going to want to pay for a brand new lead group that they don't get the benefit of for the rest of the term.
Jesse (12m 38s): Yeah. I was just laughing there because it just reminded me of first year in accounting where they're like, is it a repair or replacement? Well, what if it's this piece? And then this piece, and then this piece, and you've got to kind of take a holistic look at what exactly is being done. Okay. So that would be kind of off the, you know, from the outset maintenance and repair, that's definitely one, we come across all the time and it is something that, that the lawyers, you know, like yourself, they go back and forth on what would, what would be the next one,
Rosa (13m 5s): Th the next one's the assignment, Elise. And again, both parties are equally interested in what's happening. So from the landlord's perspective, as you're aware, when you get a tenant, there's a lot of work that the landlord puts in to getting this tenant, right. They might have expended costs on leasehold improvements. They might've financed the leasehold improvements for the tenant. They've, pre-qualified that tenant and probably reviewed financial statements and historical statements to make sure that they can carry the lease because they don't want to tenants that can't carry the costs.
So they've put a lot of energy and time and costs up front for this particular tenant. So they are very lows to have that tenant, then just assign it to somebody else who they don't know at the same time on the, from the tenants perspective. Again, it's all a balancing act, but from the tenants perspective, they're running a business. And if they sell all of their assets, they don't want the landlord to be able to say, no, you can't sell your business.
Or if they are a large multi-national tenant that has a parent in the U S and they have Canadian operations, the us, parent's not going to want a local landlord to tell them that they can't do a reorganization within their corporate structure, or if they are a business and they're selling their shares because they have an exit strategy. So they're going to sell their shares. Well, that's a change control, and that's usually captured in a lease to say, you can't do that again, because the landlord has spent all this time to pre-qualify its tenant.
And so it's a balancing act there to kind of reach the right balance where the tenant is not bootstrapped and can do things in their business and not have to be reliant on a landlord and individual landlord at one particular premise consenting or not consenting. But at the same time, recognizing that the landlord has an interest in who has who the tenant is and what they're doing and what their finances are. So the tenant cannot have carte blanche either to do whatever it wants.
So,
Jesse (15m 13s): Yeah, go ahead.
Rosa (15m 14s): No, I was gonna say, so you gotta, you gotta meet a middle ground there.
Jesse (15m 18s): Yeah. I was just going to say one thing we found that was a recurring theme over, especially over the last five to 10 years, is that now that there have been more technology companies, startups in Toronto, a lot of these companies, they don't have a time horizon of 5, 10, 15 years was trying to get past the next month. And often times we, we kept running into the same problem, usually under the transfers section of the lease saying, well, wait a minute, like, we're our whole goal here is to sell in five years. So this idea of, and of having them, you know, be able to do so now, is it correct to say that the, the, the quid pro quo for that, or, or the, the compromise for that is potentially staying on covenant or the, or the landlord being the one to determine at their discretion?
If the transfer E I think is, is acceptable to them as a, as a tenant.
Rosa (16m 8s): So what we try to do is rather than giving just a cart launch like that, to say that they have to be satisfied with the transferee, for the landlord to say, yay or nay, or yes or no, or stand in the way of this deal. We try to put some parameters around it if we're acting for a tenant. So what we say upfront is if the purchaser is actually an entity that has at least the same value as the existing tenant. So the landlord has the right to find out how much value and how much equity and what the financial statements look like of the purchaser.
But if they are as strong, a covenant or greater than the current tenant, you will consent. And so we have that upfront because the other risk from the tenants perspective, although most landlords are not like this, but if you're in year three of a lease and you've negotiated a really good market rent three years ago, and rents have gone up extraordinarily, and there's high demand, landlords could use the request for consent as a reason to get out of the lease and realist the property to somebody else.
And that could actually scupper the tenants deal. If that's a key location for them, if the purchaser needs that location that could scupper their deal. So the reality is that the tenant has some skin in the game and doesn't want to lose that. And so that's why we try to get some parameters upfront to say, this is reasonable, this isn't. And so you can't say no. In these instances,
Jesse (17m 42s): I remember when I first got into the industry, when somebody explained that portion of it, you know, going to the landlord saying, we want to sublease, or we want to assign, and then they said, okay, you said, you said you wanted to, and then now they have all, all different rights. You know, it always reminded me kind of like kids on the playground say, no, no, no, I was joking. Don't, you know?
Rosa (18m 2s): Yeah. And you're talking about the provision that actually says, if you come to for consent, they can terminate. And then, and then the tenant gets to say, no, no, forget it. I don't want that. I don't want to assign it yet. You know? And the, and the problem is is that if you just asked for a sublease or an assignment, because you didn't want to be there anymore, you might have the option to say, forget it. I don't want to assign it. But if you're actually like a tech startup, and you're about to sell for a hundred million dollars, are you really gonna like, kill your a hundred million dollar deal? Because a world landlord at one location, you're not like this, it's not feasible to say I'll revoke my request, but you could lose those premises for that rent.
Jesse (18m 40s): No, that, that makes sense. Okay. So that's a assignments. And maybe even before we move to number three, it's something that comes up. I find with younger people, especially on the brokerage and when they get into the industry, there's always a confusion as to what we're talking about in assignments and, and the distinction between that and subleasing or sublets. Could you just touch on, you know, the broadly the difference between the two?
Rosa (19m 5s): Yeah. So a sublet is I'm company. A and I occupy these thousand square feet. And now I want actually company B to occupy either a portion or all of the thousands of square feet instead of me. And that's really a sublet and the landlord absolutely should have the right to consent to a sublet because the reality is, is that they've got new people on the premises. They want to check what kind of business they're running for insurance purposes. Again, they want to know what's happening for rent and to make sure they have enough money to pay the rent.
The difference on a sublet is that company B has no direct relationship with the landlord. Their only relationship is with company aid was the tenant. So company automatically remains on the covenant. As you said earlier, just they remain on the covenant. They are the ones with the lease with the landlord that have the obligations for the rent company, B has an obligation to company eight only not to the landlord directly. The difference on an assignment is that company a, maybe wants to leave the premises and actually have company B come in and to occupy the whole thing.
And they're going to assign the lease. And that actually means that then company B has a direct relationship with the landlord. The other thing that I think most people miss is that in most leases an assignment, although at law, this is not an assignment, but they include language that says, if you change control and you sell your business. So if you sell the shares at company eight, we're going to say that's an assignment. And that legally is not an assignment. That's actually just the change of control.
And you can do that without assigning, But most leases by contract scoop that in.
Jesse (20m 53s): Yeah. It kind of reminds me of, I was just reading a, kind of a bankruptcy ruling and talking about how prepaid rent a, you know, security deposits and prepaid rent. You have to be very clear, which ones are the tenants and which ones are the landlord where oftentimes, like you said, at law, people write in, no, no, no. It was a security deposit. You know how I know I wrote security deposit and it's like, well, that's not, you know, you have to be really clear in these, in these things. And it's why we have, you know, people like you actually looking at these documents before we have our clients sign. Okay. So,
Rosa (21m 22s): Well, it is funny because I would say that in most instances, it's funny leases are probably one of the least reviewed material contracts that a company will enter into. And I think it's because they talk about it in terms of the $12 a square foot. And you're like, wow, it's $12, right. But if you actually take the $12, $24, depending on what you're leasing, but if you actually take that and multiply it by the square feet and then multiply it by the five-year term, it's probably the biggest contract that company will ever sign.
And they will often not have it reviewed by lawyers because it looks like $12, but it's not.
Jesse (22m 3s): Yeah, that's a really good point. I've never thought it thought about it that way. Cause it really is. If you take a look at the consideration, you know, and then if you really start putting in, you know, the likelihood of renewing options, these, these contracts are, can get very expensive very quickly, even for small space,
Rosa (22m 18s): Right?
Jesse (22m 19s): So assignment and subleases maintenance and repairs, number one, assignments and subleases or assignments number two, what, what it takes to the third spot.
Rosa (22m 28s): Well, the other, the third one, for sure. It's funny. Cause we just talked about that as damage and destruction. So again, in most contracts, you're not worried about fire and water damage and floods and all of those occurrences, you don't deal with that. But because a lease is a dealing with physical premises and B over a term, as you say, it's, you know, your typical terms five years plus a five-year renewal, lots of leases are much longer than that, even. So over that time, you gotta think things can go bad, right?
So something's going to happen. And so the damage and destruction is a key provision. And so from the landlord's perspective, if they have a building that is occupied by many tenants, they do not want you to touch that section when you come to negotiating the lease because they don't want to have to rebuild for this tenant, but not rebuild for that tenant. And it has to be the same across the building, because if there's a fire, pretty much everybody in the building is going to be affected in one way or another.
Or if there's a flood, pretty much everybody's going to be affected. So they don't want to have different obligations for different tenants. So if you are a small tenant in a larger building, you're pretty much not going to be able to negotiate that section, then what you do to cover because you go to your insurer and make sure they have business interruption insurance for as long as what's in your lease that says, you're going to give the landlord this long to rebuild because you won't have those premises, but you will still have the obligation under the lease to continue to pay rent and to go back when it is rebuilt.
So you got to make sure that you have insurance coverage for your rental amount.
Jesse (24m 8s): It
Rosa (24m 8s): Changes, oh, sorry.
Jesse (24m 9s): Just a quick question on that. So would that be kind of the umbrella, be careful to say the word umbrella regarding insurance, but we, for a long time in Toronto, $2 million liability insurance was our recommendation to tenants. Now I think table stakes are 5 million for the most part that would cover the, this type of interruption that you're describing.
Rosa (24m 28s): Yeah. So business interruption insurance is usually different than your liability, which is what you're talking about, which is like slip and falls and things happening. I think it might be covered under the actual general liability, but it is its own its own a line item. And you, you have to read the fine lines because you have to figure out how long are you covered for and how many months of rent in case there is damage.
Jesse (24m 52s): Got it.
Rosa (24m 53s): Yeah. And so if you are though the sole tenant in a building in a, in a distribution center again or in an industrial law and you're the sole tenant, well now you might have some more negotiating power to, to actually do something that's bespoke between you and the landlord. And in that instance, it's very important for us tenants that the landlord is obligated to rebuild, especially if this is your sole premises and you can't move to anything else. So you want to make sure that there is very good language for you to say that the landlord real will rebuild the building.
So you have somewhere to go. You may, you you'll have to find swing space at some sport at some point and find somewhere to be in the meantime, but you want to be able to go back if it's your sole place. And so in that instance, the tenant might have more negotiating ability to actually have some damage and destruction provision that works for them.
Jesse (25m 49s): Okay. And that is not a bar in Toronto swing spaces. Other space you utilize at the time.
Rosa (25m 55s): Yes. Well not a bar.
Jesse (25m 58s): Okay.
Rosa (25m 59s): Yeah, for sure.
Jesse (26m 1s): So, okay. So that, that makes sense. And so what would be next? Rosa? What do we, what do we have for number four?
Rosa (26m 8s): I think environmental and you know, and I'm, I'm clearly this is not an office building, right? Cause that, that generally doesn't have a lot of risks. But when you start talking about distribution centers or you started talking about industrial environmental is a big deal and it is a heavily negotiated provision. And, and what the landlord wants from their perspective is they may not be at that building on daily basis, right. You're running your operations, but they're an owner. So they have some risks.
Vis-a-vis the Moe, if there's contamination. So they want to be made whole, they want to know that you as tenant are going to clean up whatever shows up on that property or look after it. The flip side to that from the tennis perspective is there's all sorts of reasons. There could be contamination there and it may not be at their fault. So there may be preexisting examined a contamination on the premises. It may have migrated from adjoining lands. And so they want to make sure that they don't have an obligation to actually clean up, unless it's something they did against what the rules are and how they run their business.
So if they're doing everything they need to versus the Moe and handling their hazardous materials correctly, in accordance with guidelines, they don't want to be on the hook for something that migrated from an adjoining property owner or from something that pre-existed, and the way you get there on the preexisting is if it's an industrial or a distribution center as a tenant, you should do an environmental test. You should do a phase one or phase two before you commenced. So you have a bright line test of what did preexist and what you caused post, because if it's discovered that there's gas under underground and that's at year three of your lease, how do you know from when it was there?
And so you need that bright line test and, and then you usually try to carve out anything in the lease that migrates from adjoining lands that you didn't actually, cause if you caused it, you're on book and you've got accept that liability as tenant. And I don't mean you in the instance of just the tenant, it's anybody they're responsible for their invitees. If somebody comes on, that's delivering stuff and spills, that's still the tenant's fault. So that's okay. What you're trying to alleviate as all these other liability issues.
Jesse (28m 32s): I would say this is an interesting one in the sense that when I'm typically drafting offers to lease or letters of intent, there's some clearly there's key points. There's term there's rent. Environmental is probably the one I find that is not translated from often, oftentimes not even there in the offer to lease that is expounded on and debated much more in the, in the lease stage. And that, I mean, part of that is probably the fact that, you know, we're not the subject matter experts on that, but it's a good point because, you know, I'm sure there are certain states have their provisions.
I'm not a hundred percent sure on different provinces, but USTs are underground storage tanks. For instance, there, you know, we have by law, you have to take those out of the ground. If, if you find them, would this be a, also an example though, of how business terms can kind of crowd out legal, legal recommendations in the sense that in a hot market, I could only imagine like industrial right now where you have Mr. Landlord is, is the request of the tenant is to do this phase phase one or phase two, but he or she has multiple other tenants and maybe he doesn't want to go down that, that kind of rabbit hole for lack of a better.
Rosa (29m 42s): Yeah, for sure. And it's interesting you say that because I think all of my top five are not covered in the offer abilities. Right. For sure. And, and, and it slows things down when you get to the negotiations and, and I think the parties for sure, in today's market, that's so hot and everybody's moving so fast and then you start humming and Hine about who caused the environmental contamination and, and everybody's annoying. And, and we feel that as the lawyers and, and all we can do is advise our clients right.
And give them the advice and warn them. My hope is that in year four, when something happens on the environmental, they hear my words and say, oh, she was right. But, but the likelihood, the reality is is that probably a 90% of the instances, there's not going to be any contamination and it's going to be okay. Right. But that's not what we guard against. And not when we negotiate contracts, it's not the 90%, the 10,
Jesse (30m 40s): Yeah. It's those low probability high impact or high risk aspects. I will say this though, Rosa, I am, I am a good boy most of the time. And at the very least like assignments and subleases, those are absolutely in our, in our letters of intent or offers to Lisa at this point, because it is something that materially impacts the deal. If they start negotiating after, and, and the two parties had different views of, of what they think should be the case. Okay. So that's environmental. So what do, what do we cap off with?
I think that's, this is number five.
Rosa (31m 12s): Yeah. So I think this one's kind of about bacon space and how it, and two things that it affects. So when there's vacancies, which there are not a lot of right now. So I'm talking back from my history of my, of my, my career when there was vacancies and, and people used to apply to get real estate tax breaks for vacancies and properties. We don't see that anymore because there aren't any, but for sure when there's vacancies, there's a couple of things to be careful of.
So the landlord, again, wants to be made whole on the building, whether there's vacancies or not. And so when we're talking about proportionate share in a, lease the tenant at the same time, doesn't want to suddenly have their proportionate share increased because they've got to pay for vacancies. And so the way that common area costs and operating costs work when you're one tenant with several tenants in a building, is that there's this concept of proportionate share. And it's calculated by saying the number of square feet of your space on the numerator and the number of square feet, square feet of the total building on, on the denominator.
And that's your percentage of those costs. There is often language that creeps into leases that says if there's a vacancy, every other tenant that is occupying will bump up their proportionate, share by a certain amount to cover those vacancies and tenants don't realize that that's what's in there. And then they're usually surprised during the term. And so it's just being aware of that and knowing that and knowing what kind of building you're going into. The one that is always gets me though, is that I have had some tenants when I point this out to them and we start talking about it, but then say, but you know, maybe it's a strip mall and it was six years ago.
And they say, well, but there's four stores that are empty there. And it's like, okay, but you're, you're paying that now. So you're, you're paying that from day one, you're paying for those vacant spaces. So that's it, you know, when they go into it with open eyes, they understand that
Jesse (33m 15s): It's funny, you bring this up. This was probably when I first started in brokerage, probably one of the most confusing aspects of explaining things to your clients. And it was kind of one of those jokes where we don't tell clients, or we try not to explain rates in terms of net effective rates. And it doesn't really matter for listeners. You know what? You can look that up what that is, but you get down a rabbit hole of getting into the minutia, the deal with this one, correct me if I'm wrong, we often see it as gross up that you gross up the building. And a lot of times the closet you'll see, you know, assuming that even if it's 50% vacant, we assume 99% or 95% or a hundred percent occupied.
And that, yeah, that was one where, oh, man, I needed people like you to kind of walk me through it. Because from a, just kind of a layperson's perspective, when we have clients, they, they were from a fairness point of view. They're like, no, that doesn't make sense. Why am I, why am I paying if it's half full?
Rosa (34m 10s): Right. Right. And, and, but from the landlord's perspective, they want to make sure that the hallways and the reception area and the elevator banks, that all of that maintenance is being paid for no matter how many tenants are there, the building, because even if there aren't even if all the building is in full, you know, you think your typical office building where you walk into reception, you use the elevator banks, you go up to four or five, there's 10 floors. Let's say only half of the building, even though you're only using half of the building, you're using all of that area, that half that's there, right?
Like that's the flip side to that story. And they have to pay to maintain the lights on the heat, on fixing the elevators, cleaning it, all of that for that elevator bank, the HVAC that runs the whole building, the reception area, they have to pay for all that. So that's the flip side story to that, right? Yeah.
Jesse (35m 2s): I used to always use just because to me, the, the most non-variable cost was security cameras. So I used to always explain it from that point of view that, you know, whether it's one, 10 at 10 tenants, five tenants that you're going to have to have the, the building monitored for security and just cause you know, a couple of tenants leave doesn't mean you shut off half of the cameras, but, but all those other ones are a hundred percent. That makes sense. Yeah. I do have a question. So th so those are the five, I think it's a great framework for people that don't think about this as often, or even, you know, people like myself that do work with us on a day-to-day basis.
What I, what I'm curious to talk about, just it touches all of these things. And it was something that I realized pretty early in my career that we are oftentimes as brokers, we're given kind of this leeway or latitude to write offers and write letters of intent, oftentimes maybe without knowing, binding making your, your client bound to a deal. And I think there's some best practices when it comes to making sure that if you're negotiating a non-binding LOI, make sure that's, you know, indicated and is, and is clear because oftentimes early in my career, or even, you know, with younger individuals, I would see that they would take this off or at least give it to the lawyer.
And the lawyer would be like, well, I'm hamstrung here on a lot of things. So I'm just curious what your thoughts are on, on the process. And, and when our clients should be thinking about legal or engaging legal.
Rosa (36m 29s): So I think two things, the, the legal doesn't have to get too, too involved in the offer to lease there's two key areas where they can offer some value. And the reality is is that you, as the realtors are the best people to do that offered a lease because I don't have comparables for other space. I don't have the market knowledge about, you know, what is rent for this type of building? What else is available in the area?
I don't, I don't have access to that. So you're the best one to do that, to hammer out those business terms, the piece that the lawyers have to make sure they're happy with is aid it, make it a hundred percent clear that it is non-binding because my problem with most offers to lease and especially the urea commercial offer to lease it, actually doesn't say it's non-binding right. Actually it doesn't say that it says offer to lease. And the fact that you use the term offer does not inherently make it binding.
You have to say, it's, non-binding what the landlord doesn't want is they don't want the tenant to then in the lease to renegotiate those business terms. And that's a fair ask. So you can be very clear to say the offer is nonbinding, but neither party will renegotiate the business terms that are clearly here. Because as we said, a lot of the terms that I mentioned as the top five are not in your offered. At least it only comes up in the lease context. And so you can meet that middle ground by having that language.
And then the other piece that's key from the tenants perspective is for example, on the urea offered, at least the provision that talks about delivering the lease actually says it will be the landlord standard form. And so that leaves the tenant, no room to negotiate. All of these things that we just talked about today that are not in the offer to lease, you have to actually sign it in the landlord's standard form. So one little tweak to that section, which is it will be in the landlord standard form was such reasonable amendments as requested by the tenant.
It's all you need in order to give you enough room to negotiate these other trucks.
Jesse (38m 42s): Yeah. And then that makes a lot of sense. And I guess the, the, so for those that don't, aren't aware of Maria Ontario, real estate association, you know, every state and province has some version of this, or I think every, every one does, we oftentimes don't use those. I find commercial, especially office leasing. You know, we talked to folks like yourself that try to inform our boiler plate, but then, you know, just for that, but from a, from a kind of legal philosophical point of view, I'm always curious of lawyers views on the agreement to agree, because like you said, we're taking a document that's five, maybe even less pages long, turning it into document that's could be 60, 7,000 pages.
So from that perspective, you know, what is the reasonable test? You know, when you have these terms agreed to, but like you said, a lot of these are not even covered in the offer. So there has to be some good faith happening one once you are at the least stage, even though you, you know, you technically agreed that you would agree.
Rosa (39m 45s): Yeah. And so I think there's a, there's always in every negotiation, there's a duty to negotiate in good faith at law for both parties. So you have to be fair in your negotiation from the lawyer's present perspective, whether it's a lease, whether it's an M and a transaction, when there's an non-binding LOI signed, we do tell our clients because it is very true that if something's written in black and white in that LOI man, we are going to have a tough time to negotiate it differently in the definitive agreement, in the final lease, share, purchase agreement, whatever that is.
If you've said, you know, the rent, the base rent is this per square foot, there is no way I'm going to be able to successfully negotiate it at a different grant. Right? So if you've said in there that you're going to pay common area costs and cover, you know, landscape, garbage removal cleaning, and those things are listed. I'm going to have a really tough time in the lease. Even if, even though that original agreement is not binding to get those out. So whatever's covered in black and white, you know, we're, we're going to respect the deal that the two parties struck at the offer letter and maintain it in the final agreement, the rest of the terms that are not covered, because you can't, you can't cover it all or else you'd be just jumping to the final agreement.
Those everybody's just going to negotiate in good faith and be reasonable. And I think that's the way it goes. And, and, and the reality is I think most tenants and their lawyers understand that this is the landlord's building, right. And they have lots of tenants in there, and this is they're the owner. And so you have to be reasonable with how you're negotiating those terms.
Jesse (41m 29s): Yeah. That makes sense. And it kind of just reminds me of like, there's this fallacy of a complete contract. You'll never completely be able to think of everything and, you know, nobody would approach it that way. Just take, take too long and cost too much. I've noticed we're, we're coming up to, to the time here, but before, and Rosa, we definitely have to get you on again, maybe in six to eight months from now, because there's just, there's so much interesting stuff that we could come, that we could discuss from a legal perspective. I did want to touch before we, before we end two things, I wanted to talk a little bit about your outlook given, you know, the last two years, you know, where you see certain trends going.
So we talked a little bit from the outset crystal ball, but before we do, it's something that, you know, comes up in our industry. There has been more of an emphasis, I think, in all industries on diversity, on having representation of different groups, whether that's, you know, gender color, creed, and one thing we've noticed, or I've noticed in commercial real estate, as opposed to residential real estate, is that we have been slower to adapt, to having more females come into our world.
I assume real estate law would probably look fairly similar. So I thought, you know, you could kind of give me your perspective on, you know, how that has been an impact if it has on your career and maybe what you would recommend to younger people coming up and looking at commercial real estate or real estate law is a viable option.
Rosa (42m 59s): Yeah, I think for sure, I think every place has recognizing the benefits of diversity, equity and inclusion for sure. And, and, and the benefits to the bottom line and not just because it's the right thing to do, but it is the right thing to do. And for sure, I think it is difficult in real estate to kind of break down those barriers. It has been traditionally a white male dominated industry. I have clients though that are in the construction industry and it's a completely woman-run construction industry.
So we're coming, we're, we're definitely coming. And, and, and so I think it's, it's definitely something that Galileans is very cognizant of. We have a very strong focus on DEI in our firm. We have a DEI manager that runs everything that runs that part and, and it's, and it has become a key in our strategic planning to make sure that there is diversity and equity inclusion in every office at every level.
Law is not that much different from other areas. We might be even a little slower than some other areas of getting there. We do every, at every level in a law firm, you know, articling student associate partner at every level in a law firm, we lose a few women, we lose a little bit of diversity and that that's a shame and we have to do better. And we are definitely trying to do better. I think on, and I, I can't speak as much to other enumerated grounds of diversity, but on the, on the woman's side of thing, I think, I think my advice to people would be to marry well, isn't that an awful piece, but that sounds old school, but it really is.
I think, I think the reality is your career as part of your life. And you need a life partner that's going to bolster your career. And I think for a lot, and that's true for every sex as true for men. That's true for women. That's true for those who identify as men and those who identify as women, it's true for them. And you need a life partner that's going to bolster your career. The problem is that historically men haven't seen that as the role and that's the problem. And so I think when people are finding life partners is finding one, who's going to, who's going to maybe take a back seat in their career and allow yours to shine.
Jesse (45m 24s): So we need you to draft a marriage letter of intent.
Rosa (45m 27s): Yeah, exactly. Exactly. You shout. So, yeah, I think that, I think that's definitely something that, because the reality is at the end of the day, no matter how much you want to do, there's 24 hours in a day. And so you have to figure out how you're going to split that day. And if you can't, if you can't focus enough on the job and on the career piece of it and dedicate enough time to make that successful, then it won't be successful. And so you need somebody who's going to focus on the other aspects of your life to allow you to focus on that.
Jesse (46m 3s): That makes complete sense. All right. So Rosa, crystal ball for us, you know, are there trends that you're seeing opportunities or things that you're excited about? You know, what, what does the world look like from your vantage point? Like, like we said, at the beginning in the, the short to mid term?
Rosa (46m 21s): Well, I think, I think there's going to be lots of people out with their backhoes building distribution and industrial centers, seeing the rents and how that's gone. Absolutely crazy in that, that market space. I think it's like three fold over the last two years, right. Is where rents are going to, so I think you're going to see lots of landlords trying to focus on that and COVID has done wonders for that industry because everybody's home cooking and getting things delivered just Yeah, for sure.
And it's changed how we all shop and how we all are consumers and how we consume things. And so I think that area is going to see a huge growth. I am an optimist and I do not think that the office industry is going to be decimated. I think that the commercial office is still, it might shrink a bit. I kind of feel like it might shrink a bit because everybody's feeling pretty good about working from home. And everybody feels like that's going to be a small part of their life, but I do think people want to get back to the office.
I mean, I do, I want to get back to the office on a regular basis. I want to start seeing my colleagues again on a regular basis. And as much as we think it's a cost savings by having everybody, not at an office and paying that rent for office space, I think it's going to be a cost in the end because I think you're not going to have that cohesiveness amongst teams. You're not going to have that idea generation amongst teams. You're not going to have a culture.
How can you have a culture if you never see each other? And so, and those are all key, important things. And especially for this next generation of feeling connected to something they want to be somewhere. I don't think they want to be in their living rooms. I'm done being in my living room. I don't know about everybody else, but I'm done being in my living room. I don't want to, I want to be somewhere. And so I don't think the office space is going to be as decimated as people thought at the beginning of COVID.
Jesse (48m 25s): Yeah. I think it's definitely something where we're seeing a change. There was this, there was, I think I talked to a lot of people about the office, obviously for what I do and what I tell people outside of our industry, that this was a, this was a secular trend, a secular trend that preexisted COVID office was changing. It was evolving. This kind of pushed, put it into high gear, but I do think it's in cities like Toronto, it's a huge benefit because we were too far. The other side, it was way in favor of the landlords for a long time with vacant vacant space being at one, two, 3%.
So I think it's in the long run. It's going to be a positive trend, but that's cause I'm like you, I'm an eternal optimist. Rosa. If people want to kind of connect with you, reach out, you know, or even engage with you on the real estate front, where it'd be the best place to, to send them to.
Rosa (49m 19s): I am available by email all the time. And if so, my email address is Rosa doc equal Gowling wlg.com. Or if you want to go to the website and connect with me that way, it's www.gowlingwlg.com.
Jesse (49m 35s): My guest today has been Rosa Lupo. Rosa, thank you for being part of working capital. Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.
Raymond Wong is the Vice President of Data Operations for Altus Group’s Data Solutions team and has over 30 years or market research experience. Altus Group is a leading provider of Software, Data Solutions and Independent Advisory Services to the Global commercial Real Estate Industry. In this episode we talked about: * Raymonds First Steps in Commercial Real Estate Industry
* Overview of 2021 year from Raymonds Perspective
* The Retail World of 2021
* The Future of Office
* Real Estate Inducement
* Sublease Market
* Asset Classes
* Interest Rates and Inflation Outlook
* Mentorship, Resources and Lessons Learned
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, welcome to working capital the real estate podcast. I'm Jesse for galley. And my special guest today is Raymond Wong. Raymond is the vice president of data operations for the Altice group.
For those that aren't aware, Altis group is a company that provides software, data solutions and independent advisory services to the global commercial real estate industry. We use them quite a bit and have been for as long as I've been in the industry. So without further ado, Ray, how's it going?
Raymond (51s): Great. Thanks Jesse. I thank you for having me
Jesse (55s): Well, I appreciate you coming on. I think this is definitely a year where people are getting a little bit more into the actual data, looking at deals, I think with a bit more granularity, perhaps in other times as a function of just being, you know, having less product, but a lot of dollars chasing that product. So maybe for the, for the listeners that aren't familiar with, you, you could give us a little background about how you kind of got started in, in the crazy industry of CRE.
Raymond (1m 23s): Yeah. I started in commercial brokerage as a sales trainee, and I just sorta got consumed with in research and sort of got consumed with market trends and analysis. So basically I just sort of ran the research group and then moved over to the consulting side. And then that allowed me to work with a number of various institutions and, and investors and understanding how, how data can be useful to them and then rationalizing some of the decisions and as well as how critical data is especially the right type of data with respect to interpretation and analysis.
So basically I spent my last 33 years in research.
Jesse (2m 12s): So have you seen, or I guess I should put it this way. What do you think has been one of the biggest changes from the way we look at data and study data in our industry from, you know, when you got started to, to what we do today,
Raymond (2m 29s): There's a lot more value attached to it today, compared to when I started, it was sort of the emphasis, again, going back 33 years, it was more of a gut feel that the data was there and it gave you a sort of indicator, but it was a little bit more sort of wild west. And now we people pay and attach a value to the information, but more is all about interpretation of the trends.
Because as, as you know, when you look at certain numbers, it's not what it seems. And plus that say number, it can be interpreted five or 10 different ways by, by, by different people, right? So data itself is you need to have a firm base and then you need to be able to back up based on your experience or using other indicators to augment where the market's heading due to, to provide a final conclusion. But at the same time, you also hear that too, to a certain extent that whole gut feel or how you feel about the deal and the numbers is still there, but less so now compared to at least when I started.
Jesse (3m 44s): Yeah. I mean, it's something that really, you can't do the job of, of real estate, whether it's in brokerage investment, you know, any aspect of our, of our industry without having that data that we now just see as just something we take for granted where in the past, you know, perhaps it wasn't as easy to just, you know, go online and figure out a couple of key points for a particular say, product that you're looking to purchase. We've had a crazy 20, 21 where it's the beginning of a, of 20, 22 here, about two months in.
And, you know, hopefully everything from a Canadian context is moving in the right direction. But talk a little bit about 2021, because in a lot of ways it was there, there was a number of records that were broken. Talk about that. And, and, you know, what was that like? What was 2020, like from your perspective,
Raymond (4m 36s): It's that I've seen before? Partly you have to go back to 2020 with a pause in the market for three or four months and in the GTA with, with the lockdowns. And there was that sort of, you know, month or so where companies were trying to figure out what does this mean? What's, what's going to happen with the economy and everyone's sort of reviewed their sort of their strategies for, from leasing to acquisitions and 2021 as a result of that pause.
And it's so like a year and a half transactions in one year. So we had record year, we're going to be up by 40% compared to compared to the last record year back in 2018 and 2019. So if you look at all the momentum in 2021, it's going to carry forward in 2022, because a lot of the, the elements that caused activity. So there with the availability of capital still historically low interest rates and continued demand, especially, especially what we've seen in the past month, the return of foreign buyers in the Canadian marketplace, looking for us to pill stability, and again, good, good solid returns.
Jesse (5m 60s): So from the, the aspect of deals done price or evaluations for in certain asset classes, we've we saw records, but also activity itself has gone up. What, what have you seen in terms of the different subgroups of commercial real estate? Maybe we could start with, you know, one of the darlings of our industry industrial, you know, how has that activity level change or, or, or continued to increase, I guess,
Raymond (6m 29s): Well, it's, it's all about e-commerce and it w it was, it was, it was comment the other day that compared to five years ago, the amount of activity with, with the lockdown that everything's getting delivered, you're not going to the store or picking up an item, but you're getting things on an instantaneous basis. You're getting things that the next day, right. And you you've seen the growth in the industrial sector. So back in 2019, we had about 9.7 billion on, on a, on a national basis.
And in 2021, we're at 15.6, sorry. Yeah. $15.6 billion. So you see that, that increase in demand for space, but it's not just the users, but it's also from an investment standpoint and the stations and the number of, of sales. So when you look at the overall availability rate, say for lease for the GTA, it's around 0.9% and it, and industrial property for sales make up about 0.6%.
Right. So when you're a tenant, you're looking at both sell and lease, but so that's contributing to just a record, you know, activity on the, on the investment sector, right across the country.
Jesse (7m 51s): Yeah. I mean, industrial it's, it's pretty amazing to see the amount of activity from the brokerage perspective, kind of like the boots on the ground, just seeing just the volume and, and the prices that are being paid. So if we move from, from industrial over to retail, what is the, what does that world look like in 2021?
Raymond (8m 11s): You know, it's, it's as two things, sorry, it looks like the investment side has not skipped a beat, and we're a slightly above retail compared to 2019. And again, it's, it's retail and office, that sort of the number of concerns regards to our sector and office went from 8.9 billion down to about, about 5 billion this year.
But on the retail side, there's the investor standpoint. So especially the number of downloads with retail there's that there's a redevelopment opportunity to bring it to higher invest use because of the location. So I think we've seen continued demand in that area, especially with anything with food anchored gro grocery on the, on the Plaza or retail centers have been getting a lot of play, especially with the pandemic. And, and that's one of the, the, the sort of the Constance from a consumer standpoint, retail, especially though the regional malls and the major centers you still have that need for interaction similar to the office that you want as a place to, to sort of meet people.
And, you know, the, with the, with, with, you know, the lockdown re reducing order restrictions, reducing is a chance to, to meet at restaurants and to actually see the product. So I think as you can't really see the product on the screen, you need to experience a, you need to try to comparables, you need to speak to an expert in asking about a particular product, especially if the clothes you need to try it on. And instead of buying 10 pairs of shoes and then online and returning eight pairs, you can actually get what you need with, with allocation.
And from retailer standpoint, if you're online, you're buying that one specific item, but when you're in a store, like, I, I always use the example from Costco when we're going to Costco, we're only buying milk and we're buying eggs, but on average, we come out spending about $300 because there's this there's item and there's surprises. So when you go into a store, you're actually buying more than you're anticipating, and it's very strategic amongst the retailers on how they lay out certain products, right?
So, so there's a need from the, the, the retailer to have the sort of omni-channel options for the clients, as well as I think there's that need for interaction and social activity from consumers. So I think for our retail standpoint, we're still gonna see sort of that evolution and change and retail I think is still very much needed. And you can tell based on the investment activity, as well as a slow recovery and in the, in the openings of some of the major malls.
Jesse (11m 12s): Yeah. That makes sense. And I think another similar to industrial, we've seen a lot of activity on the multi-residential side. One thing I thought was, was kind of telling of the data was the, the 20, 19 to 2021. We saw a balloon in, in actual dollars for industrial. I saw a, I was kind of surprised the, that the multi res wasn't as high or wasn't, excuse me, the percentage increase wasn't as substantial. I thought it would have been more, but perhaps it would maybe be more telling if we were comparing 20 17, 20 18 to 2021 on the multi res side.
Raymond (11m 52s): Well, the thing malty Raz has always been a sought after product, right? And you always had that, you know, especially with Toronto Vancouver, that sub two sub 3% cap rate and with industrial, for the, for the tenant. Now we're starting to see some, some cap rates for industrial come in at less than three or two and a half percent, especially with the large logistics warehouse distribution companies.
I see that as a shift, whereas with apartments, eh, and cervix industrial as well, the challenge is to be able to find that product. Now we're starting to see, you know, the, the increase in, cause there's, there's a real shortage of housing across Canada. And now we're seeing an increase in purpose-built rentals, right? It's especially with the institutions and investment side. And so anything with excess land or price, a redevelopment on the side, we'll trade and trade at a premium.
The other thing that you're seeing, especially with on the residential side, it's, it's not what it seems worth when you look at certain rates. So there's been a couple of projects in downtown Toronto, but older office building locations that, that sold for a very low cap rate up under 4%, but it wasn't really reflective of the current use. It was reflect reflective of the future use. And that's what the purchaser secured the property for a future residential down the road.
So yet when you look at the cap rates, I think this goes back to the interpretation of numbers. You have to be careful of what is the intention of, of that property. What does does that number were flat? So is that secondary research that you really have to apply to really understand the numbers and you just can't accept the numbers of verbatim.
Jesse (13m 53s): Yeah. It's one of those things where cap rate can tell you so much, I mean, any, any real estate metric, whether it's IRR internal rate of return cap rate, I mean, it falls flat on its face. Once you have a half vacant building, which, you know, w and further analysis might be a great opportunity, but a terrible cap rate if we're using in place income. So the, the, the last one here is office. And like you said before, I think retail and office took the biggest hit. One thing I think was different with office leaving out the, the actual leasing and the investment sales, then it shrunk quite substantially compared to two, three years before what has been kind of the, the conventional wisdom on from the research groups as to office and the future of office.
Raymond (14m 43s): And a lot of discussion has been in the urban or the downtown market. I'm a big believer of the return to the office, especially the downtown and the world bank Plaza, office transactions is, is reflective of that, that continued confidence in the marketplace. And with close proximity to retail, close to work, and as well as if you, if you're downtown and if you're living, especially living downtown, you don't need a car, right?
So there's that aspect of it. So we're going through sort of a, with a lockdown, no lockdown, and you're starting to see a little bit increased activity, especially for the car front. People are still a little bit concerned about taking public transit. So they're driving in. So the traffic congestion that I experienced for the pandemic I'm experienced in the same amount, especially if I leave at five or five 30 from the office by eventually I think as more people come back in, starts with the senior managers, and then other people start going back in, is that a form of fear of missing out component of it?
I think we're going to return to a certain level of demand and Missy, but I also believe that the hybrid work from home component was still being in play because what we found out in the last couple of years, some departments and some individuals actually, they work better at home rather than the office. So the hybrid is not going to go away. There's actually going to be more flexibility of the space and more collaboration and more chances for interaction within. And I give you a reason to, for people to actually come in and not just to work, but to have that interaction.
So I I'm, I'm a strong believer from that standpoint, from that demands perspective. And we really haven't seen or seen sort of some of the price points on the offside declined slightly, but not to any massive gray, because the other thing is that there hasn't been a lot of transactions in that area. Cause it's a wait and see, and whether or not, you know, the occupancy levels will increase the spaces leased out, but getting people back into the office. So I think over the next, you know, nine to 18 months, we're going to see more of whether or not it's going to return to a semblance of normalcy and whether or not the, the, the occupancy levels will increase over time.
Especially if we sort of get past this pandemic or at least prior to work with that.
Jesse (17m 14s): Yeah. I think the, the office one is, is interesting in the sense that the owners typically, especially the institutional owners, I have deeper pockets, I think can wait it out a little bit better than under, than other segments, but it is like you said, it's the, for me, it's not necessarily the evaluations, it's the activity that has just kind of grinded to a halt for a period of time. How do you look at office when it comes to, if we, if we take the premise that there's going to be a longterm trend or a change from these 10, 15 year leases, just assuming they're five, 10 and 15 year to more flexible leases from the underwriting standpoint, you know, how do you, how does that impact values or how you look at valuations?
Raymond (17m 59s): Oh, that's a really good question. And actually we were looking at that before the pandemic, because we're already seeing a lot more flexibility and, and leases because companies would need it to be able to pivot quickly, especially with the tech companies and the average drop down to about three to 5%. And that was from, from, from a value standpoint, you no longer have that longer term income. And how do you look at the, the, the, the, those type of values. So even with those concerns, we haven't really seen a big shift in, in, in, in, in values.
And that's because of what you just said with Deepak is by the institutions that we haven't seen, that, that, that movement and back then, or pre pandemic, it was, it was little bit more difficult to say because you're also dealing with what three to 5% office vacancy rates. But now when you're dealing with double digits, we interesting whether or not those values are impacted, but I'm not sure if it's just based on, on the vacant space or the occupancy of the building and impact on the IRR or the lease terms.
So it's probably a combination of both and again, as a sort of a wait and see, but we haven't seen yet and major shift in values because of the, because of the, the more sort of flux terms.
Jesse (19m 23s): Do you think that these, you know, major markets that have had historically very low vacancies, whether it's, you know, you're in San Francisco, New York, Vancouver, Toronto, do you think that these, these areas are going to actually start get into a balanced space where we're seeing inducements, like some of the smaller cities where, you know, stuff that we would hear, oh, they induced the deal at a hundred dollars per square foot, or for those that aren't aware of an inducement, a tenant allowance, basically giving the tenant cash in hand. Are we going to start seeing that as a, as a norm in, in these type of markets that are, that I mentioned,
Raymond (19m 59s): I, you know, what the markets are, you mentioned with, especially with San Francisco Vancouver, those are, you know, global cities and you look at, and there's been a lot discussion about the tech workers and the tech companies that have located in these markets. So it all depends on how long we see high office vacancy rates, four and 4, 4, 4. Is it a specific sector, is a class B or C the Mo the bulk of vacancy, because right now what we're seeing is that there's a lot demand for the newer products, especially with the HVAC and updated filter systems and, and, and the floods wall space to bring in the new type of hot desking and so on and so forth.
So depending on where the vacancy rates are, and with a place like San Francisco is starting to tighten up again a little bit, and especially with, you know, Vancouver, I think we're starting to see the first element of a quicker recovery, especially with expansion, with some of the tech companies out there. And I think we're going to probably see something sort of summer in while we are we're, we're seeing more lease activity in Toronto and whether or not it adaptive style with the challenge right now is that, you know, 8 million square feet that is currently under construction and what is complete, and then how that's going to impact the marketplace.
So I think we will see sort of tenant inducements by again, depending on how long the, the vacancy rates stay high before landlord sort of want to sort of lease that space up and add more tenant decent. So we're seeing a little bit of it with a blend of extends with some of tenants and some of the space, but we sort of w we sort of have to wait and see and see what, what, what the trend will be.
Jesse (21m 59s): Yeah, we are seeing a lot more early extensions or renewals, like you said, blend and extend, you know, do that weighted average of, of rates one area. It's, it's good to be able to talk to you here, cause we've heard so much different data from the sublease market. You know, for those that don't know, you know, tenants that are current tenants with a, with a landlord, a head landlord of a building, you know, over this pandemic, we've seen an increase, an increase in them, subleasing their space like you would do in college or university.
The question I have is how do you get that data when we're talking about availability rates or sublease rates, because oftentimes this, this pro product can be occupied. It might not be occupied. It might be an under contract or not contract, not in contract. So do you look at the sublease market as a bit of a different animal when you're, when you're looking at the, the data and what the data's telling you?
Raymond (22m 56s): I absolutely. When, when the pandemic hat and we were, we, we, we knew what we would need to track that sub landmark. So sublime market in a balanced market is probably between 12 and 18% in that range, depending on where you are. But we knew that when w when the lockers were happening and their announcements would give back a space or not going back to the office, a satellite was going to increase.
So whatever increases north 35, 40%, that's what it starts competing with the drug space, right? So you can have space that has already been built out competing was in some cases, raw space, right? So that sort of pushes some of the, the, the rates. And fortunately, over the last eight, 18 months, over the last six months, we've seen a decline in the percentage of available space, that sublime, especially where it was hit, the hardest with Toronto Vancouver downtown.
So the nice thing is that it's in the low twenties, but a lot of that was due to some of that sublet space being leased out. Some of it, as you mentioned earlier, Jessie, the blended extends. But the other thing is that some of the terms were, were expiring. So something that we need to watch, especially with a market that's going through flux, or there's a sort of economic slowdown that we're really watched that because then it hits a certain point.
Then we'll, we'll probably start seeing more tears hit the marketplace, but definitely over the last six or nine months has really declined in those two sort of problem markers as we saw early in the pandemic.
Jesse (24m 46s): So if we take a Toronto as an example, correct me on the numbers here, because what I have heard over over the pandemic is that we were pre pandemic. I don't know if it was six or 700 million square feet of sublease space to peak peaking at the high point. What was it in the, in the three and a half million mark, three, three low threes? What did that look like as a, as a raw figure before, and maybe in the peak, which I assume was sometime at the mid to end of last year,
Raymond (25m 14s): You know, I it's, I think it's down by while at least 20 or 30%, but it is down a stiffly front of the peak. Th th th the other thing that we're not factoring in, I think is less so in this market compared to your market, like Calgary is the shadow vacancies that it's not being marketed, but not formally being marketed by sector space, beat held by, by the tenants. I don't think that's the case in Toronto and Vancouver where you have that shadow space.
I think what the sublet space we're showing is true cyberspace. And I don't see, we see that we have a lot of shadow space and I, this is a little bit different sort of, sort of right when the pandemic started. Cause I think there's a lot more shouts places. So the availability that was showing was probably a lot lower than what the real market was showing. But now I think is starting to tighten up a little bit on the Saba side is a little bit more transparent.
Jesse (26m 14s): Got it. So that three and a half or 3 million that probably that's, I guess, out of what out of roughly 10 million available, something like that. Yeah. So I want to pivot a little to an asset class. It's, it's just being, I've been hearing it more and more often from, from clients and just investment individuals in our real, in real estate space in general. And that's student housing. I know that you, you guys track all the major food groups in the commercial real estate side. Do you guys track student housing, student property properties either in Canada or globally?
Raymond (26m 49s): Yeah. In Canada, we, we track on the transaction side and that's sort of a niche investment sector such as young public storage, your data centers and your life sciences. Right. And, and we're actually going to start track and with our multi-family part of this coming up with purpose-built rental. So it's, it's an area that's always effect is a little bit higher cap rate just because of the risk and ball with some of those type of assets.
But especially with the activity you've seen in, in, in the university has, is, is it's, it's, it's a sought after product, but it doesn't really fetch the same type of cap rates of your typical apartment or multiple multi-family residential.
Jesse (27m 41s): Yeah. Well, I mean, that makes sense. I have seen more and more people kind of look towards that. I think maybe the thinking was if you can withstand a global pandemic and still be okay, then this asset class looks fairly recession resistant. I want to, we, we have four questions. We ask every guest that comes on the show at the end here, but before we get there, I just want to kind of get your take on the outlook for 2022 with the backdrop of interest rates, a lot of talk about inflation.
And it seems like we're going to have, like you said, a spill over effect from 2021 into 2022. So, you know, what, what do you see going forward? What, what type of things should we be on the lookout for?
Raymond (28m 25s): Well, you know, the, the interest rates will be interesting, whether that impacts consumer spending and it has slowed down a little bit and whether or not that impacts the, the GDP, but I don't think that the increase in interest rates are going to impact the appetite for commercial investments. So I still think that's going to remain strong for this year, just because the availability of capital. And we look at, you know, the 10 year bond versus the chiropractor.
There's still a huge gap there, even though with this increase in interest rates. I think on the office side, we have to wait and see the next couple of months with, with, in, in Ontario with the reduction of, of re re restrictions. But I also think that we're, we're probably going to see a increase in lease activity compared to, to a year ago. So I think that's, that's a positive because just the natural flow of some of the lease expirees and, you know, is a, is a it's of course industrial is going to remain strong, not, not a lot of demand on a supply and the same thing with the other asset classes, with respect to apartment, as well as land.
The cool thing about land is, you know, that's a good bellwether with, you know, especially what's happened in the residential side and you look at places like calidad and you look at north of Barrie, the 4 0 1, the four, one quarter Southwestern Ontario, and you've seen a lot more sort of acquisitions or, or activity there and that sort of that next play or the next growth based on that, you know, the, the, that, that urban growth of, or expansion outside of the GTA and more into the sec secondary and tertiary Americas, especially based on housing affordability.
So I think 20, 22, we're going to see, I don't see any major hiccups by again, there's going to be some surprises that noises in the, in the market and whether that, that slows it down, it'll be interesting to watch, but I don't really see anything that will sort of take down the market at this point.
Jesse (30m 39s): Okay. You heard it here first. All right. We've got four questions. We ask every guest. I promise they're a, they're easy Raymond. So if you're ready, all a LABA, Matt. Yeah.
Raymond (30m 47s): You didn't give me these questions.
Jesse (30m 49s): Oh, I know it wasn't
Raymond (30m 50s): In the notes.
Jesse (30m 50s): Absolutely. This is a rapid fire. So what's something that, you know, now in your career, it can be in business or real estate that you really wish you knew when you first started out.
Raymond (31m 5s): No, it's, it's all, as you know, with, with commercial real estate, it's a small group of, of people proportionally and it's, it's about relationships. It's, it's about networking. Right? And I, I, and if, especially with people I started out with about you over 30 years ago, and we're still friends with, and we're solid in the industry together. And I was also found is, is it's people like to cooperate, but one of the main things I want to follow, especially this is why I tell people when they started out be famous or one thing, be very good at it and be known for that particular area, for people to seek your advice or to seek your help in solving their problem.
Right? So one the whole relationship, but two as well as be known for something and be, and be your best at it.
Jesse (32m 2s): So that's a great segue to our second question. Wanted to just get your thoughts on mentorship for individuals coming into our industry. And perhaps we can even specify a little more because of your background for individuals that may be, I want to go into whether it's B B on the economist side, the research side or data, you know, what would be advice for, for those types of individuals?
Raymond (32m 26s): Yeah, I, okay. I have a bias here because I, I love research and especially with both, you know, the broken firms and our firms that if you want to get into the sector that brokerage and, and sort of the service companies are, it's a great place to learn the business because you're starting out at junior level, you're exposed to very smart people and very good experience. And in the industry, and you, you learn through research through reading reports and you sort of develop your expertise.
And plus what I said earlier, that all of us, we really, we really want to help and watch that second generation grow, that that's basically going to replace us, right? So we want to see them succeed. So very open to discussions or opinions, and we tend to refer people over as well to, you know, you should really speak to this person regardless of the industrial sector, the best in that, in that, in that area. But I find that people are willing to, to talk which, which, which really helps the, the growth of the sector.
Jesse (33m 35s): Yeah. I do think that's one thing, at least in, in the tunnel vision of our industry, that I find people are very open to. They like to see younger people, especially if those younger people are motivated, what is a one or two books that you find yourself recommending all the time?
Raymond (33m 53s): Yeah. This goes back as that, that good to great series, try to stay within your, the certain element of, of stretching, but make sure you understand what, what, what your core value is or what, what is that company? What does it represent? Right. And again, as, as being more to focus on your strengths, the other book is Freakonomics and the way they look at the economy and the way they look at different data elements that may not seem relative to, or related to that trend, you're looking at that you need to look at other things and, you know, be a little bit more flexible and open with different ideas and different feedback, different perspectives from different people.
But what really got me was the data element and how certain things that you wouldn't think are related are related and how that sort of impacts that future growth.
Jesse (35m 1s): Yeah. That's, I mean, it's just a book where if you, can you put forth applied economics in a, in a fun and an easy to understand or memorable way. Yeah, absolutely. All right. Last question. First car, make and model
Raymond (35m 15s): Onto the court
Jesse (35m 17s): Right on. I thought it was going to get something exotic. Raven. Usually when I have the seasoned vets in here, I get a, I get some, you know, 1970s or 1980s Unique.
Raymond (35m 28s): I am a researcher. It doesn't go that one.
Jesse (35m 32s): Yeah. Pretty simple. All right. My guest today has been Raymond Wong, Raymond, thanks for being part of working capital.
Raymond (35m 39s): Boom fun. Thanks, Jesse.
Jesse (35m 49s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Lauren Cohen is a returning guest, an International lawyer, realtor and cross-border expert. Also a bestselling author and global speaker. She launched her podcast “Investing Across Borders in late 2020”. Lauren believes in overcoming obstacles and navigating global expansion for business owners and Real Estate investors offering access to unique passive income options
In this episode we talked about:
- Lauren`s Background in Real Estate Space
- Canadian Investment in the US
- Navigating Investment Decisions with Clients
- Passive and Active Real Estate Investment
- Visa and Green Card Status
- The Best Time for Engagement with clients
- Deal Structuring
- Investors Influx in the US
Useful links:
Previous episode with Lauren:
https://workingcapitalpodcast.com/real-estate-investing-across-borders-with-lauren-cohenep50/
https://asklaurenesq.com
https://www.investingacrossborders.net
http://investingacrossborders1.gmail.com
a 10-step guide for Canadians investing in the US- not seeking immigration:
https://laurenesq.thrivecart.com/10-steps-to-successful-us-rei
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, my name is Jesper galley. We have a returning guest on the podcast today. Lauren Cohen, Lauren, how you doing today? Good. How are you Jesse? I'm doing fantastic.
Lauren is an international lawyer, realtor and cross-border expert originally from Toronto. And now in south Florida. Lauren is also a best selling author and sought after speaker and she launched her podcast investing across borders in late 20, 20 Lauren and her turnkey team believe in overcoming obstacles and navigating global expansion for business owners and real estate investors while offering access to unique, passive income options, everything we like here, Lauren, how you doing today?
Lauren (59s): I'm doing really well. How are you
Jesse (1m 0s): Doing? I'm doing fantastic. So we talked a little bit before the show. You are a returning guest and you are now in Florida. Is that a, is that where you're a recording from?
Lauren (1m 11s): I am in Florida in my home in Boca Raton. Yes, I am
Jesse (1m 15s): Beautiful. How's the weather there
Lauren (1m 17s): Different than their,
Jesse (1m 19s): What do you mean? We have a balmy three degrees today,
Lauren (1m 23s): Probably more like 83 south a Fahrenheit Celsius. That would be really hot. We'll maybe what about 25 or so?
Jesse (1m 31s): Hmm. Yeah, that makes sense. W we were just chatting. I was just in Orlando a few, a few weeks ago. So I'm really excited seeing what's going on. We have a lot of clients that are now pivoting to investing in Florida all over Florida, to be honest. So I mentioned before we had a, you know, we had a number of listeners either emailing me directly or messaged me on Instagram, about investing from Canada in the U S and you know, in the same breath, talked about us investors investing in Canada for listeners that didn't hear that first podcast.
Maybe you could give a little bit of a background on your career and what has got you to the point that you're at today.
Lauren (2m 13s): Sure. So thank you so much for having me back. So I'm originally from Toronto. So I've been here in Florida over 20 years. Haven't helped me. I just celebrated my 21st anniversary, I think, last month. So I specialize in helping mainly Canadians investing into the U S but also people from all over the world. My newest clients are actually Chilean and we help them. My tagline is navigating your path to invest, live, work, and play across borders.
And I started doing this after my then husband. Now ex-husband was deported on the way back from our honeymoon. And when that happened, I thought, well, if this can happen to me, it can happen to anybody. So let's figure out a way to stop it from happening and create a clear and easy path for people to not only invest, but also immigrate and in the past. Oh, wow. Since Thanksgiving, since us Thanksgiving around November, it has been unbelievably busy with people that are interested, not only in investing, but also in finding their way, especially to Florida.
I happened to be in the right place at the right time. And so the fact of the matter is that there's just so much opportunity in the U S you know, you've got 10 times the fault population, 10 times the number of opportunities. Everything is basically 10 times, not 10 times the size, because of course, Canada is a larger country, but 10 times pretty much mostly everything else, 10 times the problems too. But at the end of the day, there is a wide wide range of opportunities down here at all different price points that just doesn't exist in Canada with cap rates that are much higher with short-term rentals.
Like you said, Orlando is the ha the king of short-term rentals in the world. You know, if there's no place like it, there are communities in Orlando where they only allow short-term rentals. I don't think that exists elsewhere. So it's just a crazy time to be investing in real estate. And that doesn't mean that it doesn't go the other way, people investing into Canada, especially because of course the dollar goes further and the real estate in Canada may not have the great cap rates, but the upside, the, you know, the ROI when you sell your property is huge, especially in the GTA, you make an investment, you know, the next day it's going to go up.
So it's all a matter of just deciding what it is that you want to do with your money and how you want to invest it and what your goals are with it.
Jesse (4m 46s): So we could kind of take a stab at this in a number of ways. I thought what we could do is talk a little bit about the actual structuring of investments that you see, and maybe, maybe it could be from the perspective of having someone say Canadian investing in the U S you know, what is the first couple things that, you know, you would recommend, or you basically consult them to do aside from hire you?
Lauren (5m 13s): So it's not just about me, it's about the team. It's about making sure that you have a strategy in place and not just haphazardly deciding to do, you know, to invest because the price seems right, or looking at a property without doing your due diligence or not sending up the right structure and making the investment or not speaking to that cross border tax advisor, whichever border that might be, it's really important to have a holistic approach to it, and also to work with qualified real estate professionals, wherever it is that you're investing referred by other qualified real estate professionals like Jesse and myself, and, and just having that structure in place to help protect you.
Because at the end of the day, the last thing you want to do is invest and give all your money to either the CRA or the IRS, the kind of defeats the purpose. Right. And you want to make sure that you have a short and long-term strategy in place so that you can create goals, create paths to achieve your goals related to those strategies.
Jesse (6m 11s): Yeah. Fair enough. So when, when you have individuals that do invest or work with you, I'm, I'm sure goals are, you know, that's the key aspect of, of what they're doing. Are you trying to acquire a lot of land? Are you trying, like we talked in our last conversation, are you trying to, to work in, in the states or live in the states, or is this a passive investment? How do you navigate those decisions or those goals with clients and give them a framework to better understand that investment that they are making?
Lauren (6m 42s): Well, I, we have a lot of resources available, both with my podcast and my YouTube channel, and a lot of downloads, a lot of really great downloads that help clients understand. For example, I have one that talks about the 10 steps to successful real estate investing in the U S that has nothing to do with getting a visa. It just has to do with investing, and there are 10 steps. Okay. And so then if they're interested in a visa, then we go to the next level and to the next level and to the next level. And it's a matter of really being available to clients, to hold their hands and figure out that strategy, do an initial consult call.
I mean, client, I, you know, I've had clients that thought they wanted X and they ended up wanting Y through, or even after a week or two, they realized that they need to rethink their, their posture. I've had clients that say they want to do immigrate through real estate, which is my signature program. And we ended up buying them a franchise because it's an easier path. I've had clients that thought franchises were the worst thing in the world and ended up falling in love with the concept. I've had clients that think that they are, you know, ready to buy 20 units of real estate.
And yet they're really not because they're, they don't have the, the pre-qualification letters with the financing in place or whatever. So what did, what I think is really important in all of this is having the team and the, the, the professionals available, making sure that you have a financing partner, a currency exchange partner, you know, legal partners in different states. For example, I have a new client that's investing in Utah. So I have partners that set up entities and structures in Utah.
You know, it's making sure that you have the team and the relationships that are necessary to be able to serve whatever your client's needs may be, because they're going to change from time to time. And that cross border tax advisor, I don't do anything without one of those speaking to my clients at any time, because I'm not a tax advisor, I'm not a tax expert. That's why I pay the IRS or the CRA or whatever, just like everybody else. Right. So, and that's why I hired them. So I, if I'm going to, I need my clients to do the same.
Jesse (8m 54s): Yeah. I mean, that makes sense. So, in terms of, if anybody's interested in those 10 steps, we went through them on the last podcast episode 50, you can just type in Lauren Cohen's name and you'll find that on our website, working capital podcast.com, just, just because I know we went into some more detail on those. I had a number of people reach out after that episode that were interested in the aspect of actually moving to the states. And I think maybe as a case study, you know, we can talk about maybe three different scenarios.
One is, this is the individual that's, you know, buying a rental property or buying one vacation property that maybe that they're, they've thought about renting it out for a portion of the year. Secondly, I think if we go into the larger say, 50 unit, a hundred unit apartment buildings, commercial, commercial, real estate, and then the third, which, which I'd like to get into right now is the individual that says, Hey, Lauren, you know, I I'm open to buying real estate. I'm open to potentially buying a franchise. But the goal for me is to move to the states or have that be a part of that process.
So, you know, what is somebody like that, you know, what are they looking at?
Lauren (10m 7s): I mean, in terms of amounts or
Jesse (10m 10s): In terms of the process. So for those individuals that, you know, those 10 steps that we talked about last time, I assume that those were specifically talking about investing in, in the states from Canada. But then if you, we're talking about individuals that want to get a visa, you know, w at what point does that approach differ?
Lauren (10m 30s): Yeah. So it differs at, from the get-go really because your, your investments are going to be potentially different. If you're investing in that large apartment building and building a business that potentially can qualify for a visa. If you're investing in a syndication that will never qualify for a visa, unless you are the developer of the syndication, because it has to be a business. So our super power rests in transitioning a prospective client from a passive real estate investor to an active real estate business owner.
And if they're an active real estate business owner, they can potentially qualify. Now why we like franchises is because for the more passive real estate investor, a franchise can allow them to have this active business that doesn't, that doesn't disqualify their real estate investing. And as a matter of fact, maybe augmented like a property management company, an inspection company, a home improvement company, an alarm company, a maid service, okay. And those are easy turnkey businesses that immigration likes.
So what we try to do is make your process as painless as possible because at the end of the day, moving is a big deal. People think Canada and the U S are the same, and they're not, they're just not. And so there are many ways skin the same cat and make your life easier in the process. So what we try to do is make sure that that process is as easy as possible so that you can accomplish your goals. And you can include real estate investing as part of your business plan, but perhaps your visa application is not dependent on it.
So one is not necessarily tied to the other. So you don't have to feel pressured to buy the real estate prior to applying for the visa. You can wait maybe until we find what you're looking for, you know, and the visa is not dependent on the real estate. So if you happen to sell it, suddenly your visa isn't compromised. Okay. So that's why we like to have a complimentary business that allows you to qualify for the visa and yet still accomplish your investing goals.
Okay.
Jesse (12m 46s): Could you talk a little bit about this differentiation between passive and active real estate investors? Because correct me if I'm wrong, I don't believe Canada has exactly the equivalent aspects of
Lauren (12m 57s): In Canada. They flipping is considered an active business in the U S it is not. So you, we need to be very careful to make sure that the business here in the U S whatever it is that you're doing is a truly active business that you are, that you need to run it. So if you're, if you're flipping a hundred homes a month, then that could probably qualify, but if you're flipping one or two, that's not going to work because that's passive and you don't need a visa to do that.
So we need to figure out a reason for you to need your boots on the ground is the term that we use. Why do you need to be in the us running this business? So we need to tell that story and make it very clear. And we need to draw the line in the sand between what is passive. Like, you know, most people invest in real estate because it's passive, right. But if you're doing the burn method over and over, that's not passive. You're actively running a business. If you're running many Airbnbs, that's not generally passive, maybe one or two, but if you're doing European, you know, daily or weekly rentals, that is probably, probably not positive.
Now, on the other hand, when you look at somewhere like Orlando, or you hire a property management company to manage, then it becomes turnkey. So again, then it becomes potentially passive. Maybe you want to be the property manager. Maybe you want to be involved in that. And then suddenly that changes the dynamic again. So each business is going to be different, and there's not like one size fits all about what makes it qualify or not qualify.
Jesse (14m 33s): Was there a, I'm trying to remember, I don't know if it was a conversation with you or something that I read, but an acid test for what makes you, and I don't know if it's a, the U S legal term, a real estate professional. And I don't mean that I don't mean an agent. I mean, that, you're a, you're a full-time real estate professional. That there's a certain amount of hours. If the year that debt are dedicated to real estate investments. Is that something that's, that's taken into consideration or is that so, so your, it really is something that is case by case that
Lauren (15m 4s): Very case by case, and on top of that, Jessie, the other part of it is that it's not just about you, right? It's about a business. So you have to hire people. You have to show that your business is not marginal to replace your income. And you have to show that your business has an economic impact. That means hiring people and impacting the community, impacting whatever. Okay. So it's all kinds of different considerations. So if, even if you're a real estate professional, right, I am a solo preneur.
All of my staff is, are independent contractors. I wouldn't qualify for a visa. I'd have to transition them to employees in order to qualify for a visa. So it's a very big, it's a very big deal to us to know that that that's a business, right? So solo preneurs generally won't get visas because they aren't, aren't impacting the society. They aren't hiring people. It's got to be a business. So we, and it's not 10 employees like for a green card.
It's a few. So what does that mean? Well, generally we like to see between two and four over a five-year business plan. And if it's less than that, it's going to be marginal. And we also want to see that the numbers can support not only the business, but also support, you know, support you, your family, the employees. And there's a return because we want to see that you're generating income. So all of those factors come into play.
Jesse (16m 37s): So it seems the IRS likes business, her money-making businesses, just like the CRA of course
Lauren (16m 43s): They want their money, right?
Jesse (16m 44s): Yeah, absolutely. Yeah. So in, if we were to have a kind of ideal investment from a real estate point of view, so say you bought a large commercial property, say multi-racial property that was bringing in a million a year in terms of gross rent. And the reason I use this number just for simplicity and say, you're, you're paying a property manager 6%, so $60,000 a year. So from that perspective, you can you be creative of, you know, instead of paying a company, we create, we create our own active company, the property management company.
So that would be approach you would take.
Lauren (17m 24s): Yeah, exactly. In that, in that if there's a million dollars in income coming in a year, then we would bring in our own in-house property manager, potentially, maybe agenda a janitor, or, you know, a groundskeeper, maybe somebody to do logistics, managing all of the rents and everything, and I'll, you know, and all of those. So we help to figure out which employees make the most sense. Now, obviously we are not in your business. So even though we write the business plans, it's your business.
And at the end of the day, you're the one that goes to the government and has the interview and defends whatever your business is or presents, whatever your business is, not us. So some people say, well, I thought you were writing the business plan. Yes. But it's still your business. We are putting, we are reducing it to paper and putting it in a concise, presentable manner, but it's your business and they're your numbers. So it's really important. We can help, we can guide, but we aren't going to develop the business for you.
Jesse (18m 27s): Yeah. Understood. So I have a, a friend of mine, I think I mentioned before the show that I purchased a townhouse first, first purchase in the U S for me in, in Southern, in Orlando or just south of downtown. So my friend, who's a realtor. He's, he's been in Florida for eight or nine years. And I know for a fact he doesn't have a visa. So I assume that he is just, he's working for a company he's Canadian, doesn't
Lauren (18m 55s): Have a visa. And he has a real estate
Jesse (18m 57s): License. Does, has a, I'm sorry. He doesn't have a green card. I believe he has a visa. So he's yeah. Sorry, my mistake now, why would somebody like I I'm D well, first of all, do you deal with individuals that want to eventually get their green card as well? Okay. What makes that, what do you, what do you find is the, usually the, the thrust of that decision, when some individuals are, are comfortable having a visa and are able to do what they want to do in terms of investments and, you know, being in the states for the majority of the year, what's that differentiation that you find that people say, no, I want it
Lauren (19m 35s): Definitely permanent. Some, some people, if they're high net worth, they don't want a green card because then they become us residents for tax purposes. So that's one issue. Some people want the green card right away. So there is a path to that. My newest clients, the Chilean clients, that's what they're doing. They don't, they just want the green card right away. And when you do an E two, there is not a direct path to an AB five or to a green card, I should say, but there is a way to transition.
So it really depends. Each, each individual case is different. Some if they come in, depending on the visa, they come in on, they can be sponsored for a green card. The spouse can be sponsored for a green card. They can increase their investment amount and their employee count and qualify for a green card through , which is a direct green card path. So there are ways to transition, but there's no direct path from an investor visa to a green card at the moment.
Jesse (20m 39s): So if we pivot to investors that are just purely looking for investments across borders, so, you know, they're not interested in a visa, they're not in a green card. So for those individuals. So for instance, maybe using even my investment as a, as a kind of jump-off point, you know, it's a townhouse in, in Orlando, it's going to be, I think the completion of the construction is going to be in June, July this year. Now I'm going to have a couple of decisions to make what I want to put that investment in what structure I want to have for that investment personal or otherwise.
And from that standpoint, when do you find is the best time to start engaging with the client? And what do you see as a, is a typical path?
Lauren (21m 23s): Yeah, ideally, however, most of the time, especially if you're pre-construction, you can change a sign, the contract to an entity after the fact. Now there is no one size fits all. And I would say probably 30% of my clients these days are just investing. So we have a real estate investment pre-investment package that can come in post-investment as well. And generally, most Canadians, if they're staying in Canada, we'll do a limited partnership slash limited liability company structure because LLCs limited liability companies are disregarded entities by the CRA.
Now this is going to depend on your tax bracket in Canada, which again is why nothing happens without Mike cross-border tax guy. And like right now, actually he's talking to a client of mine. The outcome of that will determine what entities we set up for the client. Okay. And they already there they're closing in two weeks. So it's really about looking at your particular circumstances. If do you have an entity in Canada? Are you an investor in Canada? Do you have other investments in the us? You do not understand, but those are all considerations that come into play.
And are you investing in multiple states? Do you need multiple LPs and LLCs? What's the cost? How does that all look? So we do that quite often. We have a quick little package that we offer. And if the client decides to eventually apply for a visa, it's not going to be detrimental to have that in place. Having the LPL LLC will never hurt you.
Jesse (22m 56s): So this is a question that comes up a lot. And I know we talked about it last time that, you know, Canadians just assume LLCs. That's what I, my, my, sorry, my building should be in which, like you said, it's a disregarded entity. I believe that the default position from CRA's, they treated as a Canadian corporation for tax. So it, it, it is a problem. So in the scenario that you are describing, let's just use that. Let's say you're in the highest tax bracket in Canada. It's your first, it's your only property in the us now is the structure of that LLC.
And that, sorry, that LP, which, which I assume would have a general partner. And then I assume as the LLC, and then would have a limited partner,
Lauren (23m 40s): Necessarily general partner might be the Canadian company.
Jesse (23m 43s): Okay. So, so in that, in that let's say it's the Canadian company. The reason I said LLC first is because a lot of the documents we see that we use that we'll have the GP being 0.0 1.001% ownership and true or false part of the reason that might, that would be an advantage in structuring that way for tax purposes is the double taxation aspect of
Lauren (24m 7s): I'm not going to answer it if it's true or false, because I'm not a tax expert, but I will tell you that the whole reason of structuring things and making sure that the tax Kite's involved is to avoid double taxation. Because with disregarded entities, you can end up paying double taxes. And w why would you do that? That kind of doesn't make sense. So there's a cost involved, but it's, you know, you set up the structure right from the get-go, and then you're not going to end up paying CRA every year, which you would do otherwise.
So I, I think that it's really important. You know, we, our approach is holistic. And even though I may know the answer, I'm not going to give the answer because I'm not a tax expert. And so I like to make sure that my clients understand that nothing happens without going through the steps. And actually the steps that we you're referencing are, are actually different steps. So I, my original program was called 10 steps to immigrate through real estate, which is basically what put me on the map more recently, because I have so many people that are just investing in real estate like yourself and not planning to get a visa.
I created a, a slide that I will share with you about 10 steps to successful us real estate investing. So it has nothing to do with the immigration piece, but it has to do with all of these elements, like getting your tax ID, setting up your entity, getting your bank account, all of those things are included. Whereas in the 10 steps, it's a broader 10 steps because there's an immigration piece attached to it. So I'll share that with you so you can share it with your audience, but I just wanted to make that clear because it's really about investing.
And a lot of people don't even know if they want to get a visa right now, and that's fine, but they want to invest and they want to take advantage of the market. And so we give them that those tools,
Jesse (26m 4s): Lauren, is there, is there one or a few, you know, things that stand out to you that are under appreciated aspects of this, of this process, that people, you know, they're, they're surprised by that, that keeps coming up, you know, again and again, when you're doing this stuff,
Lauren (26m 20s): A lot of people, as you mentioned, just go ahead and set up LLCs and think that's the way to go. They go online and they say, oh, it's 500 bucks. I'm done. They don't get the right advice from any professionals. They don't work with realtors. They don't do their due diligence on the properties, into which they're investing. They just run before they walk. They under-capitalized, and don't use other people's money or find the right financing. No, I have some great financing partners specifically for Canadians investing in non-owner occupied us real estate.
So that's not readily available necessarily if you don't have the right connections, also, you know, just exchanging money at the bank rather than going to one of the preferred currency exchange and paying like, you know, one or two points more there, it's just a matter of really, or working with a us coach on us real estate investment coach that has no regard for what that means for Canada. And these are very important factors because you know, these big companies that are helping you invest in us real estate don't really care how that impacts you when you're filing your can, your Canadian tax return, but you care.
So it's important that you, that you really speak with cross border people that really understand what it means to cross borders, not just I'm investing in Indianapolis. What does that mean? No, but what does that mean? If I live in, you know, Windsor? Okay. How does that affect me? That's what's important. And when you're dealing with cross border, either way or investing into Costa Rica or Mexico, or believes you need a structure and a strategy in place, or you're going to end up getting a lot, hitting a lot of roadblocks that could be avoided.
Jesse (28m 10s): Yeah. It sounds like, you know, we, we, we get comfortable in the relationship that we have between Canada and the U S and we just see it as a similar thing. Oh, you know, Buffalo's two hours, Detroit's five hours. Yeah. So these
Lauren (28m 24s): Borders now they're not so easy. Right?
Jesse (28m 27s): Yeah. Fair enough. In terms of, I hear from other investors, you know, one of their apprehensions, at least on the smaller scale is currency exchange rates, you know, is that something that you strategize with your team or kind of prepare them, or is it something that, you know, it's just a function of the market? How do you,
Lauren (28m 48s): I have an amazing currency exchange partner I will share with you. And they are actually out of London and they, they, they have bettered every single rate that has been presented to them by my clients so far. So that's my strategy, you know, obviously it's about timing, but man saving a point on a million or half a million bucks is, is significant.
Jesse (29m 18s): So we're just coming close to the end of the show here. Before I, I wrap up with one or two questions, I just want to make sure I get to, wanted to talk a little bit about creating as a Canadian or even as a us individual in Canada. But you know, this conversation is centered around Canadians investing in the U S so when it comes to developing an identity, for lack of a better word, so that when you do buy future assets, that you can actually get financing. And you, you know, you're looked at from the bank as not just a complete anomaly, like, is there a, is there a process that you recommend to develop that, to build credit in the U S or is that always going to be a challenge for us?
Lauren (30m 1s): I was going to be a challenge until you can partner with, I mean, if you build a lot, if you do a lot of transactions, you're going to build credit. Okay. But if you don't have a social security number, the credit is going to be attached to your companies. Now you also build relationships, which helps you build credit. Right. But it, but again, most of the time in the U S the social security number is the, is the decisive factor. So that's one of the driving forces for people getting bees as, as well, because then they can build us credit.
So, in the meantime, you, you need to like partnering with, well with joint venture partners that have those relationships that have that credit history, or that are in the U S or are us residents is, is always going to be positive for you in, from that perspective. And just making sure that you always have access to ongoing capital and resources available to you to make sure that you have that
Jesse (31m 2s): Well, I mean, it's relationship, business and real estate. It seems like that that does not no borders, no. In terms of what has been happening over the last few months, I think it's almost been a year. I think we spoke last in April. You mentioned that there was a pretty big influx of investors in the states. Maybe you could chat a little bit about that. W you know, w what has been the driving force of that, and, you know, where are you seeing people invest in your world?
Lauren (31m 30s): So I think the driving force for people that are planning to move is locked down and frustration with circumstances. Winter definitely helped for sure. So, and I think that people just want change and freedom. And, you know, to be honest with you, it's been a pleasure to be here without having to deal with winter, even in spite of all of the stuff that's going on.
So that's a big factor. And I also think people are more open to investing across borders because they realize that the world is small. I think that they're also open to investing remotely, which was not really available as much before COVID. So COVID has opened a lot of doors. The demand from Florida is not just from Canadians. It's from everybody. It's just unbelievable. What's going on here. I mean, you saw an Orlando. Orlando is insane.
South Florida is crazy, but people want a place to go, and they want a place to go where they don't have to with all the rules and where they don't have to deal with the cold. And that's really what it comes down to. But that doesn't mean it's just Florida. I mean, we've got Texas and Arizona and Alabama and Arkansas, and Tennessee is a big, big one, North Carolina, Ohio, Michigan, you know, not, not California, but
Jesse (32m 58s): Most of those seem pretty landlord friendly state, all
Lauren (33m 1s): Landlord friendly places. That's where people want to invest. Ontario is not a landlord friendly place. It never has been, it never will be it's 10 and friendly. So it makes a difference. So people are, are frustrated and want to get doors in places where they can actually have some control. And I can understand.
Jesse (33m 19s): Yeah, I think, you know, it's complete anecdote, but even the last time was in Orlando. It's just funny that every time I spoke with an Uber driver, it seemed like this guy's from Jersey. This guy's from New York and, you know, all of them had moved, you know, when you're talking to them within the last year or two. Yeah. So Lauren, I will, if you can, if you, we have that a 10 step, we'll put that in, in the show notes. Where can people, you know, aside from a simple Google search, where should people reach out to you?
Lauren (33m 46s): Well, one place that's great. And it's just launched is our brand new chat bot, which is ask Lauren esq.com. So I'll put that in the chat as well, but you can find us there. Everything that we're doing right now is basically branded around the investing across borders brand. But the chat bot is, as I say, ask Lauren Esq. You can reach out there and ask any questions that you have. And it's a pretty cool thing. And if we can't ask them, if we can't answer them there, we will answer them directly.
Or you can set up a consult with me. I'm investing across borders.net real estate, across borders.com. You can find me everywhere. My podcast is investing across borders and I'm pretty easy to find. Also our general kind of general generic email is investing across borders. one@gmail.com. We set that up before we had the URL. So investing across borders, the number one at Gmail,
Jesse (34m 44s): My returning guest today has been Lauren Cohen, Lauren, thanks for being part of working capital.
Lauren (34m 48s): It's always a pleasure take care. I'll see you soon.
Jesse (34m 59s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse, for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Allan Perez is a co-founder & Chief Executive Officer of CanFirst Capital Management, a private real estate equity firm. CanFirst invests on behalf of institutional and private high net worth investors and has raised in excess of $800 million of equity capital since its inception. Allan’s real estate career encompasses 40 years of senior executive positions with real estate organizations including The Prudential Insurance Company of America, Canderel Ltd., Dundee Realty Corporation and V&A Properties. His responsibilities included acquisition and disposition, development, marketing, leasing, e-commerce and asset management.
In this episode we talked about:
- Allan`s First Steps in Real Estate Space
- Investing in Real Estate from scratch
- The Process of a Company Creation
- Asset Class Identification
- Deals` Structure and Scaling
- Fund Modelling
- Real Estate Market Changes Overview
- Macroeconomic Forecast
- Actual Industrial Trends
- Segments of Real Estate which are worth Attention
- Mentorship, Resources and Lessons Learned
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, my name's Jesse for galley and you're listening to working capital the real estate podcast. Our special guest today is Alan Perez. Alan Perez is a co-founder and chief executive officer of canned first capital management.
A private real estate equity firm can first invest on behalf of institutional private high net worth investors and has raised an excess of 800 million of equity capital since its inception Alan's real estate career encompasses over 40 years of senior executive positions with real estate organizations, such as Prudential insurance company of America, candor, REL Dundee Realty, corporation, VNA properties, and others, his responsibilities included acquisition, disposition, development, marketing, leasing e-commerce and asset management.
And probably most importantly for me, Alan was my sessional professor as one of my courses in my MBA. I believe it was real estate finance, Alan, how you doing?
Allan (1m 15s): Great, Jesse. Thanks for having me here.
Jesse (1m 18s): Yeah, it's been great. You know, one thing I have, I'll always remember from that class and I assume, you know, sometimes memories, you know, you over time, you can't remember if the, if they were actually true, but I've still told enough people that were when you first got started. I remember you saying it was basically a handshake agreement at a Tim Horton's when you're buying your first industrial site. I don't know if that's accurate if I got the right guy.
Allan (1m 44s): Yeah, yeah, no, it was, I mean, it was, it was roughly a 20 odd years ago when we launched the company, both my partner and I at the time were just starting out in this new incarnation and, you know, working out of our living rooms in our bedrooms and getting offices set up and got a call from a broker that we had done a lot of business with and said, you know, there's this little building out by the airport. Not sure it's for you guys, but do you want to come have a look at it?
So we went out on a, on a rainy midweek afternoon and drove around the building said, yeah, it looks okay. When went over to the Tim, Horton's very Canadian thing to do sat down in the classic back of the napkin, sat there. And you know, no artist runs that point. We just penciled out a few things and said, yeah, this could make sense. And so that was really the first, the first transaction for our company.
And this was back in 2002, it was a $5 million deal. We raised $3 million in debt financing and raised another 2 million from friends and family and our savings and, and off we went.
Jesse (3m 5s): So take us back a little bit from when you first got into the industry. I think it was McGill university is where your Alma mater. And did you know at that time that you wanted to go into the real estate space? Was it, was it that early on?
Allan (3m 21s): No, I don't think so. You know, it was, you know, it was an interesting time look, I think like all of us who went through a university days, you come out and some are fortunate enough to know that they want to do this or that for the rest of their lives. And then there were people like myself who really had no idea, you know, my, my father had, had been involved in real estate in different capacities. He had developed some residential properties in Montreal, which is where I grew up.
And so heard a little bit about it at the dinner room table as it were. I did a finance and marketing major at McGill. One of the courses actually that did really stand out for me, there were two of them. One was the equivalent of, I guess the finance 1 0 1 course, which can be at times a bit dry, but it was fortunate enough to have a professor that kind of really got me turned onto that. And, and the other was a, a real estate course with this professor who was an outside the box kind of thinker and had this infectious enthusiasm about the industry.
So, you know, it got me thinking a little bit about it, but to be honest, when I came out of Miguel, didn't really know that that's what I wanted to do, fell into an opportunity right out of McGill to join Prudential Prudential at the time was the world's largest insurance company. I don't know that that's the case today, but more significantly from my perspective, as we entered the eighties, they really were on the verge of becoming, they did in fact, become one of the most active real estate developers in north America during that decade.
And, you know, in Canada, we were a small part of that, of course, but in the states they were building everything. You could imagine, office buildings, industrial buildings, business parks, shopping centers, residential, anything, and everything under the sun. And so historically in Canada, the company had been primarily a residential mortgage lender, as many insurance companies where they were morphing into becoming more of an equity based investor and developer in, in commercial real estate.
So I kind of arrived for truancy as it were at a time when there was a lot of transition in what the company wanted to do in Canada. And so I was really the beneficiary of being able to jump in at that point in time. And what was really interesting as from my perspective is that because of the company's background in Canada, historically, they really didn't have a big team of commercial real estate experts. So, you know, I really had the chance to jump into some projects and probably take on far more than I should have been taking on that, given my non-existent background in commercial real estate, because there weren't a bunch of people who actually had that expertise in the company.
So it was really an exciting time to, to be there. And, you know, early on we were involved in, in, we built a suburban office building in Montreal. We, we developed some industrial product as well on the, on the loan side, there were a couple of foreclosures that we took back that we were working through. So it was really an interesting time. And, and, you know, as I said, I, I kind of fell into it. Didn't know that this was what I was going to be sitting here talking about 40 years later, but I fell in love with the industry pretty early on.
Jesse (7m 3s): Yeah, fair enough. I mean, it seems like trial trial by fire is pretty, pretty common in our industry in general. So it makes sense now from the Montreal, I don't think we've ever talked about that you grew up in Montreal. So for it makes sense that you had worked for Cantarell. Was that in Montreal as well?
Allan (7m 20s): Actually, it was not. So we got to know when I was at Prudential, we got to know candor quite well. They were, we had retained them on a number of projects to a property manager for us to help us build out spaces. So they became really an integral part of what we were doing at the time three years into my stint at Prudential, I was offered a transfer to Toronto. They had a, the company had a site in downtown Toronto that it wanted to develop a joint venture with another institutional investor.
And there were other projects on the books in Toronto and really not a whole lot planned for Montreal at that time. So they offered me the transfer and the relationship that we had developed with Canada REL survived that. So, and, and in fact there was talk of me potentially staying in, joining them in Montreal, but I thought, you know, what seemed like a great opportunity to go to Toronto, try this out. And so I moved at the end of 1983 and it was there until 1987, at which time I did join Kendra
Jesse (8m 28s): Right on. So it seems that from there you're in Toronto and what these various roles prior to can first, I guess it used to be done D I assume, dream rate. And now today with the various roles that you had prior to starting or building out the, what you have today in the company today, I assume those, those roles influence the way that you make decisions today. If, if you could take us back to when you kind of made that move from working at a shop to starting to say, Hey, you know, we can start raising capital for our own investors.
Allan (8m 59s): Yeah. So one of my philosophies, and certainly I, I think it was, you know, maybe more by observing the industry as I was early on and, and learning the business was really trying to understand every facet of the business and become a generalist as opposed to really being a specialist in one, in any one area. And that was probably colored by the fact that when I looked at a lot of the senior people in the industry, they were really good quarterbacks.
You know, they understood every, every piece of the puzzle fit together. And I thought that's pretty good and not necessarily the best around the table at any one discipline, but certainly able to dialogue and communicate and really sort of lead, you know, lead projects in a certain direction. So for me, I guess it's something that maybe by osmosis sunk in. And so, you know, in my time prior to, to launching Ken first, I was able to really be involved in every facet of the commercial real estate project.
And so, yeah, so if you look at the resume was acquisitions development, asset management, property management, leasing financing, you name it. And so we had a company called BNA properties in which I was a partner really was a sort of a boutique real estate investment development firm. And in 1997, we sold the company to what was then Dundee Realty corporation, which is a 400 dream office today and became part of that organization, which was in its very, very early stages.
So it was actually quite an, an interesting and exciting time to be part of that and spent four years there. And again, learnt a lot. The company was growing in leaps and bounds. And I think for me, it was, you know, I was just moving into my early forties as, as the, the new millennium began. And I think I was at that philosophic fork in the road where I had to decide, do I keep going on this path, which I'm sure it would've turned out wonderfully well.
And the company obviously dreams done fabulously well don't or do I go out and try it on my own and see if I can make that work. Right. And so, and it really was, you know, w really was a conversation with my now partner who was also a trainer at the time with me. And we just got to chatting one day about what we both like to do going forward. And it sounded similar. And it really was about being able to focus on the parts of the industry that we most like, which was really raising capital, managing that capital and the capital and all the way through that, of course, being able to be actively involved in the deal flow.
Because I think for most of us or many of us in this industry, we've all got a bit of that deal junkie in us. And so, so for me, it was an opportunity to really marry up all the facets that I really liked about the industry. And for the first time, I guess at that point, not just take a job, but actually create a job for myself. And, and that was really the, the, the Genesis for, for health for came to be.
Jesse (12m 27s): That's great. Do you feel Allen? Like my, my perception from talking with a lot of professionals in our industry, that there's a lot of people that, you know, work in real estate know a lot about real estate, but then there's a different type of individual that's that entrepreneurial individual that wants to invest in real estate and even further start an investing business. Do you find that, that that's true, that the ones that end up going off maybe, or have a little bit of a different breed or there's a little bit more of an entrepreneurial bent to those types of individuals?
Allan (12m 56s): I think, you know what, by the very nature of the beast, I think you have to have that, you know, you have to have the ability to say, look, I'm going to start something from scratch. And I got, I, I walked away from a terrific job and a terrific organization and great, great people and, you know, had I stuck around there, I'm sure I would've had a great career and no regrets. I think you have to, you know, and listen to some people are hard wired that way and, you know, terrific.
And I know a lot of successful people like that, I think, yeah. I think you have to, if you have that, a little bit of that entrepreneurial bent and that little voice in the back of your head that says, you know what, let's see if we can do this. I think that's what spurs you on to take that leap of faith. And it is a leap of faith. You know, listen, I I'll tell you when I made that move to sort of walk away from a pretty good job. And, you know, I kind of took solace from the fact that, you know, if it didn't work out, I was probably still young enough that I could go back and get a real job.
And so, you know, that, that helped propel me to take that, but it is a leap of faith. Anyway, you cut it, you know, the day you walk out of that organization with a nice title on your business card, you walk away from that. And you know, what you don't really know is will you be able to navigate and transact without that fancy title on your business card? And so, so I think that was a big part of it for me, was just being able to say, yeah, you know what?
We're not that the, the edge of the cliff and be a jump now and, you know, close your eyes and hope it works out. So, but yeah, I think you have to believe, you have to believe in yourself obviously, but that's kind of motherhood, but I think you have to also believe that you have an idea or a plan that is going to appeal to other people who will want to actually participate with you in that.
Jesse (15m 11s): So from that point, you, you and your partner, you move to, to create this company and invest what were next steps for you? Was it deciding which asset class you wanted to invest in? Was it, you know, let's figure out roles and responsibilities who knows the investors, who does the deal? What did that look like?
Allan (15m 28s): Yeah. You know, listen, I, I, I wish I could tell you, excuse me. I wish I could tell you that it was a very formal process. You know, I think that the decision we had to make was what part of the asset class, excuse me, that we wanted to participate in a bit ironic in that. I think both of us came from a background, which was probably much more office oriented than it wasn't gastrique oriented. But one of the things I think we've come to appreciate in our respective careers was that the office business was a really capital intensive business and was really what I call, you know, a big player business.
You have to have deep pockets to play that game. As we all know, I mean, you know, vacancy costs a lot of money to carry vacant space costs a lot of money to release and we capitalized. And what we were really looking to do was to build a platform, almost like a private REIT, where we could raise capital where we could make distributions to our investors while they waited, while we all waited for hopefully a happy ending. And, and we thought, you know what?
Industrial might be better suited to that because the, the volatility is more muted. Again, the costs of sharing vacant space cost of retenanting vacant space, much, much lower relative to the office space business. And I think we felt that the time there was probably less capital chasing that. So for all of those reasons, you know, we went in that direction. I can tell you, and I don't know who it is, but I've told this story before someone early on said to us really industrial, not very sexy business, we said, that's okay.
You know, we get it and we're going to give it a shot and see what happens. So, and I can tell you that for the last five years, I wish it was still an unsexy business, but so that's really how we got into it. Was we just sort of made that decision and said, yeah, let's, let's go in that direction and see what happens. So
Jesse (17m 38s): At the point where, you know, you identify, or you start to identify properties that you're looking at, you mentioned kind of a, you know, a small version of a, of a public REIT. So the way that you structured these deals, was it kind of, was it a private placement style, limited partnership, general partnership structure when you first started out?
Allan (17m 58s): Yeah. So our, our first deal, so the deal that we talked about early on that the Tim Horton's deal was just a one-off syndication. And, and at the time I think our aspirations were to really build a syndication business and go out and find a deal and do the deal, find another one. And on and on and on, we did that deal. And while we were doing that deal, we started a conversation with, with the, the head of a merchant bank who, with who, you know, we had a relationship newest in our previous lives and vice versa and said to us, you know, what are you guys up to?
And we told them and said, sounds interesting. Let's do, why don't you come in and we'll meet and we'll chat about what you're doing and what happened. The next step was really quite fortuitous for us. And that was that they liked our business plan and their take on it basically was tell you what we're going to take out of the money raising business for the next few years, we're going to give you money and we'll commit capital to you. They brought along actually another institutional investor that they had done work with.
And, you know, basically that was the origins of our first fund, which we launched in late 2002 and alongside their commitment. We also went to our private investors and said, it looks like we're doing this. Do you want to be part of that? So, so the institutional investors effectively put up about $35 million. We raised $10 million privately.
And, and we were off to the races with our first fund of $45 million, which back then was quite a lot of money for us. So, you know, that was really the beginning of us getting into the fund business. And yes, so everything was done by offering memorandum and, and these were all limited partnerships that were set up and, and we were off to the races.
Jesse (20m 2s): So Allen, for, for those that aren't as familiar with the, the fund model and how it works. I mean, the syndication is, is fairly simple to understand it's typically closed ended. You're you're doing an asset specific raise. Oftentimes when you do the fund model or when you did the fund metal model at the time, was it something that you would have a rolling people that could join on a rolling basis? Was it something that you had a target in mind in terms of the raise and that this merchant bank really already hit that target and you were just kind of bringing on original investors, what did, what did that look like?
And it hasn't changed the, to what you do today.
Allan (20m 39s): That's a good question. I mean, look, we, you know, as I said, we, we did this $5 million deal. It got the ball rolling as it were. And, you know, we figured, well for this years, this is what we're gonna do. We're gonna do five and 10 or $15 million deals and then see where the world takes us. So when, when, you know, when these investors came along and said, you know, here's $35 million, I can honestly say we had sat there and said, Jesus, is that a good numbers out of bad numbers are too high or too low. You know, when you're, when you're starting out and you go into the trough, it all looks good.
Right? And so the one caveat though for us, which was important was we said to them, listen, you know, we have nurtured a group of private investors who are, you know, they were there on the first deal and we have undertaken to do more with them. We're not going to turn our backs on them. And so, you know, as long as we can all cohabitate together, we will do this. And that was a condition of us doing the fund and, and the institutional investors agreed. And they said, listen, their only caveat was, you know, we don't want 45 year investors calling us on a regular basis, as long as you can speak for them with one voice.
We're good with that. And so we said, yeah, that was fine. So really what we had was we had two institutional investors, each of which was a separate limited partner. We had, I don't remember how many private investors, but probably about maybe 30 or 40 all wrapped up in one limited partnership. So in fact that we have three limited partnerships, we were the general partner for each of them. And, and all three of the limited partnerships were rolled up into one master limited partnership of which we were also the general partner.
So we were really the voice for the privates and it was, and that's really the model that we have continued to use for the last 20 years.
Jesse (22m 33s): Have you seen that market change over the, over the time that you've been in the industry? Because we see a lot in the states, I've had people on the show that have, you know, they, their perspectives exemptions are slightly different, but I think it's kind of the same thing, whether you're dealing with the sec or you're dealing with Canadian securities, that, that model where you're, you're not in the public markets you are doing exemptions, is that changed over the last, whether it's five years or from when you started started way back when,
Allan (23m 3s): You know, I think some of the, some of the laws, some of the rules have changed. I can't tell you that it's, it's had a sea change effect on us. You know, I mean, these things change gradually over time and, you know, the documents get a little bit thicker each time you're out raising capital because there's that much more generally legal verbiage. But, you know, at the end of the day, you know, it's still, it's still a very similar model, you know, and again, we go to the offering memorandum route versus a prospectus route, and the latter of which involves the OSC, you know, much more stringent in terms of documentation requirements.
What you can say, what you can say, you know, involves more in the way of forecasts, all of which of course have to be audited. So it's, it's a different kind of game when you're playing in that, in that arena, we have managed over the years to just continue running, you know, our model, the way we started out 20 years ago.
Jesse (24m 8s): And when you continue to go down that road or you technically exempt market dealers at that point, or are you guys, is that you're not getting involved in that those types of securities at that point?
Allan (24m 18s): We're not, we're not, we're not getting involved in those types of issues.
Jesse (24m 22s): Okay. I want to pivot to the darling of the industry, as we mentioned before, it seems to be industrial. You know, the last couple years has it, it's just been crazy for both industrial and for multi Rez, we see an asset valuations increased quite substantially. I've seen just boots on the ground, net rents. When I first started only seven, eight years ago, compared to today, you know, it's pretty wild when you're like, wait, is that industrial? What, what are your, what are your thoughts over, over what you've seen over the last two years? And I guess in answering that, you know, you've been around for right now, 2008, 2001 93.
So you've, it's not your first time seeing a change in the cycle. So how have you guys been digesting the last, the last couple of years?
Allan (25m 7s): Yeah, look, it's a great question. And you know, I'm going to start by answering your last question first because, you know, we, we all know the, the four most dangerous words in any investment businesses. It's different this time, you know, and I've, I've said this over the years and, and I still believe that any investment in any investment business in the world is cyclical peaks. The troughs change cycles change. They look different, they feel different, but at the end of the day, they're still cyclical because if they weren't, Evelyn would pile in and we all make a ton of money doing that.
So, but the issue really is that this cycle that we've been in to talking about 93 talking about 2008 and 2009, and in 2008, 2009, wasn't even cataclysmic in Canada, right? I mean, there was a global financial crisis. The real impact up in Canada was debt markets seized up. And without debt markets, there was virtually no transactional activity during that period of time, but it's not like asset values fell through the floor at that point. So we've had a pretty long and a pretty good run.
And if you've only been in this business 10 or 15 years, that's all you've ever seen. And you start to think it's a pretty good business. It is still cyclical and things will go up and things will go down. You know, look, we are clearly in unchartered waters, you know, in the industrial sector, e-commerce has been a huge, huge driver that was ramping up nicely up until 2020, and then absolutely exploded at that point.
And I've read, I read somewhere that in 2020, we had the equivalent of e-commerce growth, which was equal to the last 10 years of growth of e-commerce sector. So currently supply chains, as we continue to see it today, we're not set up for this. They were not ready for this. And the great benefactors of all of that was really the industrial market or the great manufacturer was, and that market wasn't ready for it and still is not ready for it because we keep falling behind in terms of supply and demand.
We're not building space nearly quickly enough rents seem to go up weekly, monthly, you know, and this is now classic supply demand that we're seeing, right? I mean, people say, well, how, how high our rent's going to go? And I don't have that kind of crystal ball, but when you look at the intersection of the supply and demand curve, it keeps suggesting higher and higher rents until something changes until supply catches up until demand cools down.
You know, the growth in e-commerce is not going to continue at the pace that we've seen in the last two years. People are going to start going back to stores and actually walking in and walking out with something as opposed to ordering it from, from home in their pajamas at 11 o'clock at night. So, so look, I've never seen this and I don't think anyone in our business has ever seen this and the fundamentals have never been better, but it will change.
The thing about the industry that I think is somewhat comforting about that last statement is I don't think it will change overnight, you know, in our businesses, as opposed to say the office building business, it's easy to turn off the supply tab fairly quickly, but it takes six to nine months or 12 months if you're building an Amazon multi-story facility to build a building. And so I think if supply were to get too far ahead of, of demand, you know, that tap would get shut off and, and mitigate any, any serious imbalances.
But look, the truth is if you look at, you know, this country, we have 1.5, 1.6 billion square feet of industrial space across the country vacancy rate today is somewhere between one to 2% equilibrium is generally considered to be around five. So we are a long way from equilibrium right now. And so, so I think there's, there's still some, you know, there's, there's runway for sure.
But if you're a user, it's a tough, tough time out there right now, because there's nowhere to go and you don't have a lot of leverage with your landlord.
Jesse (29m 41s): Yeah. Fair enough. In terms of like one thing for us, just trying to understand this where it's kind of a, somewhat of a natural disaster, not a, not a pure recession as we've seen in the past. And I'm still trying to understand from just in brokerage and investment, how we are, you know, forecasting the next year, that the next two years where, you know, the question of whether you're going to have more inflation with the interest rate, environment's going to be like, I mean, without the crystal ball, if you, you know, looking forward, how are you planning for the fact that yeah, we might slowly come out of this and hopefully it's not as anemic as it was in oh eight, you know, to, you know, 10 years on a recovery, but how do you see this playing out from a macro economic point of view or even just a national,
Allan (30m 26s): Yeah, look, I, I think that, you know, our markets are fairly efficient and, and so, you know, you have the demand drivers on one side and, you know, short of a major economic recession, which I don't really see coming anytime soon. I think you're going to have, you know, demand is going to continue to move along at a reasonable clip. I think it will really be incumbent on the development community.
And in many cases with the assistance of municipalities across this country, to be able to get more product to the market, there's no shortage, there are no shortage of sites. There are no shortage of developers. There's no shortage of capital for that, but it takes time and there is a lag there for sure. And I think that, you know, I think for the foreseeable future, that's going to be the challenge. But I do think that, you know, over, over the next three to five years, I think you'll see probably a more normalized environment, which, you know, probably a little bit unhealthy right now what we're seeing.
I mean, you know, you talk about, you know, how, how you sort of deal with that going forward, look as an investor. When you, when you're looking at cap rates dropping on a regular basis, you have to scratch your head and say, well, I don't want to be caught without a chair when the music stops. And again, I've seen this movie before and I still got the scars, certainly from the late eighties, early nineties, which was, as I say to younger people like yourself, wasn't, wasn't a recession.
It was really a depression in real estate, the likes of which we've never seen before. I don't see that happening now for a whole bunch of reasons, not the least of which is I think that the world is a different place today. And I think many in the real estate community are probably more conservative in their approach to, to development, to debt and to pricing expectations. And maybe what we saw in the late eighties, early nineties, but, you know, things will change.
And so for us, you know, the key is not getting too far over our skis when it comes to looking at opportunities. And, you know, I think when I, when I look back over the last few years of prices, we've paid for assets and you know, what looked like a ridiculously stupid place two years ago. Now it looks like a steal. Are we going to be saying the same thing two years from now? Don't know
Jesse (33m 9s): They have the old, I should've bought five of those in terms of the, the actual trends of where, where you see industrial going. I'd love to get your thoughts on, on some of the, where you see tenants and with what the wants are today. That might be different from five or 10 years ago. But just in general, I, I questioned, you know, comes on this idea that, because we, you said before the supply and demand issue where we are looking for more development, we're looking for fewer and fewer sites or buildings, do you buy into this idea that we're going to see more repurposing or rezoning of existing sites from whether it's retail to industrial office, you know, to industrial or even hoteling to apartment units?
Like, do you think we're going to see that? Or is it, or is that more of a kind of a, you know, something you read in the news, but the practicality might not be there?
Allan (34m 2s): No, I, I think that's real and I think it's true. And it goes back to, you know, what you see in the appraisal reports, which is, you know, what is the asset worth on a highest and best use basis and what was highest and best use 10, 15, 20 years ago for a site might not be the same today. Look, when you look at suburban office space, as an example, you know, there's lots of it out there, certainly in the GTA. I think last time I checked vacancy rates were in the teens.
You know, you have the whole trend of people not going back to their offices so quickly. Maybe now they will. But, you know, I think many are going to probably adopt some type of a hybrid approach to, to, you know, working, going forward. And so, you know, I, and so you have that as, as part of the backdrop where it might be an outdated retail property. And then on the other side of that, you have industrial rates that have slowly been creeping up, you know, where up until, I don't know, five years ago and bounced around in a very narrow range for the preceding 20 years.
And all of a sudden everything changed. You know, we we've got a project just like that. As an example, in, in Meadowvale right now, we acquired the site last year. It had some older two-story walk-up office buildings. They were 70 odd percent leased, but likely not huge demand for that product going forward. And we really looked at it on the basis land value and what we thought would make for a terrific industrial site off a major artery close to the 4 0 1 close to the airport.
And so we're moving forward. So there's an example of a site that is being repurposed into what we believe will be a higher and better use. So, yeah, I, I think you're going to see a lot of that. Look, I mean, there's been talk of repurposing shopping centers to, you know, e-commerce fulfillment centers and logistics facilities and whatnot, which is what the economy needs and wants right now. You know, the challenge in some cases, if you're not doing a tear down, is the bones that you're working with and no different than, you know, looking at an old house and saying, I'm going to renovate it.
In some cases you might just be better off knocking it down and starting over again. And I think in some cases that may be what happens in some cases, it might be that it's completely workable. I mean, I, I would say this, I haven't seen a lot of that yet in Canada. I certainly have read about examples of that type of thing in the states. But yeah, I, I think that it's, you know, you'll see a lot more intensification on, on retail sites with industrial, with apartments and residential.
You look at, you know, arguably the most successful shopping center in this country at Yorkdale. And, you know, I believe that Oxford's got significant multi-phase development activity planned for that site, which will make it even harder to find a parking spot, but, and I'm sure I'm going to get a call from Michael Turner over that one. So I think that's what you're going to see. A lot of this is, you know, look, if you're in the industry as a, as a provider and deployer of capital, you're trying to figure out where the demand is coming from, and that's the demand that you're going to be catering to.
That's the demand you're going to build to. So yeah, whether it's it's repurposing buildings, whether it's intensifying sites or whether it's just a complete knockdown and start over again, I think you'll see all of that
Jesse (37m 37s): Right on. Well, Alan, I want to be mindful of the time there's four questions. We ask every guest a kind of a rapid fire before we do that though. Is there an area that you've you feel in our market that people aren't talking enough about or an opportunity, you know, whether, you know, throw it out, student housing, self storage, is there something that you don't think is getting enough press right now?
Allan (37m 59s): Yeah, look, I think there, I don't know about not getting enough press, but certainly, you know, in, in the commercial real estate space, you know, self storage is, has always been an interesting segment of that market. To me, I think it's, it's still in its early stages. I think it's an industry that's fairly fragmented in terms of ownership. You know, again, I, I, I think there's probably a consolidation opportunity there and I think there probably going to be some good development in that space, because I think a lot of the trends that we're seeing in the economy are going to lend itself to people wanting to have that kind of space and use that kind of space.
So, you know, I, I think there are segments certainly in our market that, that probably don't get as much air time as some of the other ones.
Jesse (38m 57s): All right. Allen, look for questions. If you're ready to go all through all that. Yeah. Okay. All right. What's something, you know, now in real estate or in business that you wish you knew when you started out, maybe at that Tim Horton's.
Allan (39m 12s): I know I should have watched all the other podcasts already prepare for discretions. Yeah. I think that, you know, look, if you're saying well, in the benefit of hindsight, you know, I think that over the last 20 years or so, you know, clearly for the most part, we've been in an expansionary cycle. And so probably an aggregation strategy that, you know, in hindsight would have been more aggressive when I think back to all the deals that we've said no to over the years, kind of look at that and say, I wish I'd said yes a few more times, but you know, you'll only have the information you have at the time to make the decisions.
But yeah, listen, if I had that crystal ball, I would have said no to virtually nothing.
Jesse (40m 11s): All right. Number two, for younger people coming into our industry from a mentorship perspective, especially, you know, given the environment we're in right now, what would you recommend to those, to those individuals?
Allan (40m 22s): Yeah. So I think, look, the industry is in a great place and you know, there's a lot of growth. There's a lot of activity. There's lots going on in the industry. The one thing I would say is this, you know, th that first job out of school might not be your dream job, but I've always likened the industry like any industry to a club and no different than trying to get into a club on queen street at midnight on a Saturday where she had people lined up a hundred deep and I'm like, what are they giving away in this place?
The whole, the whole thing is about getting into the club. Because once you get into the club, you can move around, but you got to get into the club. And so the analogy for me is for young people is, you know what? Getting into the industry, get into the club. That first job may not be your dream job may not be the one that's going to make you independently wealthy, but once you're inside, you know, get a couple of years of experience, build up your resume. And then before, you know, it, people are gonna know who you are, your phone's going to start to ring, and you're going to have opportunities to do other things, but you gotta get in the door first,
Jesse (41m 28s): What's a book or a resource that, you know, has helped you over the years or something that you constantly are recommending to other people. I'll say, I'll say aside from real estate and financing investments from Peter Lindemann.
Allan (41m 45s): Absolutely. You know, that's, it's a great, great question. And if I have time to think about, I'd give you a great answer maybe, but what I would say is this, you know, it constantly amazes me when you look, when you read. And I read, I do read a lot of business books. I mean, I read a lot of different kinds of books, but, but sticking to the business stand for a moment. You know, one of my favorites is, was the big short.
And when you read books like that, which to me almost read like fiction, cause you sit there and say, how is this possible? How could people have done this? And I think to me, the takeaway there is, you know, we're in business, we're all out there trying to make a living. And I think doing the right thing, doing the ethical thing in the long run is always I think, going to work out.
But I think it's also important to realize that there are a lot of bad actors out there and, and you can never just assume that people will do the right thing because often Greek gets in the way.
Jesse (42m 57s): Fair enough. All right. Here's the real tough question. First car make and model.
Allan (43m 4s): Well, that's very funny. You should ask that question because we were actually talking about it yesterday and it was, it was, I'm trying to think of what context it came up in. It was, I think I was chatting with one of my kids about this. So my first car was back then. It was a Datsun, which I guess now is Nissan. Yeah, it was a, B two 10. And it was a sporty kind of car was not super expensive. I was just out of university, but what was cool about it?
Which back then was cool was it was a two-tone car. So the top half was black and the bottom half was great. And I loved that car. And sadly, I went away with a couple of friends and I left it for my sister who totaled the car. And thankfully she walked away without a scratch, but the car was district.
Jesse (44m 0s): That's great. That's the first, that's it on the program. All right. Well, ladies and gentlemen, my guest today has been Alan Perez, Alan, thanks for being part of working capital.
Allan (44m 10s): Thank you.
Jesse (44m 20s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Chris Prefontaine is a 3-time best-selling author of Real Estate on Your Terms, The New Rules of Real Estate Investing, and Moneeka Sawyer's Real Estate Investing for Women. He is also the Founder and CEO of SmartRealEstateCoach.com and host of The Smart Real Estate Coach Podcast
In this episode we talked about:
- Chris` Background
- Changes in Lead Generation
- Vendor Take Back Mortgages
- Chris` Involvement in Deals
- Geography and Real Estate
- Motivation for Writing a book
- Interest Rates and General Economy Outlook
- Regulatory Environment Challenges
- Coaching. Advice for the Younger Generation
- Chris` Plans for the Future
Useful links:
https://smartrealestatecoach.com
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, my name is Jesper galleon. You're listening to working capital the real estate podcast. Our returning guests today is Chris Prefontaine. Chris is a three-time bestselling author of real estate on your terms, the new rules of real estate investing and Monica Sawyer is real estate investing for women.
He is also the founder and CEO of smart real estate coach.com and host of the smart real estate coach podcast. Chris, welcome back.
Chris (47s): Thanks Jesse. I'm going to be back and thanks for having me
Jesse (49s): Back. Yeah, it's my pleasure. So a lot's changed since the last time we spoke. How, how are things in Rhode Island?
Chris (56s): Yeah, lots change would be an understatement for everybody, right? You and I were talking off here. It's been crazy. I knock on wood. I'll say the craziness helps us because we're looking to solve problems. Right? It's every person I come across in every show is like, oh, why is it affecting you? And I almost feel bad sometimes because we're doing really well. We've increased that business because of it because more people need a guide. That's the short answer.
Jesse (1m 21s): Yeah. Have, have you changed or pivoted anything specifically because of just given the last year and what's changed either regulatorily from a government standpoint or just, just in the business.
Chris (1m 34s): Good question. So not from a regulation standpoint, because again, knock on wood. Nobody's screwed that up for us. There's always a bad egg in every market, but nobody's done that to two on this yet, but as far as the deals yeah, because their market's so hot, there's still a need for different lead sources. So we've added like three new lead sources, but still do the same base have always done. And now I'm starting to see the numbers creep back. Not quite as far back as 13, 14, 15, 16 pre COVID, but getting better.
Meaning how many cells we talk to to get a house in a contract, for example, it's just starting to come down again, which is nice to seek. So as long as you know, the math is okay, but we've added variable so that we don't have to rely on three sources, you know? Yeah,
Jesse (2m 19s): For sure. So for, for listeners that haven't heard the, the last episode, I think it was episode 63. Don't quote me on that, but maybe you could give a little bit of a background again on what, what kind of space you play in, in the real estate world?
Chris (2m 34s): Yeah. No, thank you for contact. Cause I go, I go with something like that. Everybody knows what the heck I'm talking about. So we buy without banks, we bought without using our own cash. You buy without signing on loans still to this day, that was all sparked long story short from the oil crash that I painfully lived through. Then re-engineer, re-engineered everything to kind of weather every storm. And then, you know, the then obviously COVID whacked everyone. So we only buy on least purchased owner financing, which is one of my favorites and subject to existing financing.
Those are the three things we do if a Canadian listeners, the vendor whole back. And there's different ways of saying it, but that's what we do. I love those types of deals now, because again, as the market tightens and now rates going up is going to push a whole bunch of people out of the market again. And that'll put us back and play with a lot of people. So that's how we buy. When I said we added lead sources, we used to call on a, for sale by owners, expired listings that don't sell the agents and for rent by owners. And now we've added probate. Most recently we've added TV very recently.
And so those are some, a couple of new ways that we're going at it and then believe it or not, Jesse, there's a brand new list. We're experimenting before we bring it to our community. We do that all the time. We want to make sure we're good with it. And that is COVID stress people already, there's less you can buy. So we did our first blast with that and we'll see how it goes, but that's, those are the three new sources we've added, always looking to provide, you know?
Jesse (3m 55s): Yeah, for sure. So you mentioned the lead generation piece there, so what's, what's changed specifically in that area. Well,
Chris (4m 3s): Okay. So there's two ends of this cause people say to me, well, the market's so high, you must have been getting deals. Yeah, the market's hot, but there's still a bunch of buyers that can't get financing. But balance that with the fact that the market is hot in pockets. And that means we have to talk to more sellers to get a deal. And that's why we added those three different lead sources. So let's, I'll give you some metrics back, say 13 to 19. I'll give that as a reference before COVID I would talk to about 11 as get in the door about 17 sellers. I've talked to, to get a property under contract and by about 25 leads per actual sale, where we create three paydays, which we can talk about later.
Now the number's up to instead of 25 to get a say, probably talking closer to 50 or 60. So it's doubled the amount of people you have to talk to to get a deal double it's. Okay. As long as you know your metrics and you can plan your business that way, the key is knowing your metrics, right. Keeping track of it, but that's, what's changed. Hmm.
Jesse (4m 56s): So in terms of the, the kind of the vendor take back aspect, and you know, for those that don't know, you know, we've talked about it on the show, seller financing vendor, take back where you're basically, you know, asking the vendor or the seller to participate, kind of like the bank and provide the loan. We see it oftentimes when people are trying to close a deal and they can't get financing and sometimes it sweetens the deal. And then sometimes, you know, even with clients or, or ourselves, when we're buying things sometimes as a vendor, it's nice because you typically have a deferral in your capital gains in terms of what you do, how it, how you differentiate yourself from the pure vendor take back or do you, how do you go about that?
Hey,
Chris (5m 39s): We we've done it all. But the one I prefer Jesse is running down the lane of when they do take back the cell financing hobby referred to in your particular market, we do no interest. So we make principal payments monthly to the, to the seller, to the vendor. I didn't mail them building. I, you know, we do it on a big multi-million dollar properties. You do it on $200,000 homes. So you're the bank Jessie, you sell to me for 400 grand. Maybe you couldn't get 400 grand in the rocket. I'm willing to pay you that because I'm going to make monthly principal pay down that hammers down.
Principal gives me a nice hedge against any kind of market changes. And you as a seller may be ego maybe financially, but you get your price. You go, Hey, I want my number. Okay. What happens? So we do monthly principal only payments. Now, does that work always in forever? No. It's about 90% of ideals that are on financing. The other ones you might go, if someone says, I need interest, I'm working on a deal right now. And I said to my son a lot, who's structuring it well. Okay. But why don't we try to get 12 months to 18 months of no interest. And then we kick in interest for them.
So we both win. That's another huge advantage. There's all kinds of ways you can stair-step it. But the short answer is we prefer a principal only payments monthly for a lot of reasons.
Jesse (6m 51s): So could you maybe for a, for those reasons, if you could go into the aspect of the principle payment, just so I understand if you're not deciding to go with that interest step up or, you know, I don't know what else to say, like a balloon payment that are kind of, it gets introduced at a later date. What is the, what is the preference or what is the reason that principal is, is so appealing to you? Yeah.
Chris (7m 17s): Well, let's take a, I'll take a house. We just cashed out of it. It's it was a million dollar ocean front property and a resort area up sitting up on a bluff or looking open ocean, gorgeous. The woman, believe it or not selling it to us was a relative. She couldn't sell on the open market. This was probably four or five years ago. We structured a deal at 945,000 and the monthly payment Tara was 2,500 principal. Only. That means 30,000 a year was coming off that price. So we bought it for 9 45. We just sold that recently for only 1,000,050, but because of four or five years, I think it was a principal pay down.
We had a nice six figure plus payday cash out. If we took out a loan for that, as you know, that would have been a pathetic profit, a hundred grand on a house that big to hold it for years, you know, it wouldn't have worked. So the principal pay down, puts you in a position to really have it down that principle. Think of, think of anyone listening, buying a home it's heavily weighted to interest. You get a minute amount of principle every month and then slowly goes up. We get all principals. That's pretty cool. So, so here here's some metrics that we can jump off of this. If you buy a house the way I'm saying, and you get at least four year terms and the house is at least 200 grand or more, I'll give you kind of a low 200 grand a month and you structure at least $900 in that percentage of monthly principal payments, you have a six figure pay day.
The way we do all three paydays, six figures on that one house on a $200,000 house. So think about that. People can't, this is a hard one too. I'm going to buy this house with two, one and a four years. I'm going to make a hundred grand on it because of the principal pay down feature. Yeah.
Jesse (8m 47s): So it's kind of a, it's essentially like a loan amortization that you, you know, over the time say you have a five term five-year term mortgage. You look from the beginning and you look at the end and you're right. You have what? 50 sixties could be 70% interest payments at the beginning. And then after that five years, 10 years, whatever the term is, you see what you've kind of paid down? What your emiratisation you paid. Whereas yours is 100% in this case, 100% principal pay down. So you're that direct effect is, is obviously accelerated.
Chris (9m 17s): Yeah. And then some context here. So this woman that we, that we did the 2,500 a month payments, obviously that wasn't spread out over the term of the loan, right? Because it would have been a lot higher. We pick an amount and we tell the sellers, this, we pick an amount that when a buyer comes in to look at our property, they have to say, if I'm charging, say 3000, cause I'm paying 2,500. They have to look at that and go, well, if I bought this and I went conventional, I can't afford it yet. I can't get financing yet. But if I did, my payment might be around 3,500. That means I have to be somewhere around 2,500 to make that work for me.
I got to make a spread every month. And then of course it's a balloon payment at whatever year. We're cashing that out. You have three, four or five. We usually don't go less than four. So year four or 5, 7, 10, whatever it might be. That make more sense. Yeah, it does.
Jesse (10m 1s): So, Chris, what is the kind of, where do you get involved in these deals? Typically
Chris (10m 7s): Me personally now,
Jesse (10m 8s): Well, I mean, at what point do you get involved in the deal? Is that when you have somebody that has it under contract, you have something that was just traded. What's the typical kind of insertion for you? For the team?
Chris (10m 19s): Our team starts with taking a, what we call it, property information sheet. It's online now in our CRM, but we take a property information sheet, elite sheet, if you will. We get that from virtual assistants who calling people, basically not saying, get lost, but say, Hey, you I'd be open to some options. Have your team call me our acquisitions team. Then calls them I don't anymore. I used to do it all back in the early years. And then it moves from them to, from them to a person on our team that goes on appointments again, just being me then my son-in-law and just duplicated ourselves.
So all I do is check the metrics now monthly and make sure I help them structure deals. I like that aspect of, of the real estate, as you know, that never gets old because every deal is different. Every deal is different. There's still lessons to learn. So I love being that transaction engineer, but me personally, I don't get it until them, my team right away, right after that person raises their hand, we're calling.
Jesse (11m 11s): Got it. And what do you find has been, is there been a specific geographical area that, that you guys have focused on? You know, will you do loans anywhere or do sorry, insert yourself anywhere.
Chris (11m 23s): Yeah. Sorry if that's what you meant, geographical. Yeah. We'll go anywhere we limit, because I I'll tell anyone this within 50 miles of you, your radius, unless it's water, you have plenty of deals to go to go be had. I have students in our area. I have no problem with that. There's so many deals out there. You just have to approach this with a prosperity mindset. Now, as a family team we do in the United States, Connecticut, Rhode Island and Massachusetts. And then we have students in most of the other states in the country in a few in Canada. So we'll go anyway, it works anywhere. It's not price contingent, it's not cycle contingent.
It's just a matter of how you bop and weave and become that transaction engineer depending on where you are.
Jesse (11m 60s): Gotcha. So in terms of the book, we talked a little bit about it last time for listeners that you know, that didn't hear that episode, or, you know, just wanted a little bit more information. I, I'm just a genuinely curious when people write books, cause it's such a, it's such a large process, especially when you're not just, you know, getting it ghost written or it's a, just an ebook, you know, what was the motivation for that for you to write it? You know?
Chris (12m 25s): So I'm going to say this from two levels business and personal one is I've been at this 30 years. This is my 31st year I K 30 is, was September. My wife said back on the bow when I was turning 56. So about six or seven years ago, she said, it took you 50 years to figure this out, like get all this going. And she was kidding, of course, but it's, but it's a fact like it takes time to walk and we've, and I've always wanted to write the book, frankly, growing up, I had, I wouldn't call it special ed, but they wouldn't let me take a language cause I didn't score so well on, on those tests you have to take.
So I would have never thought that I would write anything, but as I got into the years in the real estate mode further, further along, and she said that to me, I said, I'd love to share that. So that was number one, number two reason for sharing. It was, we got beat up in the crashes, you know, and it's probably on your last episode. And so my wife said to me, why don't you tell people like teach people how you got through that? Meaning the crappy credit in the United States. That's a key thing to have. So teach people that teach people how to teach people, how to buy a house when they don't have great credit, teach people how to sell when they don't know how to sell.
So that's what sparked it. And then from a business standpoint, you became more of a business card versus let's see if I can go on and sell 10,000 books. I really don't care. I want the message to go out. I want people to read it for free or for the small Amazon chocolate, they buy it and then say, okay, this is something I want to go further on or you know what, thanks. But I didn't spend much time on money and that's not an issue for me. So there's a business reason and the personal reason, that was a long answer. Sorry, but that was a good question. I don't know.
Jesse (13m 52s): Not at all. So that, I mean, since, since you launched the book and it's been out there, what's been kind of the feedback or maybe some things that you didn't realize that it was going to lead to or, or spark
Chris (14m 5s): As I didn't notice before, but now that in hindsight and we have three books in a fourth coming out, I will tell you that I'm always amazed at the hands that gets into number one. And number two, that the credibility of brings by nature of the book. Never knew that I wrote for personal reasons that I said, okay, I can turn it into a lead magnet, but then I am just over the top, satisfied with the authority that that brings when someone is an author of a book and you attract a different type of person, perhaps a higher level of prospect than you would otherwise. And I'm calling that kind of the authority figure.
The fourth book when Sally coming out is called sell with authority for real estate investors. So it's like, how do you become that person in your marketplace that people want to seek out versus you trying to go seek them out?
Jesse (14m 49s): So you're, you're doing another one. Just, just a masochist.
Chris (14m 53s): Yeah, we, well, I, you know, you said at the beginning, I should've commented to do a book is starting to work. We started this one the month before COVID shut down in 20 with the goal of bringing it out in September of 20 and it's coming out this much and I'm saying to the team, what the hell? I mean a good team of people that have partnered on this book, two great authors. It just took, it takes a long, I think, I think always, always, always said, don't ask me why don't we do the next one? I don't know if that's going to be tomorrow.
Jesse (15m 17s): We always say, is it take twice as much work and two times as long. So I want to talk a little bit about what's a topical right now. I think a lot of real estate investors are looking very carefully at the fed in, in the states, you know, BOC in Canada, you know, whoever whoever's running monetary policy, where you reside in, you know, the question of real estate interest rates or interest rates in general and how that impacts real estate we've been saying for ever, or as long as I can remember, interest rates can only go one way.
And it seems that with what seems to be non transitory, arguably non transitory inflation. What's your, what's your outlook right now? How are you feeling about interest rates and the general economy? Maybe you can start back home and go more broadly.
Chris (16m 7s): Yeah, my wife and I just got back from Vermont and I was talking with this, cause she'll always say to me, how's this going to affect you? How's this going to pick your business? How's it going to pick us always? And now she's thinking about our kids who are young adults, 30 to 33, how's it gonna affect them when they bought? So my take on it is this, you and I don't have a crystal ball. If we did, we'd be on a beach somewhere. We wouldn't have to be doing these shows together, but my take on it is yes, clearly inevitably interest rates are going to creep up. Then when I said to my wife was sadly, even a quarter of a point in interest rates, certainly a half a point in down the road for more, you are going to flush out tens of thousands, hundreds of thousands, if not millions, eventually a buyers out of the market because first buyers at so many times, it just borderline and the rates of afforded them to be able to get in.
And hopefully they smartly did a fix. Right. And they're good for a long time. So, so on the buyer's side, they're going to flush a lot of them out. They're going to need more time. If they're going to have a buy, we can help them with that. So selfishly really cool, but we can be that guide. Now, how does that affect the other part of my business sellers? Same way. If buyers are getting flushed out, the demand for their houses went way down. And so I'm starting to kind of taste and smell and see what I did in 13 through 19 slowly coming back, like I talked about earlier with the metrics.
So that's where my niche standpoint and I also, for personal reasons don't care as much because the stage I'm at in my life would, I don't have that anymore. And you know, I did all that after the oh eight crash and get rid of all that. So it's important to know that's coming from my context from a business standpoint and a personal standpoint. I don't care. I hate to say it, but I really don't care. It's only going to help us help more people. Does that make sense?
Jesse (17m 41s): Yeah, it does. So in terms of the actual mechanics of, of your real estate in general, you know, and what I mean by that is going with open rates, variable, fixed, fixed debt. Is there anything that you're doing from a tactical standpoint, preparing for what potentially could be interest rate increases?
Chris (18m 2s): Two things I guess. And tell me if this answers it from a personal standpoint, since the crash, I will never take a Ray bar, right? That's just me personally. I don't care if it's a commercial building a personal, I very rarely will sign on a loan, but if I do, it's gonna be fixed. Secondly, I would just say that anytime we do a deal and a business side of things, people say, what are you gonna change? I'm just going to make sure that longer terms. So instead of writing a four or five-year on a financing deal or at least purchase, I might do a 10 or 15 in 10 or 15 years, frankly.
I don't care if the market pivots three times I'll be okay. And that's why the terms niche is so cool. And that, and back to the book it's we wrote about in the book and it's been revised probably since you and I talked to actually the revised version. So it's up to date as you possibly can be right around COVID and that is take longer terms. You don't care as much. They come about every 10 or 15 year cycle. You'd be okay. That's my opinion. Yeah.
Jesse (18m 55s): Well, it's, what's the, I dunno if it's Warren buffet, but sounds like it, but it's, you know, not timing the market's time in the market. I think that's just a, a philosophy from especially hits home for real estate. You know, people that have been in the market for a number of years over time, you know, we ended up being successful. The aspect of, I also wanted to talk about is there's been a number of changes in, in the states and Canada, the world in terms of labor, the cost of goods, supply chains would like to get your thoughts on, on how you see that in your area.
You know, if, if that's impacting the type of business that you do, or generally your outlook on where you think we're going, if we're heading in the right direction,
Chris (19m 40s): I think the only thing I can tell is only speak about there again, if I'm nailing your question is the labor part, the employee part, meaning since COVID demand for virtual has gone up means I have better quality work for me all around the country. However, my costs went up direct example. We could hire an executive assistant, a really good one, pre COVID 15, 18, 20 would be just a crusher person. Now I, we can't attract anyone in front of $25 an hour. And so I just, from my new niche of labor, I don't know if that helps with relative to your question, but that's what I'm feeling.
But as a result, we've got great people that you couldn't get when you were trying to track locally here in new England. I mean, we, we just, weren't getting the same type of quality people. Our team now is amazing because of that. And you've got to pay for.
Jesse (20m 26s): Yeah. So you mentioned from the outset, you know, you you're relatively non geographical, like you'll, you'll do the, you'll do terms in your area, as you said, you've mentioned there's a couple of students in Canada. Is there anything about our, you know, contacts, our regulatory environment that, that makes terms a little bit more challenging or different in any way,
Chris (20m 48s): What comes to mind is just a little more challenging lead generation. So you just gotta pivot on this meaning it's my understanding from my students that you can't just readily go. If you're not a relative and grab an expired listing database, for example. So it's harder to get information. Data is more protected. That's been my experience, but does that stop anyone? No, there's a gentleman. I was on his show. He's done. He's been doing these deals there for 30 years. So I know they're being done. You just gotta not running one lane, just like I just added three sources. You just get out of the other sources.
That's all, you just gotta find the right pond efficient.
Jesse (21m 21s): Yeah. I find it's one of those things. I think it's our Castle's laws of, well, number one, contacting and privacy act. And I kind of rolled up in that, but I mean, at the end of the day, like you said, there's always a way we have a, you know, an equivalent for secretary of state where we can try to find, you know, the actual owners, it gets a little different with residential. Do you guys, do you guys do this outside of residential real estate? You'll do commercial deals.
Chris (21m 48s): Yeah. This is a good subject too. So I, we teach residential single families. Right. But I, but the fact is you can, by the way, we're buying boats, cars, planes, people do on the financing, right? So I bought out building in 2018 on our financing. The gentleman absolutely did not want to be cashed out. He, he seeped out a terms deal and we met and it took us 10 minutes. Now, if you go buy a commercial building, we still own it. You go buy that commercial building. Anytime I don't care, pre COVID nut. Now it doesn't matter.
You're going through some grueling underwriting to get a commercial building these days. And you're putting down 25 or 30% and you better have a strong balance sheet and super strong cash in addition to what you're putting down. Well, we did the deal in 10 minutes. It went to closing like within three weeks. That's unheard of. So yes. The short answer is yes, we've done four units, six units. We target them when we want to bring them in our portfolio. We either do them in our retirement account or we do them in the company.
Jesse (22m 44s): Yeah. That makes sense. I was curious from our last conversation cause we do, you know, in my brokerage, we do purely a purely in, in commercial deals and was curious if you actually, the mechanics were the same with that aspect of it as well.
Chris (22m 57s): The conversations Jesse and more fun and more, I guess I'll say higher level again. And the reason I'm saying that is a lot of the sellers that even if they're having a mortgage, but certainly if the debt-free on these buildings or multi units, they're pretty financially savvy. They got there for a reason. Right? And so these people that are like this guy was debt free. So he sat down with me. He said, well, that's pretty cool. You read my books. Like this is really cool. I like you like you're failing. And we cut a deal. The, he was at a different level than a first time home buyer trying to sell the home. And me saying, do you want to own or finance them?
That they just don't. A lot of them don't understand that it's an education process where the ones doing the deals you're probably used to doing, they get it. Like they totally get it and appreciate it, bankers. Like they get it. They love it. We we've bought houses from financial planners and bankers because they logged the system and the numbers. They totally understand it. Yeah.
Jesse (23m 46s): I think there's this. And hopefully technology's gonna help with this. But I think commercial real estate, even though in a lot of ways, it's, it's behind residential. I think the creativity of the deals is different. We think about the capital stack more from a finance standpoint then, you know, just debt and equity and that's it. So I find that most of the deals I find I do are a little bit more creative and people are open to thinking outside the box.
Chris (24m 10s): Okay, great. Yeah. I agree. I love it. I love it for that reason. Whereas the new students who go on, I can't call Jesse. He owns that big building or they're afraid to, but now it's easier.
Jesse (24m 18s): Yeah, man. It's so funny. You mentioned that I CA you know, for anybody that's in any industry that involves sales, it's it? It is one of those things. I remember when I first started and I knew that, you know, somebody was a 30,000 or 40,000 foot tenant, or, you know, somebody that owned multiple large properties. There's just this different feeling you have when you call them and you just got to get over it because the, you know, the small guys in the, in the, the guys or gals with a lot of properties, it's the same person. It's a, it's a human on the other end. Yeah.
Chris (24m 47s): Here's a coaching nugget then for everyone listening, if you, if you're in that mode, that would just, and we're just talking about there's someone in your niche. I don't care if you just are broke. Or if you just do terms like me, it doesn't matter. If you just do Maltese, there's someone in your niche that has done the higher end deals, go find them and talk to them, go buy their book, pick up the phone and they'll talk to you. You don't have to pay millions of dollars. Just they'll help you get over that. So that after you do one or two, you'll treat it like second nature. It's all mental, all mental. I promise you that the mental game is bigger than we all think.
Jesse (25m 18s): Yep. And you just get your reps and well, it would, it would be a miss opportunity to not talk a little bit about coaching with yourself. So 30, 30 years in the industry, you know, what do you, what are you seeing with younger talent that comes in to our world? Or what are you saying to them? Advice for the younger, younger generation they're obviously coming in at a crazy time. I can't imagine coming in two or three years ago, especially into brokerage, but real estate investing in general during this time. So yeah. What's, what's your view?
Chris (25m 49s): Well, a little context, Jessie like this, I don't know if I told you this before. So my son, Nick grew up in the business. Right? And then remind me to get back to your question promise. But he grew up in the business because he's around me, but he had a head injury and he decided not to go to college. He was in calmer and he got out of all that. And in 2008 he became a broker. So he started in the worst time as a result. He's pretty seasoned now. But as far as what I would have to say to them right now, coming in the business, this is so simple but effective. If you can stay with it. And that is number one, pick a niche that you can get behind and don't get caught up in the shiny object syndrome because real estate is cool.
But as a result, you can get distracted real quickly. So pick a niche. That's why I like doing free. You find a niche, there's a lot of free stuff out there. Then once you find it by your free research to find something that I alluded to earlier, that in your niche, that's where you want to be. Not just financially successful. Good, cool. But I'm talking about maybe family values. Whatever's important for you. For me. I can't go follow someone as a mentor if their life's a mess and they don't have real issue with their wife or their kids, that's not for me a mentor. So that's what I mean by get behind an issue you can get by and get by on a person you can get behind or group.
And then here's the toughie put the blinders on for at least 36 months, at least 36 months. After that, I promise you you'll have a great experience. If you listen to step number two and you talk to the person that you, that you've taken advice from. So I hope that helps that that's the best thing I could tell anyone. And I wish I did that twice in my life when I had a curve ball with the market. I wish I had someone like that. And those are the only two times I didn't. And only two times I got hit, no mentor.
Jesse (27m 25s): Yeah. I mean, that's something we, we always talk about on the show, the mentor mentorship aspect. And it seems like everybody in our industry or just business in general has a, an opinion about it. And in, you know, in the context of your son coming in, in oh eight, like I was just talking with one of the partners at my company a couple of hours ago, actually about these times in our market. So whether it's COVID oh eight, 2001, 1994, like we talked about these calamitous times and a lot of turmoil in the market.
Do you find that when you actually can live through that in our industry, that it, you know, it kind of sharpens the pencil? Cause I know that there are some investors or people in our, in our, a world that, you know, sometimes they won't even work with a certain investor or sponsor if they haven't been through at least one, one recession. What's your view on that
Chris (28m 19s): Agreement about this for awhile? Because unfortunately there are people in your space, in my space that have never done a deal, but they're great marketers. And unfortunately they're sucking in a lot of people that they shouldn't be. So I don't just think it's, it's a big deal. I think it's enormous that you speak with someone that's seasoned. I hated going through what I went through twice. I got banged up. But as a result, this niche was built. This business was built. So yes, big explanation, point on what you said, hugely support that find some of that's been at least through a life and, or a economic challenge.
Both would be great. And so I mentioned my son's accident course, we all get hit by COVID nine 11. These are things that season you and then, oh yeah, by the way that mark had just turned two. So these are all important growing things.
Jesse (29m 8s): Yeah. Fair enough. All right. I want to be mindful of the time Chris, but before, before we let you go, I just want to ask you in terms of the business in real estate, you know, what's next for you? What, what do you have on the horizon? I know you mentioned a, a new book. So what else you got?
Chris (29m 25s): Well, we we're about to rewrite our mission. We had a five-year mission ends in 22 and it's all about transactions. So in the midst of doing that now and then up leveling to bring on some amazing coaches, to help us expand that around the country and into the, into Canada. So it's more of the same, Jesse. It's just that it's not about me anymore. It's not about even my family team anymore. We've got some amazing people. Our purpose is to help individuals and families create the life of their dreams. And as such, that has caused a major, you know, motions matter when people are emotionally behind something, it just catches on.
I don't want to say a movement is too cliche, but that's where we're headed with doing more and more transactions. I could care less. How many people buy a course. I want to do more deals and help more families. And that's what it's all about. So just upleveling that in a big way.
Jesse (30m 8s): Unreal. If you could remind listeners, if they want to check you out, Chris' work and they had to,
Chris (30m 13s): I'll give you just a general website and then a, and then a free master's class. If you don't mind listening to me for another 55 minutes, you can go to smart real estate coach.com, but there's a free master's class@smartrealestatecoach.com forward slash masters class. And it's me for about 55 minutes. You'll hear from some other students and it's not going to you to make a million bucks, please. I want to make sure I position this properly. It is to expose you more to what Jesse and I talked about. And if that's for you, great, I'm sure we'll hook up cause the way to get free calls and everything's in there. And if it's not, you spend 55 minutes and got some education and I hope it's a good use of your time.
That's all
Jesse (30m 48s): My returning guest today has been Chris Prefontaine. Chris, thanks for being part of working capital.
Chris (30m 53s): Thank you, buddy. Appreciate you having me.
Jesse (31m 4s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
In this episode we talked about:
• Richard’s view on Government Policies
• Covid Mandates
• Effects on businesses
Part 1: https://workingcapitalpodcast.com/mandates-lockdowns-and-the-law-with-richard-epstein-part-1-ep89/
Transcription:
Jesse (0s): Well, welcome to part two of our two part series with Richard Epstein. We talked a little bit about the pandemic and its global impact last week. We're going to continue that conversation today for those that don't know, Richard is a legal scholar. He's been practicing law for 40 years, was a professor at New York university and is also part of the Hoover Institute. So without further ado part two, what I'm curious about is we've had a number of different policies. You're at the state that you're in right now in California and New York state is probably most similar to a lot of the policies that we've had Canada wide now to the, the Supreme court.
First of all, it's interesting to see Clarence Thomas actually talking now and asking questions. I feel like he's, he's there to fill the, fill the Scalia void, but on these policies of mandates, this is what I'm curious about. I have people like we all do family members that are on opposite sides of this that maybe experts may not be experts. But what we're talking about is from a constitutional point of view, I guess, in the states and in Canada, we're facing a number of different policies most recently in Quebec, not surprisingly Quebec, their premier Francois legal, just basically put forth.
I'm thinking that they're going to try to put this into law to actually tax the unvaccinated as a, as a group. There's a number of legal scholars in Canada that think that that is a impingement on our charter freedoms, so that I'm sure is going to be played out over the next few months. But from a libertarian perspective perspective, a classical liberal perspective, the, the very aspect of somebody saying you can't do something or you have to do something. Maybe you could talk a little bit of, of how that is, is happening in the states and maybe extrapolate that to, to what we're seeing in.
Richard (1m 56s): Yeah, this was when I mentioned that the ups at the opening of the show that we got ourselves into mind, all that is not forbiddenness required. And so there's nobody in the middle. The reason why this is a terrible situation is that knowledge essentially equates in two different ways, this sort of background knowledge about the overall distribution of certain kinds of cases. And then there's private knowledge that you have about where does it fit into that particular distribution. So for example, if you know that you're at St my age and there's a very high risk of getting COVID, if you've got co-morbidities and you know, you don't have any coat, that is, was what bothers you is scout, which is not a comorbidities for these purposes.
Then what you do is you tamp down. If you're in other direction, you tamp up. So the theory is that in all of these cases, you have this two tier situations, generalize information is provided by collective authorities. That specific information is gathered by patients or in consult with their doctors. The moment you start putting these kinds of mandates on what you're saying is a certain kind of information matter. And it turns out it matters enormously. So, you know, you know that all 10 year old boys, they could have shoe sizes from four to 10.
You know that you, a little Johnny is at five. You don't want to give them a seven size sheet because that's what the median person starts to take. And you do the same thing with drugs and with dosages and everything else. And the common law on this subject in both Canada and the United States is, you know, you're a drug manufacturer. You have to sort of put out the generic things about what's going on. It turns out by the way, they're not very good because they are driven by fear of liability. And that's where you get these voluntary organizations who put out an alternative set of them, which are more reliable and are used.
But then when you see the distribution, you've got a particular case. You go to a doctor and you start figuring out a plan in which you combine private information, public information. And what they're doing is they're saying that the second stage doesn't matter, and that just can't be right, because the moment you have a variance, everybody has to know where they are on that particular distribution. And you can't answer that from the center. So this is just a horrible mistake because it may be some cases for which these vaccines are really counter indicated. So you remember, we talked about the case of Jacobs in Massachusetts all the time.
It's a 1905 case in which it was basically said that the state had the right to force you to take vaccinations in sunset. Well, there are a couple of things about it that most people tend to forget. First of all, it wasn't an order of compulsion. It was an order to either take the vaccine or to take a farm. All right. And the fine was $5 about 160 bucks today. So it's not a terminal figure, but it wasn't an award. And the second reason is, well, this guy, wasn't just some random person came up and says, I don't mind this.
It was a person who said that he was dealing with a number of childhood illnesses associated with various kinds of diseases. And he thought himself to be at very much higher risk. And so he said he didn't want to go into the pool. And that's exactly the kind of differentiation. What talk to you about the judge who decided the case? He's a man named John Marshall hall, who was a sometime with the terror, not a complete one, but a partial one. And what did he decide? He said, look, I'm not going to allow for these individuations to take place.
I'm going to essentially push this thing in the very hard dimension. And I'm going to make everybody called them the same thing. Well, that was also, and of course it was instructed. It wasn't somebody who said, gee, I've taped all out his back to him and he's not just fine with them. It was somebody who actually had a serious risk. Well, you don't want to put together a system which denies that kind of information. Now, the next case that came out was very different. And this was a case in which you had to be Baxendale in order to get into a public school. Now you can't get out of this one by paying the phone.
And if you now have the same conditions that you all did there, are you going to let these people out from the vaccine school? Are you going to push them out of this school? And after the case, people inside and say, well, you really have to now have an administrative law procedure to decide whether you're going to do it not. Well. You can say, Hey, but you know, it's a choice. Either go to school, you don't go to school. That might be true with private schools, but it's not going to be true with state schools run on state policies because now you have a monopoly. And the general rule, respect to monopolies is always the same.
A government was monopoly. Power was, is under fiduciary duties to use them to promote efficiency, but not to use them in a way that essentially forces people with the dangerous position and monopoly power can be used in either method. And you have to figure out which is going on. It's a rather hard inquiry. I actually wrote a book about this called bargaining with the state saying when it is at the, state's doing an efficiency versus a kind of antitrust restrictive situation, you've got to go through it. So they start putting these procedures together. Then they get too complicated, right? And then you get some of the real anti-vaxxers and they just go going crazy.
Yeah. I don't know if you knew the situation with respect to autism being called by the various DPT vaccines, having to do with the theory and tetanus and so forth. Those kinds of frauds. As far as I can tell, and the guy who put them forward, Andrew Wakefield was eventually remove this license, but it took on my beloved Atlanta journal, 12 months, 12 years to re check the column or to repudiate something which had been published in 1998 and had been paid for by the 0.2 slips.
I mean, so this is once you get the government monopolies, it's just the most dangerous situation in the world because you're never quite sure whether you got the guys with the white hat challenge or the guys with the dark hats in charge. And you don't know whether it's going to compound the problem with save you from oblivion. Well, I have zero confidence in the people in the public health profession, in the United States that are running this business. I think they're all essentially just not fully informed on what's going on. If you look at the CDC website, it's essentially this we're a private party doing this and our malpractice case for informed consent.
It would not be defense because you go back to the swine flu cases and not warning about tiny risk was thought to be an adequate. And these are huge risks. That is systematically. Not only that you understand, by the way, Jesse, there's another very strange problem that takes place here, which is the correct solution. In many cases, for people to take the vaccines is to take them, but to take something at the same time. So there's a respectable school, which says you take something like crest, or in order to reduce the clotting risk.
They do the same thing with baby aspirin and you'll put it together. And I suppose what the government did was to announce to the world, then you really should get the vaccine. But given the fact that there's a small risk of X, Y, and Z, you'll be well advised to do these other two things, right? If they did that, there'll be large numbers of people getting the full set of information would do nothing at all. So instead of saying, here's a small list, which we can minimize, we say, there's no risk. Just take it anyhow. So you look at the CDC site and what it says is, oh, you may get a shoulder allergy for a couple of hours, sit around the place for 15 minutes and talk.
You're good enough to walk home. Well, what's going to happen is by basically soft coding the difficulties, they're gonna increase the risk of side effects. And this is just unconscionable. But if they told the truth, they'd never be able to face themselves because zero risk is easy to quantify, right? Small risk. How small, how Sarah is, what bro, that's the, so they don't do
Jesse (9m 37s): So. W what is the response to, and this is, this is the challenge I've had for somebody, you know, I've traveled for personal, personal, and for work. So like yourself, you know, nobody cared, but I took it in protest to a certain extent, but I did largely believe that I was in a COVID or contra-indications from the vaccine. I saw myself in a very tiny, tiny percent chance of complications group. Now, the challenges you have, what I find interesting. I was reading a paper recently on scientific, scientific knowledge in general.
And it talked a little bit about people that have passionate claims or passionate views on science, whether it's global warming, whether it's the vaccine where, you know, at the end of the day, most people left or right. Don't really read the IPC reports. They don't really read the, the, the literature that you're talking about today. So some of the common sense conclusions make a lot of sense to me on both sides. So one of them being you'll have somebody that's my age that perhaps is either getting pregnant or is around there they're older, older relatives.
And they say that they don't want to take it because they don't know the long-term effects. And then on the other side, you have an epidemiologist that says, you know, yes, we don't have laundry, laundry, longitudinal studies, but we've been analyzing this stuff for a long time. It is definitely safe. And now you're in this position to say to the person that doesn't want to take it, what would make you feel comfortable? And for them, you know, part of the government kind of botching up the, the actual communication for so long, those people are there at this point. They don't want to trust anything they say, so you've kind of lost them.
So, you know, what is, what is the right analysis from that perspective of when somebody does say I haven't seen long-term long-term studies because it's just been two years.
Richard (11m 26s): Yeah. Well, I mean, it turns out there was at least one study that I read a kind of a meta study, which says that when you do run long-term studies, the kind of serious side effects often tend to mature only four to five years after the truckers. But of course, that's the longterm stuff. I mean, if you have somebody who takes the vaccine and collapses within the next day or two, you could argue that though, there just was an epileptic stroke or something like that. But nobody's going to believe you, because what you do is you cannot pose a hypothetical cause for something, from which you have a potential wheel cause out there.
Right? And we know you took the vaccine. Why would we assume that having spent 72 years ago life without having epilepsy on just the day after you take the vaccine, you got an epileptic fit. I mean, you can't persuade people on that. And if you left it to a jury, you'd get convictions all the time. And so what this does suggest to you is you cannot let the government have a monopoly over the sources of information, with respect to any project. What you need to do is to get independent voices to speak, like my friends who ran the great Barrington kind of situation, what makes this work is there is now a kind of unholy Alliance that is taking place between Google, Twitter, right?
And the other various kinds of services, all of which are run by overtly the Facebook liberal people. And what they do is they work with the government in an effort to try to figure out what to do with respect to misinformation, roughly defined as those things, which I believe in which they think of more. And so they kind of escaped in petty defamation. Like then they say this, somebody who's been working in this field for a very long time, you know what we think this is really bad. It's misinformation that goes against who it goes against the CDC.
We're going to basically take you off the air. And well, at that point, what you've done is in the control of the monopoly space, on information, you stop the creation of an independent dialogue that other people are going to take. So it's a totally disastrous situation, but like everything else, it's an enormous, complicated, legal problem. Is this a natural monopoly or a common carrier? Is it not? I've written both sides of this things at various times. And my current position is so long as I have no active current competitors.
You should treat them as though they have a kind of common carrier duty. The moment somebody else can start up and come in, you don't so that the status is not indelibly done, but it turns out, you know, networks like Paula, they really have never taken off after they were, was there stuff. When you look at the dominant three or four, and they still control all the 80% of the market and they coordinate with one another, what, how do they coordinate? Do they meet? I don't know. They may. But the other thing is, is a huge literature in antitrust law about communications through public signals.
And one of the things that you find it very difficult to do, although you're trying is you sort of sit on that. I would want the prices to go up in a given area. So if I raised my price, will you come and raise your price? And so when you're trying to do is to get a card cartel without coordination, that's hard to do, right? But in this particular case, I know if Mr. Zuckerberg gets up there and he has a misinformation program and the Twitter guy has one eye and Mr. Whatever it is running, some other network has one who get or five people, and they are talking the same game coordination with respect to keeping information out of the system is much easier to do than coordination of prices, which are constantly moving for all sorts of independent raisins.
So we have a tricep on our hands with respect to this stuff. And when you really have to do is to stop the electioneering from the president and all the other plans of people said, there's only one right answer. And what you have to do is to kind of encourage other people or there's something else you should do. I mean, in climate change, there was a proposal made several times by amongst others. People like Steve Koonin, an extremely knowledgeable man. And I said, we'll have a red team and we'll have a blue team do a panel like a military.
We'll give our view as to why climate change is really dangerous. We'll give the other. And so, you know, this goes everything. That was just another story today, claiming that in Hawaii and national aeronautics, alpha is fudging the data in order to make it look like there's a steep rise as opposed to a gradual rise. So, so what my basic reading of this situation is, most of the recent data is relatively flat, which is not a particularly disastrous scenario you're talking about. Well, one, okay, so you get these guys.
They try to do the two teams to have them talk. It's interesting. Everybody who believes that climate change is an existential threat is opposed to blue team versus red. They say science is always a business of collaborative cooperation. What they're really saying is amongst friends, but not amongst the opponent. And the whole point of the team situation is to force everybody to meet somebody who really believes in the, a game on the other side, and then to figure out what's going on.
And, you know, I always been willing to do this. I have entered into several debates and I've now found for the first time in my life, I get abused. I mean, just playing out crazy, whether it's antitrust network industries and so forth. Climate change what's happened is the cancel culture has killed the debate along with all of these regulatory sorts of culture. So shows like this, you know, you have a fine audience, I'm sure, but I don't think it's 850 million people unless you've got virtues. I don't know about so that, you know, you can keep this thing alive because you can't shut down almost the communication, but you don't need to be a monopolist to have be short only on the opposite.
If you have only a hundred percent of the market, you get 80 or 85% of the market, it changes everything. And it gives you a very strong level of a political dominance. If you could do it now, what's happening today is I think the whole establishment is now for the first time I get, I think in Canada, as well as in the United States, there is no longer presumption of legitimacy of government debt. People are seeing just enough guff coming up. I've just been up people and it's Cumulus. Oh, is Mr. Pharmacy a crook because its finances are sort of, so is Mr.
Bouncy a cook because he basically conceal stuff about the wool buyers is Mr. Pharmacy, because he's had some sweet business deals with major drug companies who have proprietary advanced. Now they may all be wrong. And you know, one of the things I like this to say is I'm a professor of law. Not a fact. I'm not somebody who can tell you whether these charges or what, what you can do to see that the cumulative effect is beginning to take its weight and that what you use the question take without question, you're now starting to question on, on every level and in part it's because of colossal, miscalculations on prediction and in part, because what happens is these other voices are kind of being heard at the edges and people starting to kind of move.
And I have to say in my experience, I've been at law professor in apple, 53 and a half years. So pretty long time, I started very young. I've never seen an intellectual climate as bad as the one that we have today, either here or in Canada or anywhere else. And it's not just a hosted issues. I know we're coming to the answer I just mentioned, but the issue of global warming and stuff, you've got all the COVID and disease stuff, or you got all the critical race theory kind of stuff. You got all the antitrust kinds of stuff. You've got all the poverty and welfare trust, traditional kind of stuff.
You got all the criminal laws that having to do. How do we deal with various kinds of offenses? And you know, you hear proposals and you say what's going on. So the last one that a friend of mine sent to me at the phone proposal, and I'm sure I do have children. I don't know. Oh, well, but let's assume you did. Right. And the new proposal is the only way we can deal with blinding inequalities of wealth is to introduce Plato's Republic and say that all parents have to give up their Cho who have randomized across other couples.
So as to prevent the privileged from going from one generation to another and the parental rights, oh really? Huh? Well, or defund the police, it's the same kind of thing. And so what's happened is the American left has pushed itself further and further off. They're all things on the right, which are symbol, right? They're not in Charlottesville, but this is the big difference. All right. Was a big term two years ago. Right? You hear much of it now, almost nothing.
Right? Because it got repudiate. You think people went back to Charlottesville to do another ride in 2018. Do you think that there was anything that January 6th, 2022? No. So the left is trying to keep all this stuff alive. Whereas on the other side, I mean, you get some serious problems. So I'm Jewish. I don't know whether you want it doesn't matter, but you know, you hear what happens in Texas and Cooley bill, whatever the name of that town.
And I mean, I can tell you the number of vigils that took place in the states in Jewish communities and many of sympathetic, one was very, very long. You first hear that the guys, the brother of the woman who's in jail, but of course he's not. Then you see, how did he get into the United States? No explanation. Then what you do is you see, he takes over a Jewish operation on the Sabbath, threatens to kill people unless this person is released. And the FDI to his infinite disgrace, I said, was this an anti-sematic incident?
Well, nobody in their right mind can believe them when they start to say that Mr. Ray just discredits himself Mariko and is the attorney general? He is Jewish. Not that it should matter. But then he come out and say, well, this case is all too painful. We have a terrible problem trying to figure out how it is. We deal with Muslims intent upon death of other people in 99.9% of that population is now at that point, you could start having a serious discussion, but to deny that it's an issue rather than that's where people kind of start to say, but, and it's the same thing that the fund that please send all the rest of us.
So what's happened is the silent majority that they used to speak about people who were not interested in education or in politics and so forth. People want to, they are now actually, because all of a sudden they realize, Hey, this stuff applies to everybody. And that means me. It's going to be my kid. Who's going to have to wear a mask in school is going to my kid is going to happen to learn that the United States engages in genocidal war against anybody that ever deals with themselves. I don't want them to be taught that way.
I don't want to be shot that way. I don't want the college market to be that way. And so what you've done is you've raised the stakes, which means you're going to transform. Who's going to be participating. So you're going to see two things. And one of the reasons why in 2016, Trump pulled out from the woodwork, people who were never in public law. I mean, so I mean, one of my friends that he went from Philadelphia to Pittsburgh in Pennsylvania, in early December or late October of 2016, he said for every Hillary Clinton sign that you saw in these rural counties, you saw 50 shops.
Okay. Now what's going on? Well, it turned out, remember Nate silver, he's a smart guy. And he got 40, 99 out of a hundred state's rights in 2012 and 28 missed only one state. By one point he got everything wrong. And so you ask, okay, Nate, why didn't you get it? He said, I knew the sentiments. What I didn't get right. Was a massive change in the, and somebody who looked at those signs along that road, who realized that these rural counties, which normally give you 800,000 boats are going to give you 1.2 million and that's that's, what's going to happen more generally.
And the Democrats, they still find it. Go back to January 6th. Look, the many people belong in jail. Nobody wants to deny that the president is one of them. He is in many ways, but you can go back and you'll look what happened in Portland and Seattle. All those people released on their own recognizance is when they engage in an act of acts of violence. I mean, that's not so good. And so what's gonna happen, I think is there's going to be, unless Biden changes his position and the Democrats back off is going to be a tsunami in the United States.
Yeah. These guys are going to be voted out of office because they have no respect for the common sense of the decency of the ordinary man or woman. Who's. Now all of a sudden been politicized by events behind his or her control.
Jesse (24m 19s): Well, Richard, we're going to have to get you back on because I'd love to get your predictions on a pivot onto some of the, the inflationary aspects and implement policies on that point. This, this leaves me kind of rereading the fatal conceit FAA hike. And it just, it reminds me of one of my favorite quotes by him. The curious case of, of economic or curious task of economics is to teach to man how little he knows about what he imagines. He can design. And I feel like we're in that space right now with a lot of policymakers, leave us on a, an Epstein positive note here.
What, what is something that you, you see in 2022 or 2023 as a potential positive or something that if we're going to go in the right direction, this needs to happen. I do think
Richard (25m 7s): The substantial chance that will basically sweep the Rascals out. I mean, I've gotten to the point where I, I never have dreamed myself as a Republican. If you're a Jewish kid growing up in Brooklyn in the 1950s, you didn't know anybody in 52 or 50. Well, I wasn't in Brooklyn, 56, whoever voted for a Republican included why nice and how, I mean, I still find, you know, I got a case of the twitches when somebody says, and I'm not a Republican, but what's happened is you look at the choices between these two parties and all of a sudden, if you could get the good beast on the Republican side out, you'll get moderate support for free trade.
You'll get general tolerance on an issue that I care a lot about. You're not going to get an antisemitic rent with respect to Israel and all the rest of these stuff. And I think that those forces are now that are, and I, I myself have become much more politically active or mitigation active than I've ever been before. And I do so because I have a genuine sense of anxiety about the way the dominant my pinpoints out. I mean, you know, take George Floyd and so forth. I mean, what on earth happened?
You couldn't get anybody to say, Hey, that moment had a lot to do with this. That because they had failed those being three, he was at 11, you know, that's kind of a diff and then everything that followed after that, I just don't believe that we are in that kind of frenzy. And what we really have to do is to make sure that we are a little bit more tentative in our judgments. If you noticed, I didn't tell other people how to run their part. It was on whether they do it, do not take the backseat. I give them incident and BICE.
They want it. But what we have to recognize is that high X great contribution was not as positive contribution. That is how we would organize it though. But it was the notion that somehow or other centralized knowledge always beats decentralized knowledge. And he was wrong to say that you can't do any central planning. I mean, you can't have a highway system put up by hook or by crook, right? But it turns out you don't need zoning to figure out what should be an industrial and which should be a manufacturing and what should be a commercial district or residential district and so forth.
And I think that that message is the one that you view and have to get across the today is figure out where the space is for individual choice. And don't treat everything as though it's a giant public health crisis or a prisoner's dilemma game. I think people in this country are beginning to get that. And it's because of the anxiety. You mentioned inflation, right? You know, the people like Paul Krugman said, you know, life is a perpetual motion machine, no matter how much you borrow, you're never going to raise the interest rates. Right? Well, I mean, it's always stupid some portion of the distribution for some reason, but whatever it is, this is now a serious problem.
And 7% just transforms everything. Here's a simple way. You talk about real estate guys. I'm going to give you my one sentence real estate. So somebody tells you that the raising the interest rate from three to 5%, 2%, what's the difference right now? That's not what the ratio is. It's you raise it from three to five. It's an increased. The 67% is the way you have to understand. And you're in the real estate business. You kind of know what I'm saying. And some people just don't get that. And when they don't get that, they don't get the pain that is going to be inflicted on people.
And they don't understand that when you think the pie's getting smaller, what's going to happen is people are going to become much more anxious. And then you keep on having the wrong shores, all this stuff, price controls, paint on a work enforced antitrust law, ain't going to work, right? And so you're happy to get people to understand that the cures you want us to get rid of the regulations that you have in many cases, rather than the adding on new ones to compensate for the ones that are already there. And I think that the, this notion that the way we deal with bad regulations with good regulation is going to be replaced.
And I'll end on this note where bad regulation is best handled by repeal or modification. So thank you Jesse, for having
Jesse (29m 15s): My guest today has been Richard Epstein. Richard, thank you again for being part of working capital. Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.
Richard Epstein is our returning guest. Richard is an American legal scholar known for his writings on torts, contracts, property rights, law and economics, classical liberalism, and libertarianism. He is the Laurence A. Tisch Professor of Law and director of the Classical Liberal Institute at New York University, the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution
In this episode we talked about:
- Richard’s View on Lockdown
- Moratoriums on Evictions
- Policy Responses to Covid Pandemic
Check here the previous show with Richard: https://workingcapitalpodcast.com/the-impact-of-rent-control-and-eviction-moratoriums-with-richard-epsteinep52/
Transcriptions:
*Speaker 1 (0s): Low everybody. Okay. So this week, and next we're going to do something a little bit different and we're having on returning guests, Richard a Epstein. If you saw his old episode, we talked quite a bit of boat, eviction, moratoriums, and a bit of a history of rent control. And I thought this week, and next we would talk a little bit more about the actual pandemic and COVID-19 in general, talk a little bit about its impact vaccine mandates and kind of the political landscape in Canada and the U S so I thought Richard would be a perfect guest for that.
He's practiced law for over 40 years. He's a legal scholar, and I believe still working with the Hoover Institute and New York university. So without further ado, check this episode out. And I should just note, if you liked this episode, feel free to go to working capital podcast.com. You can also download our financial model at that address. Okay. Check it out. All right, ladies and gentlemen, my name's Jess for galleon, you're listening to working capital. We have a returning guest on the show.
Richard Epstein. Richard is an American legal scholar known for his works on contracts, property rights, law, and economics towards classical liberalism and more. He is the Lawrence eight-ish professor of law and director of the classical liberal Institute at NYU and Peter and Kirsten Bedford senior fellow at the Hoover Institute. Richard. Good to have you back. How are you doing,
Speaker 2 (1m 27s): Thank you. I'm in given the set of the circumstances in the larger world.
Speaker 1 (1m 31s): Yeah, it is a, a lot has happened since we last spoke. We currently in, in the city of Toronto are back in a modified lockdown, which fingers crossed is going to be something that opens up on the 26th. I think today we had teachers going back to school, but then it was a snow day. So can't get more Canadian than that.
Speaker 2 (1m 50s): Well, snow is no surprise. Look, the, the good news is, and this is a result largely and natural forces is one of the rules about viruses is what goes up, must come down. And it turns out the Alma chronic virus now seems to be on its downward slope a little bit earlier than some people expected. My view about this, is that the way in which we have handled the entire COVID situation? It means we're not talking about pandemics that in cleanly, we're talking about cyclical arrangements or endemics, and it's just going to be very difficult to predict aid the length of the cycle, be this intensity of the cycle and three, the severity of the disease that comes with the intensity of the cycle.
And so, I mean, if we are going to continue to have a kind of a lockdown mode mentality as the first alternative, it's likely we will be continuing to face this with COVID for the indefinite future. I mean, the notion that people had when they postponed their admissions to college or to law school in 2020, we'll be out of this by 2021, nobody postpones today because they think they're going to be out of it next year, or what's also happened. And I think quite justifiably is nobody has any competence whatsoever in today's experts who believe in only the science and all the science that nobody seems to think that that's true, or if it is true, then science is very, very bad.
So there's going to be an increasing level of popular discontent that's likely to spill over. And I know in the United States, one of the things that will lead the Democrats into serious difficulties was that Joe Biden overclaim when he says, I know the cure to cancer at the cancer at the COVID and made the silliest recommendation imaginable where a mask outside, where they don't do any good for a hundred days, and this thing will stop. Nobody's going to believe that. And when you overclaim and under produce, your credibility is shot not only in the field that you bungle, but everywhere throughout.
So the COVID performance ratios will influence not only the COVID issues, but the general coloration of the political economy.
Speaker 1 (3m 51s): So on that point, I think when we last spoke, we talked a little bit about the history of rent stabilization. We talked a bit about how the COVID policies affected the real estate development community as a result of the moratoriums on, on evictions. How do you see from the, you know, the time we last spoke to the cases that have now come forward in, in your Supreme court with, with mandates, how have you seen this thing evolve from when we last spoke to now with this latest variant kind of coming through both the states and Canada?
Well,
Speaker 2 (4m 25s): It turns out there's a twofold issues are that you have to contend with one, there are the various sort of legal arguments associated chiefly with administrative and constitutional, or that people bring to bear in the discussions about the COVID mandates talking largely in terms that are independent of the substantive merits of the program. And then there's the other way where it says, let me just look at this vaccine, let me look at the underlying disease. Let me look at the available treatments and so forth, which take a much more medicalized view or the way in which it's commonly dealt with.
And it was the way it was dealt with in the Supreme court is they did it in the first way. They were straight administrative lawyers. And with respect to the grand mandate, what they discovered was that the key issue was what sort of presumptions do you set in favor of or against government action, or there was an interesting conflict of authority with respect to this mandate. The general rule with respect to ocean mandates is there's a lot of administrative deference for, but the general rule with respect to these emergency situations that apply only in grave times is that the presumption is set against them in the two decisions down below in the fifth and the sixth circuit, one of them is centered in Texas, the other and Ohio, the fifth circuit basically said, oh, this is the narrow COVID emergency problem.
The presumptions are against you. You lose, you get up to the sixth circuit and they say, oh, this is a general administrative law problem. The presumptions of seven, your favor, you win. When it got to the Supreme court, what they essentially did, they decided to stay with the skeptics on this issue. So they required very strong proof on this particular issue. And what they then found is that for something which was of this importance, it could not be done by an administrative fee that it required something that looked more like congressional authorization.
Now notice when I said that, I did not tell you whether the COVID thing was a good or a bad or in different ideally a mile understanding about most academic lawyers is that they are extremely skiddish in dealing with the underlying science. And so what they do is they tend to move their cases sharply in the other direction. I'm not a constitutional lawyer by initial training. I was changed in the English system. I started off as an Oxford lawyer and my torts casebook was actually prepared by a Canadian law professor named sessile, right?
So I mean, it wasn't as though I was a stranger to all of this. And so we tend to not to start with administrative law. We started with Commonwealth when I came back to the United States. What I discovered quickly is that while the paradigmatic towards case of 1964 was one that involved an automobile collision at an intersection, you had to figure out who had the right of way. You can see what the rise of product liability law. We are now painting on a much wider canvas. We had starting to talk about medical injuries associated with Des and similar quantities.
And I was told by some very smart lawyers, they said, young man. And I was young at the time. They said, if you want to understand how to defend or deal with any one of these cases, you must master the science. Now they didn't say you had to do the signs because you can't do that. But they said, it's like punching in the air. If you don't know what's going on. If you're talking about Des you're talking about asbestos and so forth, and I basically drank the Kool-Aid, I had a reasonably good, not spectacular science background. And so I've always made it a point to start in the opposite direction.
And so I keep up regularly on that literature. I do it with respect to global warming. I do it with respect to the various kinds of health conditions of which COVID is only one. And at that particular point, you start thinking about this case, Jesse, in a very different way, you say, well, the first thing you want to know is what's the upside and the downside with respect to the various kinds of programs and the insight that I started with a long time ago in which I made a spectacularly wrong prediction under a thoroughly, right analysis, was that you look at this stuff and you start with 1918 and the Spanish flu, it killed 675,000 people, usually in a one day spurt.
And then you always ask people, how long did this last? And do you know how long it lasts? I bet you, it was nine weeks, nine weeks, nine weeks. And virtually everybody who died was in the prime of life. And they died ultimately of pneumonia because of what they call a cytokine rush, which is healthy. B people, seeing the virus try to set out the killer fluids, do it. And what they did is they drowned. You might literally, and we know much more about it today. We could a control for these things, but virtually the entire new movement is completely different from the old one.
This is something that affects people who are relatively old with serious comorbidities and anybody under 60 has only a meniscal chance of dying, unless they also have some very serious kind of comorbidity. So it's a completely different kind of profile. And so what you kind of guessed it, looking at this sort of thing is if you sort of let it run, its course, it would go up and it would come down Shaw. But since it didn't have the potency associated with the Spanish flu or the death rates would be very much slow, then that's the way I thought about it.
I looked in the New York times and I looked also with respect to the Imperial college situation. And they have the following projections that they set up by the media, by July 15th, 2020, we will have 10 million active COVID cases in the United States and a similar proportion in Canada and in great Britain. And if you talk that the chart, it said as of July 1st, it would be relatively modest. And I said to myself, this has to be crazy because of everybody knows that this isn't just going to come at that particular level and they're going to take precautions much earlier on and they will be holy without regard to government action.
A lot of the adaptive behavior. There's no point in engaging in strategic games. The bluff of your own life is at stake. And what you saw on March 9th, the day before this thing, and you know, everyone, transportation was down by 78%. Now people are taking all sorts of strange. I had that patients when they went to restaurants, this bumps and all the rest of that stuff. And you realize that these adaptions were going to take place. The government comes in and makes it more dramatic. But the projections that you actually had was the first peak that not come on, July 15th, 2020, it came on April 9th or 10th in 2020.
And it was follower than anything that anybody had predicted what the predictions were extremely dangerous at that high level, because people tried to gear up for something that was going to be just absolutely enormous. And so one of the things they did in New York city and several other major metropolitan areas, they said, we're going to have such an onslaught of people in the hospitals. We have to take people who are COVID positive and move them out. So they moved them back into nursing homes where they probably cause an extra 30,000 best simply because you took a very potent person and put them into an environment where there were a lot of variable honorable people.
And what they then did is they opened up in New York city. The jab had sent the, you know, thousands of beds. The Trump administration sent a bunch of hospitals, ships, and none of it was ever used. Right? And all the people who made those projections 16 months later, essentially apologized for the fact that they were very, very wrong, but the interim damage had been done. And once you start to intervene, the natural cycle that you had in 1918 is not likely to continue. What you're going to do is when you create an artificial foreign team, you slow down herb immune.
So I did some calculations. If you're curious, tell me if you're not well, it's 675,000 deaths. And that was essentially a two and a half percent death rate out of people who got the disease, which was putting it around 20 odd million people coming out of this stuff that doesn't get you to herb immune gossip, because you need to get the 60%. Well, we got there because it was a pretty rapid prop and some of my guests, and I'm not assigned this, but I am a structuralist is that there were a lot of asymptomatic transitions, which created an immunity, even though it didn't create a disease.
And this is consistent with something you have to understand in dealing with COVID, which is you just don't talk about medians. You have to talk about the bearings. And that means in effect that disease like the deadly Spanish flu is relatively innocuous for say 95% of the population that gets it. There may be some people don't die, but get very sick and so forth. And the herd immunity took effect and it slows things down. We don't have her. So I remember waking up one day in about may or June. And I said, oh my God.
So long as we protect a large portion of the population, it means that we're not going to get the herb immunity. And the next time a new variant comes along, it's going to have a highly vulnerable population because it turns out, and this is, I think a point that's been well-established, but systematically ignored is that natural immunities are extremely effective in terms of dealing with the condition of my friend, Jay bought the Charia who's collected and read all of these studies. I have not, you know, it says there's not a single identification of a breakthrough case in either direction.
And nobody who has natural immunity has ever been seen to give the virus to anybody else. And nobody who has natural immunities has been seen to get the virus from anybody else. So you get a perfect wall. Well, at that point, what you want to do is when you start seeing natural immunities is you'll let them ride. But when I made my terrible predictions very low and then try to correct them, what everybody said is you have to understand that people who are asymptomatic and give you COVID. But again, the key thing to understand is the distribution.
And so you have to do it in, let's just do it in discrete terms because the continuity's don't matter for the well, so now you have either very high resistant people or very low resistant people. Okay? And you have you the very powerful, very weak viruses. And so you start looking at the parents and if you have essentially a very high resistance rate, you can carry in you a very high dosage of stuff and not get sick. And then when you transfer that some to somebody who has a low resistance state, you can actually give them the disease, the question your then have to ask what's the probability of that happening, as opposed to the other distribution, which has people have ordinary levels, they get the week COVID stuff.
And then they transfer the week COVID stuff, all of the people who condemn asymptomatic transplant at the high high to the low load person, that was probably 2% of the case. That means that 98% of the cases are doing what they did in 1918. I used spreading the immunity asymptomatic so that you come to a conclusion much more quickly. If you would ignore the second tab and only worry about the 2% you are going to ban the transfers. If you take the whole hundred percent of the distribution into account, you're not going to do that.
What you'll try to do is isolate two kinds of specialized cases. If by some miracle you could figure out who is a very high resistant high transmitter type. You try to keep them out of circulation. And if you could certainly identify vulnerable populations, which you can, you try to keep them out of circulation. So they appointed a COVID test would not be the test that driver coming from Canada to the United States will reverse something. You mentioned happened to me before the show. It would be that you will not let the grandkids visit the grandmother.
If it turns out that she was in the COVID vulnerable portion. And so you'd get private administration of the cases in an effort to enforce this policy. And I'm all in favor of that. But when we do it, the other way, what we say is we forget the probabilities. We forget the benefits side. So we systematically overregulate as far as I'm concerned. And I think that the folks who did the great Barrington declaration, Jay and one called door, what probably not, probably pretty surely write about all that stuff.
Although interestingly enough, they didn't do the probabilistic analysis either. Right? What they did is they just said, this stuff generally works. And what I try to do, knowing a little bit about games, theory and so forth was to figure out why they were right. Not to figure out why they were wrong. And I think they are right with respect to their general conclusion, but then you get everybody up. So that's the first mistake they made. Second mistake is X. And they post, you can try to attack these things in two ways.
One is you can try to stop it from happening until you can try and cure it after it happened. Right? And it turns out there's no dominant solution that is you're not going to do only one or only the other. You want to get the optimal mix. So what's the advantage of doing it. Soon. You can spare people. The illness what's the danger is you have wild over breath, because if you're talking about protecting 0.1% of the general population and so forth, you stop Miami.
But the ex post situation says this. If you get sick, we're going to treat you. And the advantage of that is if you get it in time and know how to do the treatments, what you do is you have to now tackle 1% of the population instead of a hundred percent of the population you don't need to quarantine. You certainly don't want to give any medication to people whom you think is going to be asymptomatic. What slide, which means that virtually everybody under 40, probably 50 or even 60 doesn't get any kind of treatment except maybe some HCQ ivermectin and kind of stops it.
The question you have to ask is safety. You have to ask effectiveness, okay, Jessie, on the safety stuff, it doesn't matter what you use a drug for both of these drugs have been out there for a very long time with billions of usages. There's a kind of an epic, epidemiological and FDA and drug type situation, which says the acid test for any drug is, do you give it to a pregnant woman? And the reason is during the first trimester of pregnancy, the rapid levels of cell differentiation can be easily interfered with, by some foreign substance resulting in something like the food over the mind flips, right?
And it, both of these drugs have been recommended and found safe for women who are pregnant, chances are there's going to be no subgroup of the population for whom they're going to be especially vulnerable. And we don't have clinical studies of a hundred or 200 people. There have been hundreds of millions in the case of ivermectin billions upon applications, but which the safety has never been questioned. So what's the downside. Well, it turns out Mr. Fallacy, who I think is a terrible master on this particular study. He says, well, you may get some kind of hard complications, but he's talking about extremely low numbers, one in 10,000 or so for the relatively minor conditions.
But the overall profile on the safety is long use establishes general say, well, what about effectiveness? And I'm here. I like the Pope Rhett Butler, frankly. My idea, I don't know, but I don't give a damn. And what do I mean by that? Well, let's suppose the thing is effective. What will happen is people will quickly use it. And when you measure effectiveness, it's a completely different inquiry from measuring safety, with safety. You're worried about, you know, that kind of, oh my God, this is going to take you from 0.1 to 1.4, 1.0 adverse effects.
You make, take a drug off the market when you get things like that. But if you can sell a drug, that's going to have a 1% effectiveness and nobody's going to buy, I possibly going to buy a drug, which can take you from a 2% cure rate to a 3% cure rate. So the effectiveness stuff has to be much larger to make it worthwhile. And then when it's much larger, it's much more easily detectable, right? Because we have 40% rate you can do. So the key thing is to let this stuff out there and then to get essentially a quantitative assessment.
Well, what did we do? Well, first we have the phony subjects that were done in Lancet, right? Edited. It should have been filed five because of the recklessness moves. You'd put his vote, but since he was anti-Trump, he was perfectly okay. And they had to retract that and they did. And then there was a Ford study in the news, and then the journal of medicine, they had to retract that because it turns out clinical studies are extremely difficult to do with viruses because essentially the theory of both ivermectin and HCQ is you have to catch it at a very early stage that prevent the things from breaking through.
Once they broken through, it's useless to give the drug and it may have a slight negative effect. So if you don't get the right controls on this, you can't do it most critical studies. You know, people in a third degree, third stage cancers or something, you can begin everybody on April 15th and this drug, you have to do it on very different dates. And you have to have a physician who can record the accuracy. Well, this is extremely difficult to do through an organized clinical trial. And so what happens is people start to put together these various kinds of indices recording, all the cases that have come through my all sorts of people, this, by the way, in the United States and it's worldwide is the common way.
Nobody trusts formal government warnings. They're too rigid, too stiff, too out of date. So they do is they form voluntary associations and they collect the information and then they organize it and update it and give you recommendations as to which drugs and what combinations at what sequence at what those images at what time. And self-worth in an effort to do that. And so what you need to do is to encourage that ex-post collection rather than to rely on clinical trials. And then it's also, if this is a game of trying to get advantages, you have to have a theory.
And what happens is it turns out there is a general theory that says, zinc is a very powerful agent for doing this, but if you give it alone, it's not going to work. And so I have to do is you have to give them some other drug as this role might as soon as something which prevents in probation, and then you have to give them something else. The HCQ in order to make sure that you can find a way to protect those zinc from being wiped out. So they're kind of tripartite situation. You're not going to ask me to tell you everything about it. I don't know enough about, but what you do know is the way in which this stuff ex-post works is it does not depend simply on trial and error because trial and error, cherish Jeffries, Jesse is too slow.
What it does is you got a theory that zinc in this combination has worked in other cases, and then you carry it over. Now, is this something which is just done for this, you know, or there is a wide class understanding of what we call off-label drug uses. I don't know if you're familiar with the term, but essentially it gets approved by a government agency. And then once it's on the market, a doctor could use it for any other condition that he or she wants to do it. And in the United States where the numbers are pretty good, for many cancers, off-label uses are dominate.
On-label uses by five to one 10 to one ratio or whatever it is. And all of this is outside the formal system. It becomes the standard of care for malpractice, the standard of care for insureability and forth. So you get this back culture what's happened here is they're killing this off with respect to this drug. And they're saying, if you go through the clinical trials or we're going to go after you. And so, you know, the last blog that I read said, you can only get ivermectin in the United States. If you get a court order, they're killing the off-label mark, right?
So now you kill off the ex post market. It puts greater pressure on the ex-ante market and you start getting these quarantines. But if you understood what was going on, it turns out that some people might be good targets for HQ, some not, but by having this thing on the wraps for the last 18 or 19 months, it means that you don't get the aggregate data, which will start to tell you whether or not there are subpopulations that are especially prone to damages with this or 72 real advantages for trying to use it. What we do now is the same point I said before, everything is a matter of Marion's right?
Same block won't have the same effect on more people and the larger, the samples that you get, you can do it, and you're reasonably happy to do this because you know that for all of these subsets, the negative side has been ruled out by the extensive use that has happened before. So this is the perfect case for running that situation. Then what we do is everybody wants to do basically become German autocrats. You know, the famous Maxim in German, I will say it in English because my German is terrible. At least today, all of that is not required as forbid or all that is not forbid and as required required, there's nothing left the choice.
What this means is once we decide, this is a very good vaccine, everybody's got a tick. Yep. But again, what have they done? They've ignored the variants, which is the key.
Speaker 1 (25m 31s): I want to ask you about that. So we've been kind of going through this process back to the extreme again, I think we talked before about us in Ontario, Canada being in lockdown again. Now what we have seen from businesses, chamber of comments, commerce, I think announced today that the biggest thing that's killing us right now from a business standpoint that can be in real estate or business in general is the uncertainty of what the government is doing when we're supposed to come back in any clarity. Originally, the vaccines, my understanding was that, you know, it was the target was to actually stop, you know, flatten the curve and then it had shifted.
And now the conventional wisdom we're told is that it is you're, you're far, far more likely to end up into the, in the ICU or the hospital, if you are not vaccinated. Now in Canada, I believe double vaccination is at 82% as of right now. So I think Mo majority of Canadians do want to get vaccines. However, just to your point, natural immunity was, was almost a word you couldn't use words you can say a year ago. And it's interesting to me that I had COVID over the Christmas break and mail, like, God,
Speaker 2 (26m 44s): Yeah, there you go. Giving it
Speaker 1 (26m 46s): To each other. We might have. And what I find funny is that you have the congressional hearings in your country that just happened in the Supreme court cases. You have policymakers saying one thing, but I called the U S embassy about cause I'm flying to Florida next week. And basically they they've said just like Canada has, as long as I give them a positive test. I think the us needs a physician to show that you have recovered. Now you can cross without a molecular test. So to me that says that it's admitting natural immunity from a policy standpoint.
So it, maybe you could talk a little bit about the, the kind of moving target and just as a footnote, one thing we do know in Canada, the last lockdown, what they said was no, no. The difference now is cases don't matter anymore. It's about hospitalizations. And I do think Canada is probably, I think it is the worst in the , if not one of the worst four per capita ICU beds. And one of the issues just to aggravate this even more is the fact that because of our policies, when it comes to testing, we have a bunch of nurses that have tested positive for this new variant.
So we're even understaffed to a greater degree. So maybe talk a little bit about how this target has shifted and you know, where do you, where do you see this going? Because it is certainly impacting not just individuals but businesses, the at large, in, in both of our countries.
Speaker 2 (28m 7s): Okay, look, I mean, let's just state this, first of all, it is true as a statistic that there are relatively few vaccinated people who end up in ICU, a similar place as relative, do they own vaccinate, which is an argument in favor of vaccination. So it doesn't want to be, but you have to break the unvaccinated populations down into two plots unvaccinated with natural immunities and unvaccinated without natural moon. And if it turns out that the, all of the situations, all with unvaccinated people with no natural amenities, then the number is actually higher than it might otherwise appear.
And if you were somebody like that, you should think very seriously about the vaccine or getting yourself a natural immunity. So there are a couple of papers that have been written recently, which says, now that everybody gets this thing, if they're under a certain age, because they're going to survive that, and it's better than the vaccine. And there's a lot to be said for that position, but it's certainly wrong to treat that statement as though it carries with it, an implication that natural immunities are no good or uncertain. And one of the lasting disgraces of the CDC is just kind of throws up his hands and says, we don't really know very much about the door ability of the natural amenities or the backseat.
Now, one of the things we do know about is that some of the immunities that we're talking about in these cases that come from natural sources and date from previous epidemics 10 years ago, even 50 years ago, if you were old enough for it. So we used to have something on durability with the vaccines. We have no information whatsoever. And so, so then the question is, well, what do you look at? You look at the past numbers and I'm just going to make a two comparison, and then I'm going to extrapolate from it. It turns out that the more potent vaccine is the maternal, but less potent is the Pfizer.
The more journal last longer, it gives a greater penetration than does the fine. But if you start looking to adverse side effects, the other side of that, it turns out that the Moderna vaccine is associated with more adverse events than is the Feisal, which is exactly what you would expect, right? The good and the bad are both simulated bias all above. So the question that you then have to ask as well, what is this situation? And the numbers in my view, keep changing that is what's really happened in this case, is that people have to understand MRN.
A vaccine is not a vaccine. It's a drug because if you look, but the CDC did was to change its definitions in the United States. So it's no longer kind of a diluted version of the original stuff. It can be totally fabricated the way in which the MRR and a vaccine. Well, the natural immunities are like a bore spectrum antibiotic, but the MRI is a specific situation. And the way to understand that is you have a large number of links in this particular chain, and they take advantage of a principle known in a railroad, which is you take out 10 feet of a railroad.
You can't go from one end of the country to the other, right. What they forgot to say is you take out 10 feet of a railroad. It turns out you can build a bypass around it at 40 feet and fix it back up again. And so what's happening is that my guests and I would want, you know, I'm not a biologist, but I am a strategic game player. And I think is that you see the part of the track is broken and you're a virus. You don't do this by deep connotation, right? But you have so many mutations that are thrown up at a very rapid rate.
All of a sudden, one of the managers, the go around the particular break and all of a sudden, the vaccine turns out to be worthless because it's been circumvented or compromised in some way. And that you have to really know what the composition is of subclasses Alma viruses. But the point I'm making is the prediction you would make from this theory is that it will turn out that the vaccines will be progressively more on ineffective because there'll be more workarounds that the virus is able to do in order to defeat it.
So the prediction that you're going to get is that it's going to be less effective and it's going to be less effective with each future innovation. That's why Robert Malone, the guy who invented this stuff. I mean, he's out there freaking out in public, right? Essentially an answer. I, you know, I may have created a deaf machine in some sense. Now he was right. I mean, early on the first round, possibly the cost benefits were very enormous, but the law marginal rates of return applied to everything, including vaccine usage.
And so if this thing is evolving in the way in which I suspect it is, then what would you would suggest is that the immunities that you get from the backseat will be a flow with durations. And in fact, the breakthroughs in both directions giving and getting will become watcher. And so the ratio of success between the natural immunities and the artificial immunities very heavily in favor of doing the natural immunities rather than this. And so this constant re vaccination program that'd be terrible. So that's the first part. Second part is what are the adverse events?
When they did the swine flu thing, it turned out they were a real rush. They got the numbers completely wrong, and they gave all sorts of people. The vaccine, they didn't give sufficient warnings, particularly for pregnant women. And the government had assumed all liability for bad warning. They ended up paying $4 billion in 1970s and 1980s for the bad vaccines that they put out on the market. Well, there is no government liability today, as far as I can tell. And under the emergency use authorization, I don't think there's one either for the companies or I'd have to check that, but I'm going to check it very soon because it's something worth writing about.
And so what you're going to see is diminished the effectiveness of this and the rising adverse side effect. So right now, I mean, I've seen at least one publication, which just simply collected a hundred articles, all of which pointed to some adverse events associated with Mr and a vaccine. Now you look at the studies and I did with a couple of handfuls, and they're exactly what you'd expect in conclusive that somebody reports six cases of this three cases of that one case of that, somebody that clinical studies very hard to get broad spectrum stuff.
But if you then start to aggregate them and try to figure out, well, we've got 50 of these studies, which have three cases of death after taking a certain kind of vaccine. Now you've got 150. You have to make sure that you don't have double counting a lot of other stuff, but you then become more cautious. And the same thing with respect to administration, just in the last several days, people said, Hey, this seems to lengthen the menstrual cycle. You do this to a woman who's 35 years old, right. Who's trying to get pregnant and this could be just devastating kind of stuff.
And do we know how long it lasts? Of course now, do we know how serious it is? Of course not. Right. Well, what's the rule you take with respect to major conditions in essentially the population that's right in the core of the distribution 20 to 40. Well, my view is you say the cost of COVID is very well. You say in effect the effectiveness of the various kinds of remedies, like ivermectin and ACQ is doubted, but certainly possible.
Oh, last thing you want to do is to give people other conditions for which there is no known cure. And so you do is you back off in the middle generation. So what are universities doing? They have undergraduates in their late teens. They have graduate students, postdocs in the twenties and thirties, and they impose the vaccine mandate and all of that. But me, I took it as it were under protest. Not that anybody care, but when you understand is when you're 78, as I am, you're not worried about reproductive success.
You're not worried about, you know, going out and playing competitive sports in the Olympics and things like that. You all worried about something that might happen. And so the cost benefit analysis tends to shift by age a little bit more in favor of doing it. But rather than that, what you do is you look at these things and what are they counting? They shameful. What they say is, everybody knows it. This is not a question of individual Liberty. This is a question of collective responsibility, and everybody's doing this to serve the common. Good. Have you ever heard that expression?
The promise. They don't know how prisoner dilemma game place. And so I'm going to be just a little bit technical for a second, but the traditional prisoner's dilemma game was that you get two people going into jail. And if each of them keep silent, then neither one gets convicted. But if one of them starts to Blab and the other one does and Blab, the guy who blabs gets the lightest sentence, and then a guy who doesn't want to get so much heavier sentence. So some say, I don't know what that other guy's going to do.
I can't talk to him. So they both Blab and they're both worth or worse off than they would have been. If not the report. Now, the way this works is you now have a need for a public facility. It's perfectly homogenous. It turns out, let's say it's a road on which there are houses on both sides and you impose the special assessment by majority vote. And every unit has to paint Penn dollars into it. And every unit gets $15 worth of benefit. If you did it by voluntary agreement, instead of all one, everybody would sit, let the other people build the road and it never gets built at all.
Right. So why is that not work? You don't have how much in aid, right? And it also turns out that not only do you get differential effectiveness, but you get differential worse off. So you don't have a prisoner's dilemma game. If you turn out Jessie to be better off not taking the vaccine, no matter what anybody else does. Right. And if the same tools or somebody out, or what happens is under these circumstances, you now have the ability for self protection by isolation or by taking a vaccine or by teaching HCQ.
So you can get several solutions, which you can't do when you're building a road down the middle of the situation. So what happens is all of the collective action systems, all wildly optimistic because you can't get the initial homogeneity on either the cost side or on the benefit side to make this thing work. So you have to just chill that particular language. This is not the kind of case where to apply. That doesn't mean it doesn't work like that with all diseases. And so it turns out smallpox is a very rigid virus. It doesn't change virtually at all.
It also turns out that Cal parks is relatively innocent and we give everybody count pops. It's an actual immunity against smallpox, and you do it individually and you do it collectible. But what happens to people look at this and they come to the following conclusion. I don't care whether anybody else wants to take the stand backseat. I'm going to take it anyhow, because I'm better off. So it's not a prisoner's dilemma, gamma. And when you know the polio vaccine, you're not old enough to remember this, but the polo polio vaccine came at the Joan speech and a mother place.
It got shut down every summer because of polio. And then the Salk vaccine comes out. And I mean, I was 11 at that time. And my father was adopted. You see people lining up around the block to take the shot, because essentially they were reasonably confident that it would prevent this forge. And they were reasonably confident that they didn't seem to be any kind of potent side effects because it was done in the attenuation method, right? Like the small, like the other thing. And then there was a huge fight between him and save it whether you use the live virus or the dead virus, right?
Because the dead virus turns out to be as effective, but less, she was side effects, whatever. And they fought over this for 15 years, but this is just not what we are today. And if you would see people lined up around the block in order to get it, and the fact that you don't see them lined up, suggest that maybe they know something that the other guys don't, but the people who run me, Mr. Bouncy may have been a great firewall, just in some sense. But you know, now all of a sudden it becomes a social commentator talking about epidemiology, public health and game theory about what she knows less than nothing.
And ironically, he doesn't learn those things. Right. When I said is, I'm sitting down there and I read the scientific reports. I don't try to perform them. I don't check the calculations on the this on, but I look at the abstracts and the major discussions on this stuff and try to figure out something from the methodology. And as I said, at the beginning of the show, that was the way I was told you had to do law at the beginning with the sire. And I think it's, it's the correct approach. So this has become an international travesty and the quarantines prolong the situation and expose you to something else.
And as far as I can see, I have not seen a single serious public official in out. I didn't say commentator, who's actually got this right. And I've seen many commentators who seem to get it right, or at least on some of it. And there's some people who are really smart and they get much of it. Right? Some of it won't, your job is in my case, it is not to essentially reproduce the date. I can't do that, but I've been trained in, you know, I'm just old lawyer, right. But no, I mean, I've been trained in the science.
I, you know, I had to learn some games. I'm not a game theorist, but I had to learn it. It turns out from a very long time, I did sociobiology and evolutionary theory and inclusive fitness and all that stuff, which is absolutely critical for understanding how these things start to go in one way or another. And so having done the sociobiology and the games theory, and then all this other stuff, what happens is lawyers have the following set of tax advantages over specialists. I worked in five or six different areas that are relevant to this thing.
And, you know, I spent my entire life learning everything one-on-one, but the point is knowing one-on-one about a lot of stuff is extremely important. And many other people come in and they know 5 0 5 about one thing and 0.0 on other things, right. They had it, it turns out the person who has my kind of intellectual profile is probably better suited for figuring out what the systematic response would be on one condition. They don't run ahead of the evidence in substance and barriers.
Why always talking to people who know more than they do about any one of these particular things. So your job is to synthesize the best rather than to make it up yourself. So, I mean, I do a lot of work on science cases have been for many, many years, starting in the early eighties with Des and the specialists and agent orange and the whole thing. And you don't go near one of these cases unless there's a specialist who's worked in the area for years, it yourself.
Speaker 1 (42m 55s): So that was part one of two with Richard Epstein. And we're going to cap off the second half of that conversation next week. So I hope you enjoyed it. And I hope you tune in next week. And if you want to download our financial model or check out other episodes, go to working capital podcast.com, hope to see you there.*
Tim is the co-founder & CEO of StackSource, a tech-enabled commercial Real estate financing platform. StackSource has now completed over $250 Million of commercial financing transactions and they are in growth mode They are re-inventing the stagnant mortgage brokerage model with a tech-enabled marketplace/service. Tim speaks from experience when he says that the best possible financing for a commercial/multifamily real estate deal doesn’t have to be painful. StackSource brings transparency to commercial financing.
In this episode we talked about:
* Tim’s Bio & Background
* Genesis of StackSource Platform
* StackSource Distinguishing Aspect
* Capital Markets Overview
* Underwriting Real Estate
* Inflation and Interest Rates
* Debt Market
* Residential Real Estate Space
* Tim’s Team Structure
* Promising Areas in Tech Space, Real Estate Tech and Property Tech
* Roll Up Strategy in Real Estate
* Mentorship, Resources and Lessons Learned
Useful links:
tim@stacksource.com
https://www.stacksource.com
https://www.linkedin.com/in/timmilazzo/
https://www.facebook.com/TimMilazzo
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Or ladies and gentlemen, my name's Jessica gala. You're listening to working capital the real estate podcast. My guest today is Tim Palazzo. He's the co-founder and CEO of stack source. A tech enabled commercial real estate financing platform.
Stack source has now completed this hot off the presses over half a billion of commercial financing transactions and they're in growth mode. They are reinventing the stagnant mortgage brokerage model with the tech enabled marketplace slash service. Tim speaks from experience when he says that the best possible financing for commercial multifamily real estate deal doesn't have to be painful. Stack source brings transparency to commercial financing. Tim, how you doing today?
Tim (1m 1s): I'm doing great, Jesse. Thanks for having me on.
Jesse (1m 4s): Well, thanks for being here. I was going to say it in the bio here, but you might as well give listeners a little bit of a background because it seems that prior to stack source, you were in the tech space. It looks like Facebook, Google. Maybe you could talk a little bit for listeners about your background in real estate and how you got to the place that we're at today.
Tim (1m 26s): Yeah. Thanks so much, Jesse, for the opportunity. So real estate is one of these things that could have been, you know, in my blood, so to speak, right. I had an immigrant grandfather who late in his life after saving up from his union job, started buying like a couple of commercial properties in his town, in New Jersey. And then my dad was full into it right away as a, a leasing broker in New York city. And he became a managing director for a boutique leasing brokers that was then bought out by CVRE, which is now the number one, leasing brokerage in the city.
And I interned at a real estate company when I was studying finance in college. And that would have been the natural path is to follow this, you know, generational real estate path. I always loved technology companies. I loved tech and smartphones and software programs and video games. And that's the stuff that really made me excited. And so when I came out of college, I went and worked for tech companies specifically in advertising technology for several years before coming back to real estate, seeing this opportunity to merge technology and software with the real estate industry.
And I saw a spot that I thought I was really needed, and that's why I found it stack source.
Jesse (2m 46s): Awesome. So we talked a little bit before, before the show here. So you, where are you originally from New York and now you're in Florida. Is, is that right?
Tim (2m 55s): Yeah, so I, I moved to Florida during the pandemic actually had a growing amount of small children running around the floor of our two bedroom apartment in New Jersey, just outside of New York city. And so we made the move since I was working from home anyway, and our team was increasingly remote across the U S to move down to a place that would be really good for the family. Give us a little bit more space and be a pretty good work from home environment here too. That's great.
Jesse (3m 25s): So for, for listeners stack source, what was that kind of the Genesis of, of this platform and how you, you know, what you've been up to with, we said at the outset over a half a billion so far in commercial transactions?
Tim (3m 41s): Yeah. Well, I came to this idea for stack source because I happened to visit a real estate tech meetup several years ago in New York with a couple of friends that were involved in the real estate industry. And my eyes were really open to that time to, you know, taking this passion for software and technology and coming back towards the real estate industry and what was going on. And at that time there were some really cool startups in data and getting access to real estate data, cool startups in like transactions and keeping track of your portfolio as landlords.
And I started to see a bit of a FinTech and really online real estate investing was the only thing that was starting to happen there with, you know, fundraise and Realty mogul. And some of these companies that you can invest passively into real estate deals online. And this lit up my eyes to, okay, well, who's building the inverse of that platform, who is for a property owner for an investor. That's a sponsor, that's raising capital. Who's giving them a menu of financing options. Who's providing them with access and transparency into what are all the sources of capital that they can tap on a deal by deal basis.
And that seems like a pretty clear and obvious idea to me. And maybe I had, because I was further from that part of the industry and, and I was coming in as an outsider. It just seems so clear and easy and obvious. And I think to people that were in the industry for a long time, commercial lenders for decades are commercial mortgage brokers together. They were too close and they saw how hard the transactions were and how hard these relationships were to navigate when the truth is actually something in the middle. There is technology needed for having transparency into financing, but there's just huge expertise in this human touch and relationships are valuable too.
And so stack source ended up being a tech enabled commercial finance that we have capital advisors and teams of capital advisors across the country at this point that provide that skill in underwriting and that negotiation and that structuring ability to put commercial financing deals together. But there's a transparency to our platform where you can see your financing options and you can easily compare them and the is faster and more efficient.
Jesse (5m 60s): That's interesting. So with these, these different competitors that you kind of saw in the market, what was the, what was kind of the value add or the, the distinguishing aspect of stack source as it, you know, with who's currently in the market?
Tim (6m 14s): Sure. Well, the speed and the transparency of the process has really been the focus for us since day one. When I started working on this as a platform, it was myself and a couple of software engineers saying, Hey, how, how much can we automate in this process of finding the right financing options and getting loan quotes? You know, that was the first thing is like, how easy can we make it to get loan quotes on a commercial property? And it kind of showed us what are the edges of what can be automated and what can be made instant versus what are, where are the human pieces of this process?
And I think if you were someone that started a commercial mortgage brokerage in the 1970s or eighties, you probably adapted to email in the nineties and two thousands, but what other technology have these guys really had adopted because they're run just by the most successful broker at the, the, at the firm. And they're, they're going to be the best sales guys, but they're not going to be the innovators in operations, in technology. And that's led to these traditional commercial mortgage brokers to be under-indexed on research and development to be under-indexed on this innovation and this technology and what it ends up being for the, for commercial mortgage brokers and for financing advisors is they don't have access to the tools that they could.
They don't have access to the tools and the data and automation in a way that can make them more efficient. So it's speed, it's transparency. We're now working on a lot more features and functionality on our platform, and there's a lot coming on our platform, but it's always been this speed and transparency from day one
Jesse (7m 52s): Around. That makes sense. So, in terms of the, the actual kind of, from when you started inception of this, to where we're at today, it's obviously been a crazy last 18 to 24 months. What have you seen in the capital markets or change, or how has that evolved over the, the last, you know, the last little while?
Tim (8m 14s): It's interesting, because for the last decade, we've had low interest rates, right? And only now in 2022, are we starting to have economists predict the federal reserve in the, in the U S is going to start to pull back on some of this quantitative easing, and they're going to start to raise interest rates, there's internet, there's an inevitable interest rate rise coming. We're still in this low interest rate environment for now. Now certainly the pandemic made things a little bit more choppy with during the pandemic.
And in the first phase of the pandemic, we saw leverage start to be pulled back, especially from banks and more conservative lending institutions. They started back leverage. They started adding more capital reserve requirements. You know, that's, that's largely washed away by this stage of the pandemic where the underwriting has smoothed out. Again, we're at full leverage, not only full leverage for permanent financing, but we're seeing really healthy leverage on value, add and construction deals as well, where you can, there's a lot of dry powder out there in the forms of bank balance sheets in the form of debt funds.
Everybody's waiting for interest rates to rise, but there's this kind of golden opportunity right now to lock into a 10 year term with a loan, you know, in the low threes or to get construction financing. That's a, that's a really healthy leverage. I think it'll be interesting to see what happens to both cap rates and interest rates as inflation continues to rear its head and see how long it rears its head and how strongly there's going to be in interest rates. But it hasn't yet.
Jesse (9m 55s): Yeah. Yeah. It's something that we've constantly been talking about in the, over the last little while. I know, you know, you have the Powell that was, I think, just in front of Congress to answering questions. So I think it's top of mind for everybody right now, in terms of the actual asset classes themselves, we talked a little bit at the outset commercial and multifamily. Is it all different sub categories within commercial that you guys will lend on?
Tim (10m 21s): Yeah, so, so SAC source won't lend directly on anything. What we do is we act as a portal and a guide and you know, that menu of financing options. So everything you find on our, on our platform is coming from third-party capital sources. So we have built up this national lender lending network of hundreds of banks, credit unions, CMBS shops, you know, the, in the U S the big agencies, Fannie Mae and Freddie Mac, and a lot of debt funds because there's all these, sometimes it's a sidecar fund for some big real estate developer that wants to support other developers.
And the debt part of the stack, many of them are just dedicated debt funds, or even mortgage rates. And you have all these scattered sources of capital, and everybody has their own lending and investment criteria. They are looking at certain asset classes, they're looking at certain parts of the capital stack, maximum leverage and recourse. And there, there are these, you know, multifaceted lending programs where it's a half an hour conversation. If you really want to understand any given capital source, you have to ask about all of this, you know, what are the edges of what you can do and how, how, how do you size your loans?
Do you size them with debt yields? You sized them with LTV, figuring out what might be a match and what projects might be a match for any given number of lenders is this intensive process. If you try to do it manually. So what we've done is we've cataloged all of that. We've put all of that in a database so that you enter a, a loan request and stack source on the front end. And you're instantly matched with algorithmically. Here are your matching lenders now from a human level and a quality and a sponsor quality standpoint, there's some quality control and making sure the right deals are entering our marketplace for our lenders to respond.
But if you're a quality deal and you know, you're underwritten correctly, we can instantly identify which of these capital sources might be a place you might get matched to just a couple of capital sources. If you're working on something really funky. And if you've got a straight down in the middle of multi-family refinance, you're going to get matched to a lot of lenders and you can potentially get an instant agency loan quote.
Jesse (12m 23s): Fair enough. So if you took, say for an example, you took a, an investor, you know, they, they are looking at a a hundred unit apartment building in say, in your neck of the woods in Florida, what can you walk the, walk me through what the process would be like for, for that investor?
Tim (12m 43s): Sure. So we need to know what are the relevant details on the underwriting that any lender or capital source is going to need to know? So property address the, the net operating income, the physical characteristics, when was it built? When was it renovated? What type of framing, all this stuff that would impact a lenders, sizing, underwriting, and pricing of a loan. The idea is you enter that once in the stack source portal, and that's instantly matched to the database of what these different capital sources are looking for. And it also instantly generates a debt offering memorandum still can be made, have changes made later.
We w the stack source team themselves, and our analysts are going to adjust and tweak and add, add data and Siri and the right comps. But those two things are done instantly where, you know, within men, within minutes, the ideas, you know, the types of capital sources and the types of things they can provide, Hey, there's an interesting life insurance company lending on this type of multifamily. And they can only go up to 65 LTV, but hang on, their rates are amazing. Like, yeah, I want to get a 2.8% interest rate.
And I'm interested in, you know, putting that lender in my shopping cart, so to speak. You know, I want to see if that unders interested in working on my deal, that, you know, some, some lenders, some loan programs, like a, like a Freddie Mac, small balance, you can get an instant quote on our platform. And then some of this is like, Hey, it's a life insurance fund. They're going to review. They're actually going to do a lot of diligence. But if I get the loan from them, it's going to be the best interest rate around.
Jesse (14m 15s): Got it. So, in terms of that, you know, that investor, he finds, say that life insurance companies, that that's kind of lending on funky loan, funky, or, you know, more involved loans in this certain area in Florida. And then how does, how does the, how does that get taken to fruition the, through the platform they're connected and then they, they break from the platform, or is it everything is done within the platform?
Tim (14m 40s): Good question. So, first of all, you do get an advocate. That's a human being on the platform. So you're not dropped off into something that's confusing. And especially when you're matching to a bunch of different lenders and they may be asking questions and, and, you know, they they're expecting to see the underwriting in a certain way. So that person that you get to talk to is a capital advisor. And they are professionals that work for stacks, horse across the U S that have been, you know, have decades of experience in lending and commercial mortgage brokerage, and real estate investment.
And they're going to be your advocate through the whole process. So you don't have to talk to, you know, it'd be just as bad that you have to talk to 14 lenders on stack source versus, you know, trying to find those lenders on your own and pitch the deal to them one by one. So there's no pitching all of these lenders separately. You get one capital advisor, you'd answer some questions, you get an advocate. They actually will help you with structuring and finding the best financing sources, maybe challenge you on different ideas that you haven't thought of because there may not just be a senior lender, but there may be a subordinate APOE source that can also add value in your capital stack.
So you get to have a conversation with a capital advisor, they help you go out to market, and then you are getting notifications. When you have new loan quotes and new financing offers in the portal, you get an email notification, you can compare and analyze those very easily within the process. When it comes time to sign the term sheet and deposit, the lender gets to choose their own process, because they're the ones closing funding, your loan. So some of those will have a, an email checklist or, or what have you, you know, but you keep the capital advisor advocating with you throughout the process until close.
Jesse (16m 22s): That's great. So we've talked a lot about over the last few months, a lot about the amount of debt in the market right now, you know, we talked about it, just you and I here briefly on inflation interest rates. W w what we're finding on the investor side is that there is a lot of capital chasing fewer and fewer deals. I'm curious on the flip side of that, on the debt market side, what are you finding is, or is, or are some of the biggest challenges from, from the debt side of things?
Tim (16m 52s): Well, you're right. You're right. There's a lot of money. There's a lot of types of money. That money is going to go full leverage, and it's going to be low rates. So for these capital sources, when they find a good project that they want to back, it it's a competitive market for them to get in to the capital stack, especially if it's multifamily industrial, some of these darlings of the industry, or you could probably throw self storage and a couple other things in there that are performing really well, you know, really from coast to coast.
And so we're seeing that's advantageous for the borrower, not just in rates, but there are negotiable pieces of term sheets right now, from everything from recourse to reserve structuring to leverage that it really slants it in a it's a borrower's market. Right, right now in early 2022, and things can change that change economically. But early 20, 22 is one of the best borrowers markets that we've had.
And that's, that's not just early 2022. You look at 2019 was the largest year of commercial mortgage origination ever. The second largest ever was 2021 and 2022 is not slowing down. As far as the first half of the year, from what we've seen now, inflation some more economic pressure, some bad job reports, something can slow it down quickly, but right now, 2022 at pace could be the record breaking banner year for commercial mortgages.
So it's a competitive, it's a borrower's market right now. People have been gearing up. People geared up for maybe more economic turmoil than we've seen rear its head yet. And so there's this money that needs to go somewhere. It needs to be on deals. And that's just as true on the debt market as is on the equity.
Jesse (18m 43s): Yeah, I mean, we're seeing, we're seeing the exact same thing from, from our vantage point here. And we're finding, you know, some telltale signs for this is we're finding more and more lenders are getting more creative on deals, you know, in, in my area, we're typically very conservative when it comes to debt in general. And now we're finding that, you know, five years ago, there's certain properties that, that wouldn't be lent on. You know, it could be at a host of things, maybe environmental, you know, other, other aspects or variables that lenders are trying to figure out and get more granular to see if they can lend on.
So it sounds like that's, that's happening across the board. And, you know, we just had somebody that on the podcast last week that was speaking to self storage and yeah, another area that I'm sure you're seeing a lot of capital going towards.
Tim (19m 28s): Yeah. And retail, if you're in a hot market to, you know, re you probably don't want to be fifth AV office and retail in New York right now, but you absolutely want to be retail in south Florida, for instance, or Dallas, Texas. These are places where they're seeing such a population increase and, you know, there's, there are plenty of drivers behind that, that we could go into, but they're seeing a massive population increase in Texas, Florida, the Carolinas, and, you know, it's actually a great market for retail, even retail construction.
So I think any asset type in these hot areas across the country, and then if you're in the right asset type multifamily, storage, industrial, you're going to get the money you need anywhere.
Jesse (20m 15s): Yeah. It's been a, it's been a ride quite a ride the last few years. So I'm curious, Tim, just because of your background, I thought maybe you could talk a little bit about how coming from the tech world, how has that impacted the way that you look at real estate or, you know, the way that you look at the business and, and just the way you look at your customers. Okay.
Tim (20m 38s): I think there's a lot more information and data available today on real estate than there was a decade ago. There was like one big real estate data company, a decade. And while they're still one huge. Now, now they're huge. And they're a huge real estate data company, and they've acquired others. There's a lot of other startups that are bringing interesting data points that can help with underwriting that can help make you more intelligent and make you more competitive when you're using data to full effect. I think there's a lot more workflow technology, not just with real estate CRM, so that certainly has grown, but really with, you know, deal management platforms and portals, and the listing portals are so much more full featured today than they were.
I think this next era of real estate tech is going to see a lot of those trends come together where not only will some of these real estate tech companies be more vertically integrated, where they were a data company and how they're helping with like transaction tools, but there's going to be integrations and partnerships between more real estate tech companies, where processes for, you know, for asset managers, for operators, for property managers and all the way down the line can really be connected in a way that it hasn't been before where your accounting system and your asset management system and your CRM and your transactions, and all the way through to your, you know, your tenant portal.
If you have all of these things are connected in a way that can really drive efficiencies. And, and that's, that's something that we're starting to see in the real estate tech market is, you know, these startups, some of them are becoming like real companies and like larger companies. They've gotten a lot of funding, 2021 in addition to being a second highest ever year for commercial mortgage origination. It was the highest year for venture capital investment into real estate data and real estate tech companies. And that's, you know, that's a leading indicator of more change and efficiency and innovation to come in our space.
Jesse (22m 40s): Yeah. I, you know, I think that's, that's exactly right for us. What's kind of amazing from the commercial real estate standpoint is you've seen the proliferation of tech in residential for a long time now, I think, and I think we're still playing catch up on the commercial side. And I think, I think we're headed in the right direction, but hopefully COVID, you know, the silver lining there is, it's kind of made people think a little bit more in just more forward thinking from the technological perspective.
And I think we've kind of, you know, COVID in general has kind of kicked us into that mind frame a mindset because we, we just did it by necessity.
Tim (23m 18s): Yeah. I agree. Residential real estate tech is another place to look. If you want to know, what are you going to, what are the trends going to be two or three years from now in commercial? You could look at what's happening in residential today. So in our space, I mean, it's very encouraging that in the us one out of every 11 loans on residential homes, I think was by rocket mortgage last year. And that's a staggering number considering every banker and every single bank can credit union across the country, wants their own customers coming in the front door to get a mortgage, but they're not, they're using rocket mortgage, we're using better mortgage because of the digital experience because of the ease and the efficiency of it.
And for that many people to be choosing instead of their local bank relationship or the local mortgage broker relationship to be choosing the efficient path and the transparent path, I think tells you all, you need to know about what's going to happen in five years in commercial mortgage.
Jesse (24m 13s): Yeah. It's just seems like a bit of a democratization to the consumer level. Tim, I'm curious, the, you, you mentioned that you guys were in growth mode, you know, even prior to the show we were talking about, you know, where you guys were at last year compared to this year, what is the, the next, you know, year or two look like for the team?
Tim (24m 34s): Well, we tripled our revenue and doubled our team at Sachs worse in 2021. And so to stay at a trajectory like that would be amazing from a, you know, from a company growth standpoint. And, you know, I think we've got the infrastructure in place, but really it's what's what are we going to continue to do on the product and not sit still and just say, Hey, we have a nice little digital loan portal. You can get access to these different financing options. We're going to continue to invest in this product.
Things like there are a couple of types of automated quotes you can get on our platform today. There'll be a dozen types of automated quotes. You can get on our platform by the end of the year, a lot of it for multifamily, but others are starting to do for other asset classes as well. So if you have straightforward underwriting scenarios, why should you wait on a banker to finish your round of golf before giving you, what is your interest rate in one zip code versus another, that's just not going to be the way agency multi-family and stabilize multi-family deals are quoted in the future as well as other asset classes.
So we're going to continue to push on the products pretending to make it as good at experiences and as easy to experience as possible to wait through different financing and capital sources. And, and we're going to hope to do that across the U S we're going to strike some more partnerships with other real estate tech companies, which I kind of alluded to is happening across the space in order to streamline the underwriting and the due diligence process, as well as to surface financing options in more helpful contexts, where you may be off of stack source, but you can get financing options where it's helpful to do so.
So that those are some of the things that we're focusing on.
Jesse (26m 14s): Are there current areas in the tech space or real estate tech prop tech that you think, or that, you know, you're excited about, or, you know, you think you're going to see a lot of big changes aside from the space that you're currently in.
Tim (26m 28s): I'm, I'm a huge cheerleader for real estate data and not just real estate data, but like external sources of data and figuring out how they impact properties and cities and what that means for investors. I think that's like a really cool thing that's happening. And it's, it's several steps away from something like artificially intelligent, real estate investing where like, you know, but I know 30 years ago, the best chess players were human and now they're computers 10 years ago, like there's this ancient Chinese board game of go.
And they thought it was too complex for, you know, for humans to be over, you know, passed out by a computer by computers. But now it's happened. I kind of wonder about real estate investing. I don't think that there's going to be some AI that can like out invest like the best real estate investors, certainly not at this stage of our history, but I think we're about to enter this era where if you're a real estate investor, that's not making the best use of data and tech you're going to fall behind.
And I don't think it's even too bold to say that because, you know, within, within like real estate comps, but also like social media sentiment and like there's, so there's so much you can mind and understand, like, where are people going? What do people want? And I think the best real estate investors are gonna make so much use of that over the next few years. And they're going to seriously outperform.
Jesse (27m 59s): Yeah. That's a, that's great. I'm currently reading a, the age of AI is a book I highly recommend it's Henry Kissinger, I guess, teamed up with, I think he was Eric Schmidt. I don't know if he was like, I think it was Google one of the founders, but it's
Tim (28m 14s): Chairman of Google when I worked there.
Jesse (28m 16s): Oh, there you go. That's right, Google. So, yeah, I'm just kind of nerding out on that book right now. I've thought it was pretty, pretty interesting, but yeah, it it'll be cool to see how this, how we shift because even, even the proliferation of data, when it comes to our area, we, we were using Altice insight for a lot of our stuff. Then moving into CoStar. And a lot of the brokers that I worked with were like, you know, CoStar is never going to be where all this is is that, you know, what we were using. And now I don't even think, I think every broker I talked to just uses CoStar.
So it's, it's interesting too, because you want other companies to be able to play in the space and be competitive, but it kind of seems like it's very similar to these social media platforms where the, you know, you have a first, first mover advantage and then once you actually become the dominant incumbent, it's it just kind of snowballs. So I'm, I'm curious how that will play out, you know, in five years from now, we'll, you know, we'll, there'll be a couple of different data companies or will there be, you know, one or two that, that dominates our space.
Tim (29m 18s): Yeah, that'd be interesting to see. I'm also curious to continue to see how it plays out though. A bunch of other real estate data companies have grown a lot over the last couple of years, and maybe they're not as large and certainly not as comprehensive as CoStar because CoStar has also been acquiring other real estate tech and data companies. They bought 10 X last year. They bought a couple other real estate data companies for different verticals that they didn't have well covered yet. But like out of New York city comp stack raised $50 million to do office industrial and retail comps across the country.
Last year, Moody's analytics is investing in several real estate tech companies like light boxes investing in a bunch of real estate tech companies. So there are some of these other players that are putting together, if not this, the full comprehensive package, I think there are starting to be some challengers. And then there are these interesting, like alternative data, you know, placer.ai had raised a bunch of money over the last couple of years. And what they do is for real estate companies, they allow you to see without doing manual measurement, where is foot traffic and where's car traffic, because they crowd source the data from people's smartphones and they see where are all these smartphones moving around?
And they aggregated anonymized that to say, you know, at any given storefronts or, you know, ha and a given storefront, how much foot traffic foot traffic will it really have, you know, on a two o'clock on a Thursday or for this apartment complex, how many people are already driving by on the way to work and would have a shorter commute if there was an apartment complex here. So like the, the analytics I think is, you know, gotta be one of these biggest opportunities for real estate tech and real estate data companies it's already happening.
I expect that to continue to accelerate.
Jesse (31m 13s): It's curious to the, the fact that you have companies doing kind of a roll-up strategy when it comes to acquisitions and growth, where they're buying other companies, rather than building their lines. I'm curious to see how we kind of roll forward. Like in the Canadian market, Avison young, the commercial real estate company I work for. I think we are, we're over 80, 80 offices now, but we're probably one of the larger ones here. So you have CVRE JLL, Cushman, the usual suspects, Colliers and ourselves. And we've a lot of these companies. I know Cushman has, we are JLL, has we built our own platforms?
So exactly what you're talking about, where, you know, we're in an office building in downtown Toronto, you can see where all the cell phones are analytics for our company, but we're building that in-house, and I'm always a little bit hesitant when I hear companies doing that, that aren't in that space. Cause I'm, I'm just of the mind like, well, why don't you just get the best, the best person or best company that does this and, you know, figure, figure that out. So I think, I can't remember the name of the company that we use, but a hundred percent, I think, I think that this is definitely the next, the next stage.
And then I think the, the big question is just like, it was 20 years ago. Okay. You have information now, what do you do with it? And I think that'll be, you know, still the difference between these successful investors or brokerages or real estate companies versus the ones that aren't at the top of their class.
Tim (32m 33s): Right? Yeah. And, and the answer might be different based on your size and your goals, right? Because a powerhouse estate investment company that has multiple funds or rates, or, you know, and they have a, they have a big presence in a, in a big budget. They, they're probably going to build their own tools, just like the major brokerage companies. They're going to build their own tools. You know, Avison young is going to build its own, you know, suite of tools, but some of the largest investors are going to do that too, for their own operations. If you're a mom and pop investor, you should looking for something off the shelf, that's going to give you an advantage.
And because you can't help to beat some of the in-house tools beat by some of the larger ones. So that's really where startups can thrive is either enabling like these big companies and being a part of their mix or having an out of the box solution for tons of small investors. And so we're probably somewhere we're somewhere in between because we do mid market loans as well as small, but in that small space, and even in a space where commercial mortgage brokers don't even want to help you, that you owe you need $700,000 to buy your first, multi-family get out of here.
Like you're not going to be helping since the office of many brokers, but for stacks or so we've made that process really efficient. And we actually did a number of loans less than a million dollars last year.
Jesse (33m 55s): Yeah. I think that's a critical point there. All right, Tim, I want to be mindful of the time here. We're just coming up to the end of the episode here. We ask all of our guests for questions. If you're ready to answer them, they're a little bit of a final four. We do.
Tim (34m 10s): Yeah. Let's do it Jesse.
Jesse (34m 11s): Right on. All right, Tim, what's something that, you know, now that you wish you learned at the beginning of whether it's working in real estate or at the beginning of your career in tech,
Tim (34m 22s): So many things, but I'll say everything is sales when you come down to it because everyone you deal with, even if you're not actually selling something, they're a human being and people react well when you use empathy. And when you use clarity of communication, and these are really what great salespeople do is they connect with someone at a, at a human level. Then they communicate clearly and then they guide them in the right way. So if can sales and I wish I learned that earlier.
Jesse (34m 52s): Yeah. It's great to try to move the S word into a, a, a positive thing over, I feel like it's over the last 10 or 15 year, he probably longer, I feel like it's, it's now starting to take a switch to people realizing that even in the technology, I think technology companies were a big part of this too, because at the end of the day, you know, you add value you market, and then you need sales to kind of bring it in and actually have that human aspect that you just mentioned. What would you say to a younger person trying to break into the industry?
And that can be on the real estate tech side or real estate in general?
Tim (35m 27s): Well, if you're trying to break into real estate or real estate tech, figure out something that you are good at and double that strength because especially right now, companies are looking for talented people. I mean, listen, it's, it's actually a job seekers market in many ways, and there's been this great resignation, find something you're really good at. And you can be passionate about whether it's your current passion or not. Like for me, starting off my career, I, if I looked around the room of my peers and other financed graduates coming from my university, I was good at spreadsheets, double down on something.
You can to be really good and add value on day one. And you're gonna make it hard for people to turn you down for a job. If that's part of the part of the job, right on
Jesse (36m 16s): What is on the proverbial bookshelf that could be audio book or any media that you're you're consuming right now,
Tim (36m 25s): I have too many podcasts on my list and I also have way too many books. I feel like I track what books I read on good reads.com. And I, for every one that I check off the list, I must be adding two or three. So the reading list is growing. I have a bunch of leadership books that I want to read because I, my company is growing and we had less than 10 people a couple of years ago. And now we have 25 and growing. So, you know, there are, I, I expect to read 3, 4, 5 leadership books among other things this year.
Jesse (36m 57s): And it's funny you say leadership. I was just looking at a list today and I don't, I, you know, listeners can can message or they can email in on whether this, the leader who had no title, I think was the, was the book that was recommended. Yeah. I think it's Robin,
Tim (37m 13s): That's my list based on the title alone. Next for that.
Jesse (37m 16s): Yeah. Okay. So last question. Our personal favorite here. First car make and model
Tim (37m 25s): Jeep Cherokee sport. 1999 red. We used to drive it down from, we lived outside of New York city and we used to drive it down to the Jersey shore. And you know, it was a lot of fun. You didn't care if you got sand all over it. And I CA I kept that car for a while and definitely shed a tear when I had to sell that.
Jesse (37m 46s): That's a, yeah, that's a pretty good first car. I was going to say, like you were in New York at the time. It doesn't seem like a, it doesn't seem like it fits there.
Tim (37m 54s): No, no. On the New Jersey side, it works well,
Jesse (37m 56s): Though. There you go. Absolutely. All right, Tim, for, for listeners that want to get more information on yourself or the company work in, they worked in the, be pointed to I'll put some, some links in the show notes.
Tim (38m 9s): Sure. Stack source.com is our company website. If you want to reach out to me directly, my email is tim@stacksource.com. So pretty simple, but if you search Tim, Milazzo M I L a Z O on LinkedIn, Facebook or Twitter, I'll be the first one.
Jesse (38m 25s): My guest today has been Tim Alonzo. Tim, thanks for being part of working capital. Thanks,
Tim (38m 30s): Jessie.
Jesse (38m 38s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Paul Moore is an amazing contributor to BiggerPockets. Paul has launched multiple investments and developed companies appearing on HGTV and completed over 100 commercial & residential investments & exits in Real Estate. He has contributed in Fox business and Real Estate Guys™ Radio and is a regular contributor to BiggerPockets
Producing live video and blog content. Paul also co-hosted wealth building podcast called “How to lose money” and he has been featured on a number, over 200 at this point. Paul is a 3 time Real estate author. His new book is “Storing Up Profits: Capitalize on America's Obsession with STUFF by Investing in Self-Storage Paperback”
In this episode we talked about:
* Paul’s Bio & Background
* Entering Commercial & Multifamily Space
* Going Vertical in Self-Storage
* Rent Control
* Breaking into Self-Storage
* Self-Storage Performance and Risks within the recent 2 years
* Dislocation Aspect
* Underwriting of the Deals
* Thoughts on 2022 Outlook
* Why it is important to find your BIG WHY
* Mentorship, Resources and Lessons Learned
Useful links:
https://www.wellingscapital.com/resources
https://podcasts.apple.com/nl/podcast/the-biggest-opportunities-in-real-estate/id1505750263?i=1000534008754&l=en
Transcriptions:
So that's, that's what got me into real estate in the beginning. And then commercial, I ended up building a multifamily and operating it in the buckin oil rush of North Dakota. It was a multifamily quasi hotel. We did that for years. It was a lot of fun.
Jesse (4m 34s): That's great. So you, like, I'm not dissimilar from, from some stories and multifamily is you started with these properties, realize that you can make a dollar to two going that way. And then at what point did you end up going into the commercial space or the multi red space?
Paul (4m 50s): Yeah, so that was 20. So in 2010 we threw a bunch of friends and I threw over a million dollars to the bottom of a hole in the ground expecting about 50 times as much oil to come back out and nothing came out. And so I don't think we, I can almost certainly say we didn't think it through as well as it might sound now, but we thought, well, who made money in the gold rush? Well, those who sold the picks and shovels. So we noticed that there was a massive, massive housing shortage in North Dakota. I mean, like 10 or 20,000 people in a town of 3000, you know, sleeping in their trucks.
So we created this multifamily, which, which we ran as a, you know, sort of an extended stay hotel in 2011. And that was our entree in. And I ended up writing a book on multifamily about five years later and I was off to the races.
Jesse (5m 42s): Yeah, fair enough. I'm sure the, the Western Canadians can, can appreciate the throwing money in a hole in terms of the, so that moved from initially in Detroit, working with Ford motor company, was there an inflection point in your career where you, you said, okay, I'm going to go with the real estate way and, and left, left the job, or was it something that you kind of did on the side and kind of transitioned to?
Paul (6m 6s): Yeah. So when we launched our company, when I left Ford in 92, 93, it was actually, we started a staffing firm and I had only done a couple real estate deals on the side during those years. And honestly I hated real estate on the side, but when I had a chance to go into it full time in 2000 after we sold our company, that was, I I've honestly loved it ever since. Fair enough.
Jesse (6m 35s): Okay. So moving on to, you know, you write this book on multifamily, we're talking today about storing up profits, the, the book I mentioned at the outset, what can you tell us for the, for the average investor that say, you know, I'll give you an example is, is invested in some real estate, maybe it's on the commercial end. Maybe you, you know, whether it's single family or whatever, pick your vertical and keeps hearing about self storage. You know, we hear it, we hear it up here, you know, in the Canadian context, our friends to the south, we hear it constantly being brought up.
I think I mentioned before we had Brandon Moore or Brandon Turner on talking about self storage, but for the average investor, how would you describe the self storage vertical?
Paul (7m 17s): Yeah, so we, you know, we'd beat our head up against the wall for years looking for multifamily. And as I, you probably didn't know I'm old or, and, but seriously, those watching her going, he's really old anyway, but seriously, we, we were w w we're more conservative every year, you know, that I get, and, you know, I wanted to focus on investing and not speculating after making some mistakes in that arena. Hence the podcast name, how to lose money, but we, you know, really felt like it was like we were at the risk of overpaying for multifamily.
And unlike you, we didn't have a great acquisitions team finding those under the radar deals. And we found out that there were 53,000 self storage facilities in the us. That's the same as subway McDonald's and Starbucks combined, but three out of four are run by independent operators. And half, two thirds of those are actually run by single facility owners, which is also known as mom and pop owners.
And these mom and pops typically. I mean, first of all, the cap rates have compressed so much in the last eight or 10 years that they've doubled the value of their facility. And many of them did that by doing nothing except maybe staying the way they were, which is sometimes not always, but sometimes kind of mediocre. And so the opportunity for a medium sized company to go in and buy these facilities with this incredible intrinsic value, which I'll get into in a few minutes is enormous.
And we hadn't seen anything like that in multifamily in a long time. So we transitioned from multifamily to self storage, and then eventually also adding mobile home parks in 2018. And it's just been great. I mean, here's a couple quick stats. I mean, a couple quick issues to consider one would be that, I mean, if I'm renting a thousand dollar a month apartment from you and you raise my rent 6%, I might leave rather than commit to another 60 bucks a month or $720 a year.
But if you are renting me a self storage facility or unit, I should say, and you raise my rent 6%, well, you know, if it's a hundred dollars a month going to 106, I'm probably not going to spend a weekend rent a U-Haul get my buddies together to move my junk. I mean, excuse me, my treasures down the street, just to save six bucks a month. And that's one of the reasons that prices are so inelastic. And what I mean by that is, you know, I mean, they typically users don't leave because you raise the price, especially since most of the tenants think, Hey, I'm only going to be here a few more months anyway, and it's a month to month lease.
Well, that month to month lease has another benefit. And that is, it allows us to capture inflation. Think about it. Imagine my, my friend who has an Amazon sorting facility and has a 20 year lease on it, what's going to happen. If inflation goes way up, well, he's already locked in, or the guy with the warehouse, you know, that rents it for 10 or 20 years or a medical building. But this allows you to capture inflation increases, you know, potentially as much as every month. So we love that. There's also a ton of value adds.
Now, Jesse, the first time I heard value add self storage, I literally laughed. I thought, what are we talking about here? Four pieces of sheet metal, some rivets, a floor and a door. How are we going to do value at where where's the pain? Where's the fake hardwood flooring, where's the bark park. You know, none of that was available. And I had no idea. There were a significant number of value adds in self storage. For example, adding you hall now, adding you hall can, you can put a U haul out in front of your facility and with no cap ex nothing out of pocket, you can generate between one and $5,000 a month in commission, let's say it's $3,000 a month.
That's $36,000 a year using the commercial value at, I mean the commercial value formula, you know, 36,000 a year divided by, let's say a 6% cap rate. That's a $600,000 increase in value just by setting up a U haul operation at your facility. You can also sell locks, boxes, tape scissors, other retail items. You can add late fees. You can throw out bad tenants.
A lot of these mom and pops have a lot of delinquency. We invested in one self storage facility in grand junction, Colorado that had 80% delinquency, 80% of the tenants weren't paying or were paying late. And so there's just a lot of stuff you can do. You can add boat and RV storage, which is really popular. These days, you can add temporary storage like those, you know, storage, those boxes, and you can, there's so much, you can do two. And when you, you know, when you add the value formula and then add a little bit of safe leverage, it can really, really juice investor returns.
Okay.
Jesse (12m 42s): So I have a couple questions to start with, but just, just so I understand that correctly on the value add thing. Cause I, I never heard that concept before, either in terms of, so for example, the U haul, you basically just like you would see some industrial sites with multiple tenants that UCLU haul truck onsite, basically. That would be you, you basically getting the income for having that URL there and having individuals that are, that are tenants of yours renting that, is that correct?
Paul (13m 11s): Yeah. It wouldn't have to be tenants. Basically. You've got to, hopefully you've got a great location with high visibility on a main road you better. And these you halls will be sitting out front. People would book them from your location. And then the one catch is you have to have an employee there to check them out, you know, to sign the paperwork. And then when they come back in to sweep it out. So if you already have an employee think about self storage, how up and down somebody's hours are. I mean, I can imagine them sitting there for hours watching the security screens and Netflix.
Well, you know, it's not really a huge increase in cost to do that, but you get commission from you hall for doing this.
Jesse (13m 50s): It also be fair to say let's loop in Canada. Let's just say Canada is a big state and where you would be similar to New Jersey, New York, California. And I think Maryland in terms of rent control, the ability to remove tenants because of delinquency like you're describing here, is it, does it fall under the landlord tenant regulation in states or is it easier to, to remove them?
Paul (14m 16s): Yeah, that's another benefit of self storage is there's no eviction moratorium from COVID or from anything else, even in the height of COVID we were able to evict tenants. So that is another benefit for sure.
Jesse (14m 31s): I think the reason I bring up those states is those are all states with some form of rent, stabilization or control. And it's, it's a big factor up here, and I know it's a big factor in those states. So another appealing aspect, it seems of self storage, Paul, in terms of, so you talked, you opened the book with these, you know, different reasons that that self storage is an appealing asset class. And then you move into the ability to actually break into self storage. Cause you know, some people, if they're looking at these larger commercial deals and I think you're bringing up seven different paths about how you could get into the self storage space.
Could you talk a little bit about that?
Paul (15m 6s): Yeah. I, I wanted to write a book for bigger pockets on seven unique paths to get into commercial real estate. But instead I actually devoted the last one third of this book to that topic. And so this would apply to most, any commercial real estate. I think it's really hard for a lot of people, including myself for years to try to figure out how do I get into commercial real estate? And so the seven different paths real quick are one, some people call it stacking based on Brandon's a nomenclature there basically it would be buying a small facility, fixing it up, leasing it up, possibly refinancing, but more likely selling it and then going on to a bigger facility and then just rinse and repeat over and over.
I know that works. It's a long and winding road to the top, but it definitely will work. A second path would be being a capital raiser. Now here in the states, you've gotta be really careful with the securities and exchange commission if you're raising capital for other people's deals, but if you're a partner in the deal, or if you can work your way into a partnership with somebody for a raise and you raise the capital, that could be your specialty. And a lot of people do that are really good with people. They might have social media skills or podcasts, and they can raise a lot of money for other people's deals.
Some people have started their whole company by raising money. First Whitney Sule from the real estate syndication show. That's how he started. And he is just a master. Now at multifamily, he's raised a whole lot of money for his own deals, but he started as a capital raiser. Third would be a deal finder deal finder would be somebody who sort of serves hopefully legally in the role, similar to a commercial real estate broker and somebody who basically goes out and finds deals.
And then instead of getting a commission, they'd say, Hey, look, I like to get a piece of ownership in this deal. I'd like to stay involved and I'd like to do this over and over. And eventually hopefully, you know, you get to be a partner in that company or maybe another one. So deal finder is third. Fourth would be go big where you just start out at a high level. Let's say you won the lottery or, you know, retired from the NFL or you just have access to inherit it or your own money. You sold Bitcoin or something. And you can just start out at a high level and people do that.
It's, there's some challenges with that. Of course, path five would be, get a job. Now, most of your listeners probably thinking, I'm wait, I'm listening to Jesse to get out of my job. I don't want to get a job. Well, there are some benefits, especially if you're young to getting a job in property management or as a commercial broker or a commercial mortgage broker, possibly an asset manager, there's different things you can do to learn the lingo, learn the business, meet the people, get the connections and work your way into a career.
Six path would be taking the passive path. And that would be, you know, just becoming a professional or even a non-professional passive investor. Let's say you've got the money, but you don't have the time. You just need to do a great job. Vetting a great syndicator, check out several of them, use Bryan Burke's book, the hands-off investor, and go out. And that an organization that you can invest with and get, you know, essentially sometimes even higher returns than you'd get by yourself.
But somebody else is doing the heavy lifting. The seventh path is finding a mentor or a paid coach. And that would be, you know, finding somebody who will be willing to bring you into their training program or even somebody usually locally who will let you, you know, you trade your services for them, you know, the opportunity to hang around their office, get to know the product, get to know the company and the business as a mentee to that mentor. So those are the seven paths I talk about in the book.
Jesse (19m 5s): Yeah. What a great recap. I don't think I've, I've heard that in one, in one fell swoop, but that's pretty much covers everything. I didn't know that about Whitney. So for those interested, the syndication show, I believe it's called a fantastic podcast with Whitney and Brian Burke. We've had them on a number of times. I can't recommend that book enough. One thing I love about the book that he has is so many books are not from the limited partner's perspective, they're there from the, you know, the capital raiser or the, the GP. So it's nice, even as a GP, you really want to understand both sides of the coin.
So I'd recommend that to anybody that is interested. So Paul, from, from that outset, you know, you have these benefits of, of self storage. We go through this crazy time in the last two years, you know, the world has, hasn't probably one of the biggest health concerns of my generation. At least if not the last century and then various asset classes perform some not so well, some very well, how did self storage perform over the last two years? And maybe it's just in addition to that, what are the risks?
If, if any, with self storage?
Paul (20m 13s): Yeah, let me start with the risks. Cause I don't want to forget that it's really important. The biggest risk in self storage is really during the lease up. That's the time of the risk, at least. So in other words, we invested in a non unstabilized asset in Bradenton, Florida on a main road in a very, very booming area that had 29,000 new residential units being built in that area. Well, it was great until we tried to fill it up and that two new competitors, large national competitors had also built new facilities right down the road and the due diligence people miss this in that process, it just happened to fall right before they were really evident at any rate.
So it was harder to fill up that facility. It took two years longer than planned. And I think that is the biggest risk is large national competitors nearby by the way that eventually sold for an 80% profit to the investor. So it was great, but at any rate it was a hard road. So that's the number one risk would be competition, especially when you're unstabilized and leasing up. Other risks would include, of course, this is true for anything, a bad operator, you know, a great operator can take a mediocre deal and make it good or even great.
A terrible operator can destroy the best deal on the planet. And so bad property management, bad operator, those would be other risks with self storage, overestimating. Your ability to raise rents would be another one. You know, your, Hey it's 20% below market. Yeah. Well, there may be a reason for that. So really just, you know, things like that would be the major risks. I think if we drive around a lot of us, see just self storage in the, in the states everywhere.
And we're wondering why this has gotta be overbuilt. Well, I can take you to Nashville and show you, drive you around Nashville and show you why it is overbuilt. There's too many self storage facilities in too many locations around the city, but then I can drive you 20 minutes south to a suburb, a nice suburb Bellevue or Belmont they're neighboring suburbs. And they're completely underbuilt in fact, there's huge under supply there. And so this is why it's really important to invest with a great syndicator who uses tools like radius plus to check out, you know, the number of square feet of self storage versus, you know, the market, you know, the demographics, the number of people there.
So that's some of the risks as far as how it's done since COVID, it feels like you threw me a softball there, but I don't think you did the wall street journal, New York times, business wire and others have recently written articles basically saying that co that self storage is the big star in commercial real estate. Since COVID during COVID, we had students moving out of their dorms and their apartments, not knowing. I mean, the first weeks of COVID in March of 2020, what's going to happen.
We got to put our stuff in storage. Will we come back in two weeks when they flatten the curve or will it be two years we don't have. And so that, that was a nice little initial bump. Then there was the eviction moratorium that didn't happen, self storage. And then we have these unfortunate situations. I'm not making light of this, but a self storage thrives during the four days that's downsizing, dislocation, divorce, and death. And we had some of all of that going on during, and since COVID, let's look at dislocation, I mean, people have been moving in droves from places like Chicago, New York, San Francisco, and LA to smaller towns or different places like Utah and Texas and Florida and Charlotte and well, a lot of them need self storage along the way.
And so let's take dislocation as an example, Jesse, I mean, look in the last year at the massive number of people who have moved from places like New York city and Chicago, LA San Francisco to places like Utah and Texas and Scottsdale and Charlotte, a lot of these people need self storage along the way other people, you know, are moving for different reasons. There's been a lot of stress. There's been, unfortunately, a lot of divorce, there's been some death.
And so there's a lot of, you know, reasons that self storage is actually, you know, doing better right now. And another factor most people don't talk about is the price of steel and other building materials. Plus just the labor is in massively short supply. And so it's held up some self storage projects from coming to fruition. So the competition is actually lower, at least in these last, you know, let's say six to 12 months or more. And so really nobody would have dreamed, we thought self storage and we said self storage would do well in recessions.
Nobody had any idea how well self storage would do during this pandemic.
Jesse (25m 37s): Yeah, it makes sense. And just kind of from an anecdotal point of view, I can't, I can't remember a time where I've kind of put something in storage and I haven't used that storage for an extended period of time. I feel like, like you said, I believe you use the, the word inelastic. My, my very technical economic term would be sticky. It's just that aspect where once people store something in an area, like you said, you know, if you go from a hundred to a hundred, $6, is that going to make me move it probably not. You know, if you go up some crazy amount, then you might move the needle.
One thing I'm curious about I've, I've always been curious about the underwriting when it comes to self storage, because we always talk about self storage in the real estate context. I'm curious if that translates to the underwriting of the deal. And for example, you know, I somewhat of a rule of thumb when it comes to looking at multi-racial properties is an expense ratio of 40 to 50% know it'd be a good rule of thumb to do a back of a napkin calculation. Is that are the metrics with self storage?
What would they be most similar to in the real estate space?
Paul (26m 44s): I mean, that would be very similar to multifamily, but the operating expenses would be, I think about, I believe they would average something like 32% on average for most facilities, as some of the automated facilities have a lower expense ratio, but at the same time they can't have you all, they can't have showroom items like, you know, the retail items we discussed. And so their revenues might be a little lower as well. But yeah, other than that, you know, the, the revenues and certainly the value formula is quite similar.
Jesse (27m 20s): Fair enough. I just want to be a little bit mindful of the time. We do have four questions. We ask every guest when we wrap up here, but before we even get there, I'd like to get your thoughts on 2022 and maybe beyond in the relatively short term. And maybe we could talk about that a little bit in the context of self storage. And then, you know, if you want to opine on the broader real estate market, I'd love to get your thoughts.
Paul (27m 45s): Yeah. I used to make predictions when I knew nothing. And now that I know a little more, I don't, I mean, I've noticed that Charlie Munger, Warren buffet, Howard marks, those guys won't make any predictions of the cycle. Howard marks of course reminds us to, even though we can't know when the cycle is going to change, we should act appropriately for where we are in the cycle. So one thing we have here is this is a 10 real $10 trillion bills from Zimbabwe. And it just reminds me as I'm sitting here, you know, that we are in a real inflationary time and it might not be transitory.
And so I think that is something that, you know, self storage has going for it. Like I mentioned, it allows you to capture that inflation real time. And if it, you know, if deflation hits, it would allow, you know, you, that happened as well. I guess
Jesse (28m 40s): I would just say, I heard one of the best definitions from Howard marks when he said, if you want to define the, the cycle and in this could go for real estate as well. He said, stage one couple forward thinking. People realize that they think the market's going to get better stage two, a broader economy, and people realize it is getting better. Stage three people think it's going to get better forever. And he's like, I don't know why you need a better definition of that. And it it's people, you know, listening to this, they know I'm a big Howard marks fan, but I mean, it's a great, it's a great point.
And one thing I've, I've said a number of times is when my mentor, he said, you know, real estate is one of those few industries where you can actually charge your customers are downloaded inflation to your customers. I E tenants. And it sounds like self storage is a continuation of, of that. If not in more real time, given the fact that sounds like you could, you can do it on a monthly basis.
Paul (29m 35s): Yeah. Right. That's exactly right.
Jesse (29m 37s): All right, Paul, we, before we get to the final four questions here, I thought I would ask you why it is important for investors or entrepreneurs to find their, why.
Paul (29m 47s): You know, I woke up at 33 years old on October 7th, 1997. And I had a couple million dollars in the bank, which was completely unprecedented for a, you know, for me and I wasn't any happier. I wasn't any more, you know, like I didn't, I felt a little more successful than I did the week before, but not a whole lot. I think it's really important for people to find their big, why, you know, studies show that if you make over $95,000, I mean, let's say you make 950,000 or 95 million a year.
You're not any happier than you were at 95,000. So we really need to have something else to live for. I think we were created for more. And so I really would recommend people find a big why for me, it's a it's it's regarding human trafficking. You know, if you took the record profits, not the average, the record annual profits of apple, general motors, Nike and Starbucks, and you added those together, double that number. That's the approximate profits projected from human trafficking every year.
And I'd like to believe if I was alive in the 18 hundreds, I would have been an abolitionist fighting against slavery. And if I was alive or if I was an adult in the 1960s, I would have been fighting for civil rights. Well, this is a civil right. And it is slavery and it's happening right under our noses. So my company Wellings capital is dedicating ourselves to try to free 5,000 slaves in the next five years from human trafficking. And I'm just recommending, you know, on a broader point that everybody finds something you're passionate about.
That's bigger than yourself or your business,
Jesse (31m 28s): Dear. And I think it's important as you know, we do or individuals get successful individually or with their companies in our case, in real estate that you CA you figure out what those things are and you know, that human element of, of being, being successful or prosperous. Okay, we are going to switch it up to a four questions. We ask every guest, if you're ready to go, I'll fire them out. Yeah.
Paul (31m 51s): You bet. What's
Jesse (31m 52s): A one thing Paul, that you know, now that you wish you knew when you started investing in real estate.
Paul (31m 58s): I wish I hadn't known the difference between investing and speculating and investing is when your principles generally safe. And you've got a chance to make a return. Speculating is when your principal is not at all safe and you've got a chance to make a return. You know, they say low risk, low return, high risk leads to not high return. It's actually the possibility of losing all your money or making a high return. I wish I'd have known the difference when I started and lost a bunch of money early on.
Jesse (32m 27s): Yeah. I mean, it goes back to Howard marks where, you know, you have that curve where he's like, well, if high, if high risk means high return by definition, that is not that's impossible. It's it's, that would mean that it's certain it's, it's obviously the higher, the risk, the higher expected important expected piece there a return. Right. Okay. Number two, your view on somebody that's entering our industry, a younger person, what would you say to them in terms of mentorship and, and getting started?
Paul (32m 59s): Yeah, I would actually. So bill gates became the wealthiest guy in the world through three simple steps you can take right now. Number one, I'm sorry. I had to do that. Number one, he decided at a very young age, what he wanted to do, and he's stuck in that lane. He did not very, he said no to 10,000 distractions to stay focused. Number two step, he, all he partnered with, or he actually found a company that would partner with him who was the biggest wealthiest, most influential company in that business, the tech world.
And that was IBM. Then third, here's the surprise. He did everything in his power to make them successful. When he did that, he quickly became the wealthiest guy in the world at a pretty young age. And so I would say following bill gates steps, you know, try to figure out what you want to do. Say no to distractions, find a big organization. Who's willing to partner with you and do everything you can to make them successful. That's great. Okay.
Jesse (34m 3s): Number three, what is one book you just are constantly recommending to people?
Paul (34m 9s): Well, I was going to recommend Howard marks mastering the market cycle, but since your listeners are already familiar with that, I would go back to my second one by Jay Papasan and Gary Keller. The one thing, yeah,
Jesse (34m 21s): That's a great book. And you know what, it's funny with mastering the market cycle. That is one book that's fairly hard to find on. I think it's on audible. If you want to listen to the audio version, but maybe, maybe I'm not looking hard enough, but I books, I, it was more challenging to find. All right, Paul, I think we're going to get an interesting answer on this one. My favorite Bloomberg question, first car, make and model
Paul (34m 46s): 1969, black Ford Mustang with the hood scoop
Jesse (34m 52s): 1 64, a oh 69, sorry, 69. I was going to not quite as cool. I was going to say the, would that be similar to the a, was it the 1970 was Mach one with the, with the kind of riveted Fastback.
Paul (35m 8s): Yeah. Well, interestingly, my hood was an aftermarket hood and somehow or another, I ended up with a Fastback hood with the turn signals out on the hood, you know, with my 1969 car. So
Jesse (35m 23s): Yeah, and I think that car was a, it was an Evie electric. Now I'm just joking. I feel like, I feel like this question is slowly, slowly going to get phased out as more and more people that come on just never had a first car, which is just the paradigm. Awesome. Well, for listeners that want to either, we'll put a show notes for the book for links to reach you, but where would the best be the best place be to, to connect with you? Paul
Paul (35m 51s): Jessie, I'm sure you can relate to this. When I, all those years, I wanted to transition from residential to commercial. I didn't know what to do. And so I've written a guide for people, free guide for people who want to learn, how to make that transition. And it's at Wellings capital.com/resources. That's w E L L I N G S capital.com/resources.
Jesse (36m 14s): My guest today has been Paul Moore, Paul, thanks for being part of working capital.
Paul (36m 20s): Thanks, Jesse. It's prey to be here.
Jesse (36m 29s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.
Colin Lynch os the Head of Global Real Estate Investments at TD Asset Management.
Colin is responsible for Global and Canadian Real Estate Strategy, overseeing fund design and structuring, implementation and oversight of acquired assets for the Global Real Estate Strategy. In this role Colin manages Investments in over 1000 properties located in over 20 counties worldwide.
In this episode we talked about:
• Colin’s Bio & Background
• Financial Crisis
• The Canadian Market from a Global Perspective
• Post-COVID Real Estate Market Overview
• Pricing & Affordability
• Effects of Inflation
• Commercial Real Estate Culture
• Mentorship, Resources and Lessons Learned
Useful links:
https://www.linkedin.com/in/colinkrlynch/?originalSubdomain=ca Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, welcome to working capital the real estate podcast. My special guest today is Colin Lynch. Colin is the head of global real estate investments at TD asset management.
Colin is responsible for global and Canadian real estate strategy, overseeing fund design and structuring implementation and oversight of acquired assets for the global real estate strategy. In this role, calling manages investments in over 1000 properties located in over 20 countries. Worldwide. We just updated that now. Colin, how's it going
Colin (53s): Kid. Good. Thank you for having me here.
Jesse (56s): Thanks for, thanks for being on the show. I'm really excited to talk with you today. I think there's a number of things that we'd like to cover, but before we do, as with every guest that we have on the show would love to get a little bit of more information on your background, how you got into real estate. We talked a little how it was a bit of an unconventional approach or entrance into real estate. So take us back, take us back and give us a little bit of a, of your background.
Colin (1m 23s): Absolutely certainly unconventional approach to real estate. So first things first, I actually grew up as very much into music as a musician. And so I was one of those children that was in every sort of music class. By the time it got to high school was performing in a ton of ensembles through the, by the a hundred concerts a year, got to the end of high school, said time to explore something else.
Cause I figured I, I had learned all that I could possibly learn in music, which was incorrect, but I figured I'd at least explored app. And so I went into a business and history. So I did three things in undergrad. I did the world concerned for a music. I did a bachelor of commerce at Queens, and I did a bachelor of arts in history at Queens. And, and then, you know, graduated and it was the heyday of the leveraged buyout, boom. And my mom who said, I was way too all over the place said, you got to get a skill.
You've got to focus and you should go work for those banks because they never run into any issues, their board to stability. And so that's what I did I do to fleet, went out to investment banking and went to Morgan Stanley and got to experience the global financial crisis front and center. Ben went to, went to, to business school. And throughout that entire period, this is where you expect me to say, I had that passion for real estate, which I do, but I also had a passion for commercial aviation.
So joined McKinsey and company in Chicago, but reality was all over the world, did that stuff. And after traveling all over the world, I said, look, that's fantastic, but I'd like to come back to a city I love and a nation I love and that's in Toronto. So I did that and this is where the real estate part comes in. I had been very interested in, in a lot of political activities. And so in 2014, in January, 2014, somebody that couldn't get elected asked me to help him.
And that was the John Torrey mayoral campaign here in, in Toronto. And so 10 months later he was mayor. He asked me to work for him. I said, no. And through that conversation set of conversations that got introduced to this firm called Greystone, a firm that I had never heard of before. And, and after about a year of conversation, Greystone asked me to join. So initially I joined in strategy working for effectively the C-suite and, and then that turned into moving into the real estate world.
So that's a long way of saying I had a very unconventional introduction to the world of real estate, but it was, it was a fun story to, to live through.
Jesse (4m 26s): That's great. So in terms of the, the financial crisis component of that was that you were still a at Morgan Stanley at that, at that time. And if so, what were you doing? What were you doing for them there?
Colin (4m 38s): Yeah, I was doing a number, number of different things. I, so I started started that Morgan Stanley focused on consumer retail and financial services. So financial sponsor stories. So serving pension plans who private equity firms in the light and then also timber companies. And then, and then as, as the financial crisis unfolded that broadened.
And I basically worked across firstly every street, but spent a bit of time in real estate as well. And then from a type of activity, as I mentioned prior to the global financial crisis investment banking was doing a lot of leveraged buyouts and throughout the financial crisis also worked on things like that or in possession financing for companies going through insolvency or worked on a few, reached a sort of a few IPO's did some M and a, but at the conclusion of my term at Morgan Stanley, the governor of the bank of Canada, Mark Carney at the time requested some help on the financial stability plan for Canada that was quantitative easing effectively in Trent and requests was help design a program for the bank to implement a quantitative easing.
And so that's what I did in the last sort of four months or so of my time at Morgan Stanley. So highly unusual investment banking experience for sure. A lot of industries and a lot of different types of activities that I participated in very much a function of the global financial crisis.
Jesse (6m 21s): Yeah, for sure. I mean, it's still topical, I guess even the current environment we're in now. So I think the, the idea of just the macro economic perspective you got, I don't think it's something that's too dissimilar to some of what we're doing right now from a stimulus and, and a quantitative easing perspective.
Colin (6m 40s): Very fair point. And you know, it's interesting because prior to this environment that we're in used to tell folks about that quantitative easing program, which the bank didn't actually have to implement. And the bank was here in Canada was one of the few central banks worldwide. They didn't have to implement quantitative easing well, fast forward to 2020, and we were pretty, pretty heavy on the quantitative Beason train. So, so, you know, it's things, things change and evolve over time.
Yeah.
Jesse (7m 11s): Yeah. Fair enough. So take us to, to the Greystone, to the actual foray into real estate, you know, what, what area did you, did you initially go into, and maybe for those that don't know a little bit about what they do?
Colin (7m 25s): Yeah, absolutely. So Greystone began as the investment management corporation of Saskatchewan. So 35 years ago, thereabouts, it was a department of, of the government and it was spun out from the government and became sort of like the investment authority for the province of Saskatchewan then became owned by pension plans. And at that point looked very much like, you know, the Aimco as an example, what the government of Saskatchewan said at that point, when they spun it out was after five years, the pensions could do whatever they wanted in terms of their investment management services.
And over time management bought out most of the interests of those pensions and, and that, that time Greystone had a very small real estate portfolio. It was a full suite, so public equities and fixed income, but also had real estate. And that real estate grew from about 200 million to on, on, by the time TD came around and bought Greystone in 2018, that real estate portfolio equity was about 16, 17 billion mortgages was around, I believe at the time about 4 billion.
And so it was quite the successful run and Greystone had become a name for excellence in real estate, both equity and debt, even though Greystone began and, and still had quite a strong public equities and fixed income side to it. And so like that, I joined Ray stone working with the senior team in, and once I did a number of things around reorganizations U S expansion, et cetera, I said, look, it's time to fire me because I'm pretty much done.
And then that, you know, originated into originate the conversation, which was, you know, do you want to be a coach, I E a manager, or do you want to be a player on the team? And I looked at that and I said, you know, what, why being a player on the team looks really interesting. And so that's the path I went down. And as we've looked at the different areas in Greystone and where my passion was, my dad grew up in construction. And so I grew up with, you know, floor plans, building plans, sorry, I'm on my, on my basement floor.
You know, I had a fascination for real estate. And so I thought that would be a cool place to be. And so my foray in was working on our asset management division. And so we created a real estate asset management division in house to do a bit of that work a bit on the office portfolio, in the industrial portfolio. And then, so I worked on that, that I was also asked to help co-create the international strategy, which was taking Greystone success that we had experienced over 30 years within Canada and, and expanding that outside of Canada.
And so I worked on those two initiatives and, and then the international strategy went from strategy to being a fund. And I went from creating the strategy to running the fund and then, and then that grew, and it was quite, it's been quite a successful ride. And then I was earlier this year, asked to take over the domestic portfolio, which is that portfolio that had been around for the, for the last 30 years.
Jesse (10m 55s): Yeah. So in terms of, in terms of going into the fund model, what was it prior to that? Was it, was it raising capital for asset specific and w like, what was that transformation like?
Colin (11m 5s): Yeah, so it was actually, so on the international side, it was literally building something from scratch. So Greystone prior to launching the international head, just domestic real estate. And it was a largely one strategy on the equity side and one strategy on the debt side, diversified across property types and by risk strategies and by geography and on international there's, there were a lot of investors con we call clients that were asking us, you know, why don't you have a strategy to invest outside of Canada?
And for about a decade, the Greystone response was we hear you, but we're focused on delivering great results in Canada. And so when I came around and said, look, I really am interested in, in, in being a player on the team versus the coach, they said, great help us solve this. And so we, we literally had a whiteboard. That's how we began. And we, and we designed ground up a single, comprehensive global strategy, investing everywhere from Australia to Europe, to the U S across all the property types and all of our strategies in all formats.
So it could be a fund investment or can be a JV, or it could be a club. And, and so we designed something with a tremendous amount of flexibility, which took a long time, but it was quite fun to be able to just literally create something from scratch and then, and then to actually build it, which, you know, you have all of the legal ramifications, regulatory ramifications fro in selling Greystone to TV in the middle of bad. And now you're pro you're owned by a traded bank and they've got their own regulations and then sort of, you know, build a track record and, and take that to the market and, and raise capital and, and deploy it.
So that's been, that's been the journey on the international side and it's definitely been interesting.
Jesse (13m 11s): Yeah, that is interesting. So we had a Michael Emery on the show a few months ago from allied REIT, and we know every time I have some Canadian Canadian guests that has started or work for a large Canadian real estate company, I always ask them the comparison to the U S or globally, where you have individuals playing in our backyard for a certain amount of time. And then I can imagine just like you're alluding to here, the regulatory environment, the probably the accredited investor differences and those kinds of complexities. Well, I'm sure there was a bunch of things that were challenging, but was there one thing or one or two things that was really one of the, one of the hardest parts about that transformation or about that ability to go from not just in playing in a Canadian market, but into a global space?
Colin (13m 58s): Oh, that's a good question. Certainly the regulatory dynamic is, is, is challenging. The European union, as an example, is a highly regulated regulatory construct. And, and there's a lot of rules around if you're marketing a fund, there's something called a passport and you sort of have to have this passport that applies to certain European countries.
We have a vehicle in Ireland called the ICAP, which Cyrus collective acid vehicle runs pretty akin to accompany. So with a legitimate board and, and, and all of the infrastructure service providers, companies that service that ICAP sending that up was quite, quite, quite the work, particularly as we're getting to the ninth ending of this, of this story, right, as COVID started. And so we sort of certainly felt the heat of regulatory concern just in general, as, as we were creating this as, as COVID habit.
So that's probably a little bit of a boring answer cause folks, folks, really, not too many people get up in the morning wanting to talk regulatory details, but, you know, we had eight, eight external law firms helping us around the world on, on that, on that point. And so, you know, the, the complexity of that I think was unexpected. I would say I'd stepped back from that and say, there's a cultural difference, you know, in, in the U S for sure.
You know, I think a bit more aggressive in Canada, we've got a smaller number of participants in the market that are fair. You know, quite a number are fairly well capitalized and have very long-term perspectives in terms of ownership, property. That's not uniform around the world. And certainly the U S is a deep and liquid place. And, and, and the regional variances are quite significant, but I think that broad sort of hates a little bit more aggressive is actually probably true.
I'd say the real estate challenge for us is there's just a host of participants worldwide. And so, you know, we're active in Australia, we're active in the UK, we're active in Germany, we're active in Japan and, and finding sort of like-minded investors across all of those regions. It's just a lot to learn a lot to introduce yourself a lot of introductions to make, and a lot of subsequent sort of conversations. And then you layer that on, into, into do that in the pandemic.
And, you know, fortunately we S we did maybe three years of those introductions and, and subsequent meetings, pre pandemic, but still we've, you know, we've had quite a number of those conversations. So layer on doing, doing that in a pandemic. And it becomes a quite interesting,
Jesse (17m 2s): Yeah, a little more challenging than, than any other time or most times in terms of, if we go there on that, you know, lockdowns the government stimulus, what we we've talked about before eviction moratoriums a lot has happened in the, in the last crazy to say almost two years, how has that perspective for you? And I understand it's a big question, but how has that, how has your perspective as a, as somebody that deals with real estate on a, on a domestic and global level, you know, how has your opinion of the market and asset classes changed over the last year or two?
Colin (17m 38s): Yeah, that is a big question. So generally put, I've been reminded of the ever present role of government in our lives and in particular in real estate. And I, and I don't think that can be overstated, right? So whether, you know, the, the eviction moratoriums, or simply put closing down a lot, a lot of the retail, et cetera, and that was a global story.
And, and going through the different government programs requirements, et cetera, particularly during the first two waves of COVID was, was an exercise. And, and there's things that we know about. So the shopping malls closed, et cetera. There were other things that got a bit less play, but were also meaningful. I E different requirements for international investors use Australia as an example, there were new requirements for international investors looking to bring capital into the market due to COVID.
So, you know, that, that was interesting now to real estate foundationally. I don't think COVID has changed my perspective on the different property types. So as an example, while located office and CPDs high quality had the view that if, you know, pre COVID, if, if you're making office investments, that's probably where you want to invest during COVID, don't have, I haven't changed my perspective on it, you know, has my overall sort of thoughts on office as a property type being tempered clearly.
But I, you know, I think you talk to folks and say, and what you hear is, you know, COVID, hasn't really changed their direction of travel. I think that's, that's largely the same for me. I do think on the retail side at some point. So I used the UK as an example, where we saw a lot of devaluation of retail. At some point, you hit the level where you say, you know, the land value is, is, is higher than what folks are sort of trading in the market for.
Right. And I think in the UK, you actually have some of those situations, but I think in, in Canada, there were probably some deals to be had in the retail space, depending on the type of retail you're looking at. And that probably, that would be a different point of view than one I would have had two years ago. It's just, we've seen, you know, a lot interns evaluations over the last two years, multifamily and industrial. I mean, you know, I think we've all been very interested on the industrial story, the E the E grocery dynamic, something I'm focused on a bit, most folks don't see that being a significant concern in, in, you know, for those that own grocery boxes.
But I do think that that E grocery, even though most would say, it's fairly unprofitable for the operators. I do think it's worth watching. And, and then on the multifamily side, you know, the, the story say, Hey, everybody's moved out, Tim, we're all gonna live in, in, you know, in two hours outside of the metros or we're going to move someplace far. I think we're seeing that kind of played out to a small degree, but largely hasn't fully, and folks have moved back.
And especially in, in the U S where folks have moved back into urban Metro San Francisco's a bit sluggish on that. But beyond that CEO look at Seattle, look at Boston, you've seen, you've seen those apartment rants quite dramatically increased this year. So, you know, some, all of that up and say, not dramatic changes in my view on real estate overall, but certainly certainly reinforcement in some areas and, and deeper thinking and others.
Yeah.
Jesse (21m 57s): I think I'm probably agree with everything you just said, from my perspective of what you're saying, it sounds like very similar to our outlook. Obviously we're biased in brokerage, but on the office end, I think that there was, if you were really in tune with what was going on in office, you saw a lot of these changes really predated COVID in the lockdown, the different ways of working, the ability to have people come in on potential alternating days. So I th I share your position on downtown well located transit oriented office.
I think the story hasn't changed much for them. What's, what's been amazing is that record prices that we've seen in, in industrial and multi res industry industrial, you know, has been the darling of the industry, multi Rez. I think at the beginning of the pandemic, there was this concern that eviction moratoriums would have caused this, you know, mass vacancy, which I think just generally we didn't see, we saw people paying their rent, which I guess in theory, or in practice was kind of subsidy subsidized by the government's.
Colin (23m 3s): Yeah, no, that's right. That's right. It was. And that goes back to the first point on the large role of government in, in our society. And, and to be fair, so much of our society was underwritten by the government, especially in that first lockdown, but our multifamily it's interesting because one could juxtapose a national headline from CNN, for instance, saying nobody's paying rent and rent collection is only at 70%. And multi-family, and then what I was hearing from, from institutional owners was, oh, no, our rent collections are 95%.
And I, the worst I heard was like maybe 89%. And so, you know, that, you know, those two stats juxtapose show the importance of institutional ownership of the multifamily space and, and how that really paid off in, in, in, in, throughout the crisis, not withstanding the point that yes, government definitely helped pay the bills for a number of folks, but that really, really mattered. And also the types of multifamily that you were in, this is more of a us common than Canada, because, you know, you have a much broader spectrum in the us, but certainly some of that luxury multi-family was, was hit pretty hard in the U S but interestingly, it is bouncing back.
Now I was in Boston six weeks ago, or so touring a bit of this product and it's, you know, it was quite interesting. The bounce back has been pretty robust. So anyway, for me, the point is institutional ownership and management of, of multifamily really made a difference in, in the crisis. Yeah.
Jesse (24m 49s): And I think on that point with trip, you know, AAA or high-end multi res, I know that there was intra construction, you know, pivots from, okay, maybe let's go be like, you know, maybe we don't need the Taj Mahal, whereas prior to COVID, they might've gone for that super high end. But yeah, I think a big component of it has been, despite some of the government policies, people have continued to pay the rent. And it seems to be at least from the data that we have, that the not only the prices keep going up, but net operating income keeps going up.
So the question really from my point of view is, you know, w where do we hit the wall first and pricing or affordability, you know, what, what tempers multi rise.
Colin (25m 30s): Yeah, that's a really good question. And take it take cities like Vancouver and Toronto, which have robust shadow rental markets where that condo inventory is, is really, you know, subbing in for that luxury rental. And I candidly think that it's those owners that will have to deal with that question first versus a multifamily owners. And if I were to sort of locate myself along that spectrum, I have to think affordability's going to start being an issue one way or another.
So whether it's, you know, people are paying, you know, the income proportions after, after tax income is, is, is off the charts. I'd say as, as a proportion of rent on average, you know, in, in, in, in Toronto and Vancouver, again, to a lot of that sort of condo shadow inventory, but it's worse for folks that are owner occupiers, just based off of the, you know, the significant appreciation that has happened.
So, you know, I think it's a legitimate concern. I just don't think institutional multifamily Canada is going to be the first in line to address it. I think there's going to be some other folks who dressing at first and we'll see how it gets addressed. And then the big thing that everybody talks about in, in the public equities world is interest rates. And when will they go up and, you know, folks are concerned about inflation. And I think we genuinely are, cause it sucks that things are a lot more expensive quickly, but I think a lot more people are much more interested on how will central banks, if they decide that this inflation run is a bit more permanent than they thought, Hmm, how will they adjust interest rates to, you know, deal with that.
And, and, and there, you know, if I look at that's the challenge and the folks lined up to, to face that challenge, those multi-family owners, aren't first in line, they're probably third in line. The first SIM are probably, you know, I would say highly leveraged homeowners that have, you know, purchased a product in the last year or so.
Jesse (27m 47s): Yeah. Fair enough. In terms of moving on to a little bit more on the interest rate, inflation inflation environment, you know, we keep hearing whether this is transitory, whether inflation that we have right now, for those that don't know, I think the fed very quietly, you know, mentioned that they would no longer be targeting the 2%, you know, their, their typical target of a 2% inflation. And it kind of went under the radar, I think even from, from kind of financial news, but w what are your thoughts?
And I guess in your role at TD, obviously you have to take a pretty broad global approach. How, how, how did that decision and what you've been seeing as inflation kind of creeping up, how is that influencing or changing, if it does your opinion on, on, you know, where you think you want to lock in rates where you think that you can, you can be in, in variable environments.
Colin (28m 44s): Yeah. Good question. So numb number places, one on, on the fixed versus fair, but we, we have generally put, had a predisposition to have as much fixed as possible on the view that, you know, this environment is benign in terms of the cost of debt. And so if we could sort of lock in some of that, that's, that's quite attractive now in certain places, it's pretty hard to do that. So construction financing being one, but we're possible that's being broadly the approach and, and this, and now that's a worldwide thing.
So, you know, I think that approach was most pronounced pre pandemic in places like Japan and also in Germany and other European countries. But I think now that's a Candace point, a us point, et cetera, on the other side, which is on the property type side, that's interesting, right? Because multifamily have one year, at least a student housing and maybe eight months, maybe 12 month policing. And when you look at an inflation world of rising interest rate world, that becomes quite interesting, even pre pandemic we're down in Australia, looking at industrial, we took a lot of comfort from the structure of leases in, in, for industrial product in Australia, which have a rental escalations each year.
And it's quite quite attractive at two to 3% per year. And so some now, sorry, that's quite attractive right now, right? Hopefully, hopefully it's attractive in five years, but I think that's also important. What's the structure of the leasing in, in the property types that you're investing in. And, and it's interesting, even in the office environment today, we're seeing leasing transform a little bit. We're seeing shorter term leases, not due to inflation, just due to uncertainty in office, but the, you know, the, I guess the net benefit of what might be viewed as more challenging leasing dynamic is you might have a little bit more flexibility in the shorter term if we, if we do have, you know, rising rates due to rising inflation.
So it is a complicated point, but we, we really began thinking about it in earnest in 2020. You know, we, we thought about it in 2019 and 2018, but in 2020, as we saw some of those significant changes and by the way, on the fed. Yeah. So that was a watershed moment. At least to me, when they moved off that sort of target, they also sort of announced, I think in the September meeting to be, you know, that they would begin tapering. Now we've been tapering in Canada for awhile, but I also think that's an important announcement that probably didn't get as much press as it should.
And then the program to taper fully, I think goes until June of next year. And after that, you would, you know, at least conceivably expect that rates would begin to rise. And I think to most people that would be sooner than what most people anticipate for the U S fed to, to do so. Yes, the feds made a few announcements that I think of come beneath that radar screen.
Jesse (31m 59s): I think it's one of those things that when it comes down to the ground level for us at the property level, whether it's, you know, office leasing or retail, I think there is potential for return of, you know, we've had leases where in the nineties and eighties, you'd see these legacy leases where they didn't have step-ups discreetly, but they had, you know, each, each year your rent would rise or your base rent would rise as a function of the CPI index. So it'd be interesting to see if we go back to more of kind of targeted step-ups that really want to go up with inflation, you know, if that's going to be a big enough thing where you, you see that translate, but yeah, it's, it's definitely something that's on the interest rate side, curious for all everybody, you know, we have people on that are, I find extremely smart that will have complete opposite opinions on inflation and interest rates.
So it's one of those things where you watch carefully, but in terms of having a crystal ball for where, where rates are going to go, I mean, I think I've confidently said rates will have to go up for the last 10 years.
Colin (33m 5s): Yeah, that's right. That's right. And, and, and eating a bit of humble pie is essential when, when, when prognosticating about these saints, because it's, you know, it's, it's almost like predicting currencies. There's just so much that goes in to, to, to, you know, what the fed does or what the bank of Canada does. And, you know, you can raise rate rates quickly or slowly. You might raise some that dance through there is, there's quite a lot in there.
And then you've got geopolitics, you've got a health pandemic and, and, you know, so sitting in 2019, nobody would have anticipated, right. Where rates would be today, just nobody would have gone in that. Right. So to your point, yes, I, I definitely eat some humble pie as well.
Jesse (33m 54s): Yeah, no, fair enough. You, you control what you can control. And, you know, we were in one of those few industries where you can directly almost directly pass on inflation to your customer, but it's a interesting point, especially in the Canadian environment, when you talk about student rentals where you essentially can mark to market your rental rates almost almost annually, usually two years, three years. But, you know, for those that don't know the Canadian environment, even in multi res, even though they're one year leases, you're not really marketing to market within, you know, every year, you know, the turnover can be, depending on the asset can be quite a bit different than, than student res.
Yeah,
Colin (34m 32s): Absolutely. And that, and, and, and that will be interesting going forward, right? Because you had folks in the last year or so, depending on the market and depending on the product, and this is more of a condo shadow inventory point that moves to take advantage of some of the lower rents in the multi-res side, that due to, you know, rent control, both, you know, use Toronto or Ontario as an example, you would think that the turnover rates going to decline materially, at least in the short term, as a result and in, in the student world, you know, it's, it's doubly interesting.
So number one, you've got your normal turnover folks graduate, but you also have this year and next year cold called the bulge in the class. You've got people that might've delayed, that are now taking the class people that were at home that are now going back to campus. You've got campuses that were virtual, like Ryerson here in Toronto that are going back to in-person in January. So that re all of that combined, and then you've got international students that are coming back.
It makes it a really interesting place to be in the student world. Yeah.
Jesse (35m 50s): Yeah, for sure. Colin, I want to be respectful of the time here, but I do want to talk about the, the black opportunity fund for those that don't know what it is. I just want to, you know, before we, we ask our final questions here, I mean, just in kind of asking the question, are you able to talk a little bit about the fund moving on to kind of culture in our commercial real estate world? You know, we can talk about specifically here in our area, but I think culture is very similar, our commercial real estate culture.
So I'd like to just kind of get your view on where we're at right now, from your point of view, you know, we're what improvements from a cultural standpoint you think that we can make and, and yeah. And on that talking a little bit about the fund and what it is.
Colin (36m 37s): Yeah, absolutely. So first the culture culture in real estate, in the commercial real estate world, it is a highly congenial culture and relies a lot on personal and interpersonal interaction and the log on the power of networks. And that's just a global global point and familiarity with each other on the basis, usually of doing deals and transactions and working through situations, none of that's overly bad.
What I have found, whether it's going to expo in new Nick or whether it's going to, you know, an animal con conference in Beijing is it's extraordinarily a male and be uniform. And when I stepped back from that, I think, you know, the folks that occupy our properties are not all male and not all uniform. And we live in one of the most incredibly rapidly changing and advancing times ever, right?
We're in the fourth industrial revolution and everything literally is changing. And so how can an owner operator of real estate realistically tell their investors that they're the best in the world at what they do, but their staff is only, you know, only calls from a quarter of the population in the country or city in which they're in. I just don't think it's possible. There are smart people out there, brilliant people out there that would make fantastic real estate investors that aren't actually able to get into real estate for X, Y, Z at ABC reasons.
So I think that's a problem for the real estate industry as much or more than it is a problem for society. But if we can solve that problem, we create better outcomes. And this isn't just that, you know, this isn't a CSR thing. I E the thing at the back of the annual report and where everybody's smiling, no, this is actually a, Hey, you can do, you can create better returns by having smarter people running the strategies, running the real estate.
So what's the black opportunity fund, a billion and a half world's largest pool of capital to fund a black led black focus, black serving charities nonprofits on one hand businesses entrepreneurs on the other hand. And why, because when we went through the last two years accelerated by what happened, George Floyd, we saw a ton of organizations doing fantastic work, just subscale.
They just need a capital. And it, why? Because we thought, Hey, why don't we start an, you know, a scholarship? Well, there's a ton of organizations getting scholarships. Why don't we start an after-school program? There's tons of organizations. There are literally hundreds and hundreds and hundreds of nonprofits, by the way, didn't say charities because they don't have even the scale to get through the process to become a registered charity. So they're non-profits, but they're, you know, moms and pops doing their best with the limited resources that we, that they have.
So black opportunity for motivate contributions from corporations, governments, individuals, families, anybody, we think it's a whole, a candidate problem to scale up these charities, nonprofits on the businesses and entrepreneurs side. There are thousands of entrepreneurs and businesses, all of them virtually all of them, very small. And the number one issue statistically as surveyed is access to capital.
And there is both and a perception issue and also true difficulty accessing meaning financial institutions are less likely, and this was studied by the, the federal reserve are less likely to give to an individual of color. There, there are like more likely to be determined, to be high risk.
And as a result, individuals of color are less likely then to go to those financial institutions. So you have sort of this negative wheel created. And so we're just trying to break that and create an assessable pool of capital to provide. So that's the goal of the black opportunity fund. We have been raised capital TD just announced a couple of weeks ago, $10 million plus office space. Plus the conduct individuals, national bank announced 6 million, just over $6 million to, to the black opportunity fund.
There's been a number of other contributions, but we're early meaning we've got a ways to go. We spent a lot of time creating the infrastructure at the correct governance, the board, et cetera, et cetera. And it's been a huge effort, more than 300 folks involved. We talked to thousands of businesses and charities and all, all across the country. And that's important to geography. Folks think about Toronto and Montreal. They overlook St.
Johns and Halifax and equalizer. We want to focus completely across the country, French and English, female, and male, and, and, and also LGBTQ plus, et cetera, that is important to us. And so that's the black opportunity fund.
Jesse (42m 29s): Yeah, I think, I think for, you know, from the point of view of the industry, I think me personally, I think that's why it's important to have these carefully, these organizations do these care for careful, you know, dis w whatever you want to call them, disparate impact studies, but we're looking at what policy actually does at the end of the day. You know, we have XYZ goal for policy, but what is really happening in reality? One thing that really clicked for me was I was in business school years ago in Toronto, and we had a venture capital capitalist that was talking to our class.
And he said that he had his daughter, she was going into computer science and programming and university of Waterloo for, you know, the Americans listening pretty much our Silicon valley in Canada. And he said, he went, brought her into programming and it was an orientation. And as most people could imagine, 99.9, 9% male. And initially I remember thinking, well, you know, if, if you go into something and you have people that are interested in that and they want to do it, and it happens to be disproportionate to society, you know, that's people making, making decisions, but then you said something, I think it would always stuck with me.
And when we have these conversations, I always think about this is, he said, these are, this is the generation that's going to design the virtual reality in geography. We plan the way that we navigate the world is a lot of it is going to be on the computer. A lot of it is going to be software. Do you really want this one cohort of people, no matter how great they are with all the blind, you know, the blind side, you know, the blind spots that they have. Do you want that to be what creates the future and designs it, or do you want to have a multitude of different views where the collective blind spots, you know, create something that is very clear?
Colin (44m 22s): Yeah, no, that's exactly. That's exactly it. And the tech world to that point has had its owns for the realization. Cause you know, commercial real estate, isn't alone. I mean, I'd say broadly the investment world, same thing broadly, broadly the tech world. But if you stay, you know, I stepped back and I've, and I've posed this question and truly a few times, it's like, why, why is it that virtually all of the administrative assistants are female. And it's like, do you, do you grow up?
Are you born? And you grow up and there's an innate desire as a female to become an admin assistant that doesn't exist for males. And clearly the answer is no, at least at least my interpretation and understanding of medicine yields me to conclude. That's probably not the case. It's probably a societal expectation. But if you take it to your example or the instance of commercial real estate owners, you know, how, how is it that you will grow?
How can you grasp future trends? How will you understand how people want to live, work and play, how they want to shop the types of retailers? They w retailers that they want to go to the experience that they want to have in lifestyle oriented centers. How can you actually understand that? If it's five dudes planning out the layout of the mall, right? It just, I don't get it. So to me, it's kind of like, well, you want to, you want to draw people in so that you have these different points of view.
So
Jesse (46m 0s): You're just going to go to that mall and not have any place for, for your, any daycare to put your child.
Colin (46m 7s): Yeah. Pretty much
Jesse (46m 9s): Awesome. And okay. I've, you know, we've been very, very generous with your time here calling. We have four questions. We ask everybody on, on the show. So if you're cool, I'll S I'll send them your way.
Colin (46m 20s): Sounds good.
Jesse (46m 22s): Okay. What's one thing, you know, now in your career, you wish you knew when you started,
Colin (46m 27s): I say, boldly use using the Wayne Gretzky analogy, which is old flea. Think about where that puck is going and skate, where that puck is going versus looking at the shiny object today and going to that shiny object today.
Jesse (46m 46s): Yeah, that's great. I haven't heard that in a while B be where that thing or that puck is going to be not where it, not, where it is in terms of, we always ask guests in terms of what you would tell younger people, getting into our industry, and just generally your view of mentorship,
Colin (47m 3s): Jay mentorships, critical more than my mistakes has been not caring mentors throughout my career. As I progress, meaning I have lots of mentors as I began my career. And then you sort of, you know, go through the different levels and you know, you get busy, it falls off you, you know, whatever, it's a terrible thing. I think mentors are absolutely critical. Gives you a perspective on, on things that you're seeing today that, that person's seen in a different way, 3, 4, 5 different times, and can tell you what they did or what didn't do more important than that is a mentor calls out your bullshit.
And that's really important sometimes. And so that's valuable somebody coming into the industry today, what would I say? It is a relationship industry at the end of the day. I mean, you got to do the work you got to do well, you got to have passion for it. So if you don't have passion for real estate, don't go into real estate. So assuming you're passionate for real estate, it's a networking industry, it's a relationship industry. And so take that time to go out and take somebody to drinks.
Or if you don't drink, take them to lunch, whatever it is, because that, that is what gets your career going in the industry.
Jesse (48m 29s): Yeah, absolutely. What is one or two books or podcasts that you are constantly recommending?
Colin (48m 35s): Yeah, that's a good question. I do like Malcolm Gladwell's books a lot. I wish I could say I've got a long book list. I wish I could say I've read all the books on that book list. There's a book that comes to mind. It was it's the power of one. I read it in literally high school, but it, it, it, it just speaks to me as a story about courage and resilience that, you know, I think is beneficial today.
And if I go back to your earlier question about advice, people used to say in, I banking world, it's a marathon, not a sprint. It absolutely is. And so to run that marathon, you need resilience and you need that, you know, that, that capacity to endure, to learn, to fall down, to, you know, make mistakes and to get up even better. Yeah. That, that book, the pair, the power of one was quite, quite instrumental to me, even though I read it so many years ago. Awesome.
Jesse (49m 39s): We'll put a link up to that. And the last question, my favorite layup first car make and model.
Colin (49m 48s): So funny enough, I've never, I've never owned a car because I've always lived in, in urban centers and have, you know, subscribed to the notion of taking the subway, walking everywhere and now taking Uber's. But the first car is likely to be some form of electric vehicle. Can't say it's going to be a Tesla, but it might be a, so let's go with Tesla and some electric vehicles.
Jesse (50m 16s): I like it. That's the first guest to prospect there, their first car. And the second one that, that they've always, they've always been public transit oriented. So I think that trend is going to continue going in that direction.
Colin (50m 30s): Yeah. I was early on that train cause you know, you know, it was very unusual, but you know, just like the, not having a landline telephone, a terrain that was early on that too, but eventually I'm going to have to give them, I know I can, I can see it coming in. It's probably going to be that Evy, hopefully when those batteries are better, there you go
Jesse (50m 50s): Calling for those, for those interested in getting in contact with you or anybody that wants to see, you know, what you guys are up to, what would be the best place to reach out?
Colin (51m 1s): Yeah. So LinkedIn is, is, is good. People do reach out through that in terms of finding, you know, what we're up to black opportunity fund for bear has a good website, lots of info there. We keep it up to date as it relates to T them and global real estate and our Canadian real estate, there is a T damn website, like most websites in the, in the investment world. We don't tend to overload it with information.
So, but T them does have a LinkedIn page. And so that is also quite active. So following either TDM on LinkedIn or on Twitter, there's there's information there. And if you don't want to do either and just want to message me on LinkedIn, you can, and eventually I'll get back to you.
Jesse (51m 54s): My guest today has been calling Lynch con thanks for being part of working capital
Colin (51m 59s): Pleasure. Pleasure. It was great conversation.
Jesse (52m 8s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.
Hiring the right property manager to manage your real estate investments can truly make or break your business. You've probably heard horror stories of nightmare property managers leaving your rental property vacant, destroyed, or simply taking your money and running. In this Just Ask Jesse I share the pros & cons to property managers & tips for hiring the right one to manage your rentals!
Brie Schmidt acquired her First Investment Property in 2011 and left the Corporate World in 2014 when she became a Full Time Real Estate Investor. Brie is the Managing Broker of Second City Real Estate, a Full Service Brokerage Working with new Investors and Seasoned Investors Looking to Expand their Knowledge of the Industry and their Portfolio.
In this episode we talked about:
- Brie’s First Steps in Real Estate
- Switching to Real Estate on a full-time basis
- 2021 Portfolio Review
- Capital Deployment
- The Difference Between Chicago and Milwaukee Property
- The Active Investment Strategy
- Property Management
- 1031 Exchanges
- Regulatory Environment from the Landlord-Tenant Prospective
- Mentorship, Resources and Lessons Learned
Useful links:
http://www.secondcity-re.com/agent/brie/
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Hey, my name is Jesper galley and you're listening to working capital the real estate podcast. We have a special guest today that is Brie Schmidt. Brie acquired her first investment property in 2011 and left the corporate world in 2014.
When she became a full-time real estate investor is the managing broker of second city real estate, a full service brokerage working with new investors and seasoned investors, looking to expand their knowledge of the industry and their portfolio. I had the special pleasure of being on a panel with Bree in new Orleans at the bigger pockets conference. Bree, how are you doing I'm
Brie (54s): Dan. Great. Thanks. How are you?
Jesse (56s): I'm doing fantastic. Well, I appreciate you coming on the show. I thought just, you know, we were talking before the show. I think it would be really interesting to have you on because we talked a lot, but you know, across that panel and I think it would be a treat for listeners to talk not just about multiple larger units when it comes to multi residential, but to talk about the mid and lower size units or smaller size units and kind of approach it from the perspective of the kind of unique markets that you're in. So maybe to kick us off, why don't you give us a little bit of a, of a background for yourself, for listeners, how you got into real estate?
Brie (1m 35s): So I always say I used to be a normal person. I used to have like a normal job and normal, you know, grind go to the grind kind of goals in life. So I used to work in advertising sales. I used to work in business development and advertising sales never really saw myself doing anything different. You know, it was really had aspirations of being a female CEO one day. So I live in the Chicago market, which we were talking about before show is a somewhat unique market, as far as housing stock.
There's very few cities in this country that have a large portion of two to four unit multi-units. So depending on the neighborhood in Chicago, it can be between 50 and 70% of our housing stock is two to four unit properties. And they're generally about a hundred thousand dollars, less than a single family home. So at the time I was think I was just getting engaged and my fiance and I were talking about, and you're like, what are our life plans? They're like, well, we want to, we want to buy a single family house, but like, we don't need, we don't need that sort of space right now.
So that was our plan was we bought a three unit property. We did a quote-unquote house hack, you know, standard FHA loan. And our plan was, you know, at some point we would need more space. We could, you know, take out a wall, move a staircase. Now we took up two of the three floors. And then at some other point we'll need the other space. We'll just, you know, get and take out a wall and move a staircase. And we'll eventually just take this house and convert it to a single family home. So that was our hundred, like end all be all goal with real estate investing. About three months after we bought the property, my father was diagnosed with a very aggressive form of cancer and he passed away a few months later.
And the thing is the day before he was supposed to retire is when he passed away and we already planned his retirement party and it now became his wake. And it really resonated with me as, because I would just think back of all the things my dad would say, like, when I retire, I'm going to go do this. When I retire, we're going to go to Thailand. You know, I'll retire after you get married or I'll retire when your brother had finished his PhD. And like, he always had all these dreams and goals that he never got to see because he never took action on it.
So here I am, 28 years old, you know, working 60 hours a week, traveling all over the country for somewhere else. And I'm like, this sucks. You know, like this is a terrible life. I've got, you know, 30 plus years till retirement. And I'm going to be in the same position as my dad. You know, I've always wanted to go to Italy. I've always wanted to go do these things and I've done nothing with them because I was too focused on work. So it really changed my perspective on life and decided to reorientate things.
And that's how I got into real estate investing. So you'll, you'll figure out, you know, I just go, I'm a bull in a China shop kind of person. So within the, we bought our first property in 2011, we bought another property in 2012. We did it again in 2013, that 2013 property was a renovation property. We bought like a 1960s house and completely renovated it, you know, pulled cash out. And that is when I found a website called BiggerPockets, which I'm sure you know about.
And it completely changed everything that I was doing. I had never talked with another investor. I had never read a book about investing. I was just kinda, you know, winging it. And it opened up this whole new world of possibilities. So we were sitting on a decent chunk of cash and now I had all these possibilities in front of me and opportunities to learn. So we went full forward ahead. So we looked at other markets to invest in while I love, love, love Chicago.
It's not really a cashflow based market. It's more of a balanced, you know, similar, not as expensive as California, but you know, similar sort of market, New York as well. You're just not going to be retiring off cashflow here. So I, I took some time. I looked at Milwaukee, Kansas city, Indianapolis spent some time in those markets, learning those markets and we decided to invest in Milwaukee. So for you guys that don't know it's about an hour and a half drive, so it's a, you know, easily commutable distance.
So in, let's see, 2015, we bought 10 properties and then 2016, I bought another eight. And then I had partners. I worked with that. I bought another 10 in 2016. So we went quite all in and fast growth trajectory on our acquisitions in those markets. So that's kind of my, and then I started a brokerage firm here in Chicago that was started in 2014. We are the largest boutique brokerage firm working with investors in the Chicago and market. And then I also do the Midwest real estate networking conference where the largest conference in the Midwest for real estate investors.
So everything, when I say I used to be a normal person with normal hobbies, that's what I mean. Like I used to be able to small talk and chit chat about sports or shopping. And now my whole life has become real estate, which is fantastic, but it's all I want to talk about. Cause it's all that meal. It's fun for me. So it was taken over my life in a very, very good way.
Jesse (6m 56s): Yeah. Well the, the energy didn't go out and I noticed when we were, we were at the conference and it's, that's great to hear it. When, when you made that transition, I'm always curious because it's not a dissimilar story where we have guests on that had a quote unquote, normal life or normal job, normal, whatever. And then they move into real estate investing. What, at what point in that kind of, you know, 20 11, 20 12 was the point where you said, okay, let's go in full time and, you know, get, you know, not, not continue to pursue the, the day job.
Brie (7m 26s): So it wasn't like a, it wasn't a pre-planned conscious decision. To be honest, the plan always was I was making great, you know, I had a great salary. I actually loved what I did. I had spent nine years building up my career. I did, it was not something that I wanted to walk away from. So the plan was never for me to leave my job and do real estate full time. Real estate was always going to be a hobby on the side. So it was when we were looking at doing our first set of properties in Milwaukee, that I started to realize like one day it was like, well, I always wanted to make sure that my real estate investing never got in the way of my day job.
And then one day woke up and realized that my day job was getting in the way of my real estate investing show. But I'll tell you this story. I used to travel a lot for work. And we were at the airport, it was a 6:00 AM flight to Atlanta. So it was like five 15 in the morning. I'm staying at the airport with my boss who just had a baby. She was like, I don't know, baby was like four months old. So we were flying down to Atlanta and then we had to get a car and rent a car to go to Columbus, Georgia, which was like a two hour drive for a two hour meeting.
And then drive back to Atlanta to take an airport plane ride home because she had to get home. She had a newborn and I remember sitting in the airport with her at like five 15 in the morning. It's like the butt crack of Dawn. And I get a travel alert on my phone. Like, so when it comes to travel, like Istanbul has been like my number one bucket list place. And there was a flight alert. It was like 400 bucks to go to Istanbul and I'm staring at us and I'm like, oh my God, I'm going to go to Istanbul. And she's like, what one? I'm like, I don't know, there's 400 bucks. Like I'm going to go whatever. And she started going through, like, this was April.
She starts going through my calendar while you can't go this month. Cause you've got this and then you've got this. And then like at the end, she's like by October, like, yeah, you can take a long weekend. And I was like, screw this. Like, this is not the life that I want. Like if I want to go to Istanbul, I want to go to Istanbul. So between it was around the same time that we were mid acquisition with our properties. Like I said, we were buying five properties. I remember calling my commercial lender and being like, Hey, if I quit my job, is that going to affect my ability to acquire more properties?
And as soon as you said, no, I was like, great. I'm giving my notice. And that was it. So it was like a two week, like, Hey, is this gonna, are we going to completely blow ourselves up by doing this? Or no? And the answer was no. So we just did it. I just did it.
Jesse (9m 51s): Yeah. I feel like the, there is this point where people, especially like yourself that have a job that has a good income. There's a beginning stage when you're investing where it is an asset. Obviously the W2 income, T4 in Canada, where, you know, lenders are looking at that. But you do get to a certain point where the assets are become more important than you as the individual. Did you experience?
Brie (10m 14s): Yeah, exactly. But if it wasn't, we were already past the point of doing residential loans. We were already well into like the commercial loan process and that was pretty much what we would be doing moving forward. So as if you don't know, as a us and Canada might be different, you know, those are two very different processes. So it was important for me to know that the commercial under that we were working with, I said, I've done, you know, 23 loans with him. You know, they, they were very strong as far as like backing me personally and financially, as long as he was okay with it, I was ready to go.
So I said like, this was probably mid April. I left my job at, and by the end of June, I was, I quit and done diminish doing real estate full-time ever since.
Jesse (10m 60s): Right on. So what take us up to 2021? What, what does the portfolio look like?
Brie (11m 5s): It's less so, yeah, I've actually sold, I didn't sell anything in 2020, but 20 18, 20 19. I sold some properties about half of my portfolio. So this is also a very interesting story. I was at a conference, very similar, like the bigger pockets conference we were at new Orleans. And I remember the first session, the first morning was an economist. I was actually in Philly with Dave Vanhorn's conference. So this economist is on stage. And he's saying a lot of big words. I don't know, you know, yield curves.
And I don't know, I'm writing things down. Like I should Google that later. So at the end of the conference, the, there was a charity event and the economist had had was the auction off three hours of his time. As for this charity fundraiser. I'm like, this is a perfect opportunity for me to learn, right. What he's talking about. Because while I understand like real estate economics, and while I understand the market economics that I'm in personally, I don't understand on a national or global level, right? How all these other things that are going on are going to affect my market.
That's why I wanted to learn. So I bought his time as part of the auction. And one of the things he did was he wanted to go through my entire portfolio with me five years back, right. Looking at my cashflow, my projections, something that I hadn't done. Like every year I would view my portfolio, right? Like we all do, but I never really like went back and looked at it from a high-level five-year perspective. And he put on all these different calculations and I don't even, I still don't even understand half of them that he did for me. But one of the things that we looked at is what was my three-year average cashflow and my five-year average cashflow, what would I get if I sold the property less than the fees and how does that, that profit relate to annual cashflow?
And I realized quite quickly there was some properties that like, there was just always something, right. There was always something going on with these properties. At the end of the day, if I sold the property, I will be getting like 15 years cashflow up front. I'm like, well, that makes stupid for me to keep these properties. So that has become for the last three years when I'm part of my process is every year I not only review my pre like in my, or what we did and what our numbers were this year.
I also look at my three-year, my five-year. And then since acquisition numbers and reevaluate my portfolio every year, I hire a local realtor in Milwaukee, even though I'm licensed there, I don't, I'm not super active there to do a CMA on my properties. And I rebalance things and I re reallocate things and see, Hey, is this the right? Is it keeping this property, the right thing to do? Or at what point does it make sense for me to sell? So that's, that was a learning experience I took from a med economist. Yeah.
Jesse (13m 54s): Yeah. And it's sometimes it's like, you get that second opinion or you just to get something that, not that you weren't accountable, but kind of high level taking a look at your portfolio. I found a very similar thing happened with me earlier in my career, where there was very similar to you just cap X that would happen. So, so technically your P and L looks good. It looks okay. But really at the end of the day, your cashflow statement is getting hit with these large expenses. And, you know, 1960 would have been a newer pro property. Like one of the first properties we bought was in the early 19 hundreds.
So, you know, stone foundation, knob and tube. And what I was finding was that there were particular properties that were just these cash, like just pits, because you'd just be dumping in. And, you know, even if you average out capital expenditures, if you pick properties that have, you know, a lot of maintenance, you really gotta be careful about how you're smoothing that out over the, the time that you hold. And, you know, sometimes there's an inflection point, whether that's five years in seven years in it's, like you said, it just makes so much more sense to sell it and redeploy somewhere else.
Brie (14m 56s): Absolutely. Yeah. It was a very interesting exercise for me because I always just looked at things. I said, like, I looked at things on an annual basis. I never went back and looked at things from the beginning or the last couple of years and was like, wow, you know, this property is not produce thing. Right. And since I bought it, the values have gone up, like I would make, I had one property. I was going to make like 33 years cashflow I'm like done sell it now. So it's become an interesting exercise.
Jesse (15m 27s): So I want to ask the, the question that so many investors are asking today is w we see it from sellers, but just in general, that number one, you know, where do you, if you do sell a property, where do you even deploy capital? Because the market is so competitive right now, I'm curious, was Chicago, Milwaukee, was this something where you did sell properties in Chicago and then Milwaukee kind of looked like a, a place where you deployed or were you guys doing it at the same time? How did that, how did those two locations come about?
Brie (15m 57s): Yeah. So everything in Chicago, we acquired from 2011 to 2013, and we have not sold any of those properties. Everything in Milwaukee was pretty much 2014 to 2016, and we've sold about half of those properties. And so like, our portfolio was about 31 properties before we started selling anything off. And our newest property was built in 1910. So when you talk about old, like that's just the market, you know, like these, these were older 1890s, 19 hundreds, 19 times are when the properties were generally built.
Jesse (16m 34s): So sorry, the, the property, like the, the move to actually continue investing. When you deploy that capital, wha what are their active investments that you wanted to put them in? Was it, was it the strategy to put it into the properties that you currently have? How did you deal with that once you had that windfall?
Brie (16m 51s): I'll let you know when I figure that out, it's been terrible.
Jesse (16m 56s): Well, we were just talking about this before the show. They're just talking about the inventory issue in all of north America.
Brie (17m 3s): Yeah. I think I'm like, I, this, you know, this may or may not be the right decision, but I really I've gotten this far in my investing career by trusting my gut and nothing. Nothing has been interesting to me since, you know, I've, I've looked at some like multi-family investments, but very few actually piqued my interest, mobile home as well. It's like, I'm dabbling into that stuff, but nothing that's been like, Hey, this, like the doors have opened, I see the light.
This is the path forward. So really put, put the cash in the market and let it sit until I decide what to do with it.
Jesse (17m 43s): Yeah. Fair enough. So, can we talk a little bit, like I said, at the outset, I think investors would get a lot from this, you know, two to five unit world that you live in, especially in these areas. Can you talk a little bit about why an investor would go into say a three, a triplex or a five unit as opposed to 25 30, even if they have the capital to do both
Brie (18m 4s): Same things like for us? Like, so when we, when we went into the Milwaukee market, we bought 18 properties in nine months, 67 units. It was, so we obviously had the capital to buy one big building if we wanted, but chose to do smaller buildings and said for a lot of different reasons, a, like we just talked about, you know, if some of the properties are underperforming, I could sell the ones that are underperforming and keep the ones that are performing without having to sell the entire property as a whole.
So that was part of the reason. And like I said, all of our properties are within like about a mile and a half radius. So it's not completely spread out. Like everything is within less than a 10 minute drive from each other. But one of the main reasons was the properties are like, obviously residential properties are valued differently right. Than commercial. So when I was looking at the, the cap rates and the returns that I could get, they were much higher on two to four unit properties. And they were on these multis. So again, the markets, Chicago and Milwaukee, you know, got the neighborhoods can be between 50 and 70% housing stock, at least two to four unit properties.
They're everywhere you drive down the street. Right? And like half the block is a small apartment buildings. So there's a lot of different options of different inventory. But the thing was when it comes to the small Maltese, at least in my markets, they learned pay is water. Everything else is separate to the tenants, right? So there's no common meters for anything. When you look at insurance, right? I'm getting homeowners insurance that, or my business, you're getting commercial policies. Your insurance rates are much higher than mine.
You generally pay corporate water. I pay residential water. You know, there's, there's like my taxes right. Are different than your taxes. So when I was looking at, you know, up to about, I would say about 20 units that evens out, because when you think about it, if you've got a 15 unit right next to my three unit, and at the same size, same condition, you know, two bedroom apartment, we're getting the same rent, right? Your 15 unit does not offer the amenities like the pool, the, you know, the doorman to increase runs, right? So we're getting the same sort of rent, but your expense ratios are much higher than mine.
So it came out, like I said, once you got to about 20 units, then your expenses ended up being closer to what my expenses were. And then the cap rates even doubt, but like anything on you, it's like Tanya properties. And we see this all the time in Chicago. Cause we get a lot of investors that come to us and say, Hey, you know, we want to get into like these, you know, small midsize. Multi-families like, great, I'll start running some numbers for you, but taking a consideration. I want to show you something else. And I'll show them side by side. Like here's, you know, here's 10 properties that, that are like between 10 and 30 units.
And here's, you know, 10 properties that are two to four unit properties. The cap rate is always higher. So the risk though, is that if the market, the real estate market changes, right, you're subject to comps, not at a Y in the residential world, but financing is also easier as well. We don't have, you know, you can get 30 year fixed on a two to four unit property. You're not getting a five or seven year arm.
Jesse (21m 14s): And in terms of the investors that you typically work with, or even yourself is for the most part, the strategy buy and hold with, with the size
Brie (21m 22s): Of units.
Jesse (21m 25s): And one of the things, you know, you'll hear people say, even at the 20 unit size, in terms of property management, you know, whether, you know, there, you have the economies of scale, how do you handle that?
Brie (21m 36s): It's a great question. So I think it depends on your market, right, Chicago, where at least where I work is more of an AB type market. So even, you know, even clients that I've had that live out of state, a lot of them can self-manage or we have a company here locally. I think they've expanded to, if you go to the markets now called nest egg. So it's not that I got rent, they do all the cart, property management. So like I've been using them since my maintenance, since I was pregnant with my first kid. But like, I don't use them for, I do my own run collection.
I do my own lease ups, but I have that option if I want to, but there's no monthly fee. So, you know, I just had an issue this morning, a tenant reported an issue, you know, it goes through their system, they diagnose it, they take pictures, whatever it is. And then they send me emails saying like, Hey, we think this is going to cost this amount of dollars and this many hours, who do you want to schedule the repair, the tenant, you know, then they call my tenant and they work it out. It's like, I have not been in my properties for repairs and years. And if no one makes a repair requests, I don't get charged anything.
There's no monthly fees. So that sort of product works really well in the Chicago market where, you know, it's not, it's not very high touch, right. Milwaukee on the other hand is more of a C class market is absolutely high-touch. You definitely need full-time property management services, but that's what it was. We grew so quickly said when we came to our, so by the, as after two years, we were at just under a hundred units, that's enough to be important to a property manager.
And in the beginning I had my own in-house team. I tried doing it myself. And it was terrible because you can't have one person. Right. It's what I learned. One of the learning lessons I had, you know, while the, the property manager that I chose was fantastic with my tenants. Right. He lived in the community, he actually owned some of the properties that I bought. My first properties were bought from him, you know, great relationship with the tenants, with service, with service workers, repairs, right. All that was handled, knew nothing about accounting, you know?
And like he would go to him and he'd go deposit like 10 grand in my bank account. And I'd be like, what's the spore? He's like, oh, you know, I've got the receipts in my pocket. I'm like, that's not. So I, like, I still had to do a large portion of the business. So one of the things, you know, property management is a terrible job. I would being a teacher or a property manager, like the two things I would never want to do in life.
But it takes to have a well-rounded property management team requires multiple skills, right. One person can not do it and do it well. So by outsourcing it, you're getting multiple people's positions and skillsets. So that was a life lesson that I learned. I thought I was smart by having my own in-house team. I could control things more. It was 20 times the work. It was terrible.
Jesse (24m 44s): Yeah. I find with property management, the, the companies that have been successful doing it, they, you really have to look at it as a full time full service business, and you need the personalities for that. And I think it was M zero Brian Berger, J Scott, we had on another bigger pockets contributors that I think w their, their point was 70, 75 unit pluses, where, you know, you can, you can afford to have your own super in the building. So like that, you know, even with the property management company, but also having that super in the building, you know, it is at that point where you can scale and you have a point of contact that's in addition to your property management company.
But I'm always curious, because I think, I think in the two to fives, it really is dependent on the market. Like when I got into real estate, I was in student residents. So a lot of them were like these boarding houses that had five tenants, or, you know, five students or eight students where those markets, yeah. You got some people shake the mouse a little, but you also have, what was nice is you actually have this little cottage industry of property management companies, at least back when I was in school that were local, that would manage, you know, houses.
And you had that ability to scale. And like you said, I think you've made a good point there, which I think oftentimes gets overlooked. It's that you're, you're still going to a property management company and still say, Hey, this is 80 units, or this is 40 units. It's just, they're spread out.
Brie (26m 11s): Yeah. It's one of the things I was at, like one of my biggest pieces of advice, when someone tells me, like, I want to invest in Milwaukee, Oregon, or cashflow market. Right. If your plan is to buy a small multi, and then like every year acquire another couple of units, you're going to sink, you know, it's, you're, you're not going to go well for you. So when I was buying our properties in Milwaukee, one of the things I did is after we sold the property, after we bought the property, I call the seller and ask them like, Hey, you know, deals done. Like what, any lessons you can teach me or things I can learn.
The best majority of them were like out of state investors who that was their problem. They only had one or two properties. I remember this one property we bought, we bought it December 1st. The guy told me, he's like, you know, the top unit has been vacant for like three months. We've dropped rent. Like I just can't do it anymore. I'm like, really? Because we bought it, we bought it on a Wednesday. And my property manager posted that night. We had like five showings this week on it. We got it rented out. It's like the property manager can make or break. Absolutely you return. And if you're only, if you've got like three properties or, you know, 10 units with one property manager, you aren't a priority.
The end of the day, I have a hundred units and you have ton. And we both have a vacancy. Gus, who's the priority. It's me. You know, and I don't do it very often, but whenever I have to, if I call my property manager and say, Hey, I need you to stop what you're doing right now and handle this. You better believe they're going to do it. Right. So that's where scale becomes incredibly important.
Jesse (27m 42s): Yeah. And it's nice that there are kind of companies like you mentioned, or even, even locally here where the technology is getting better, where you can actually have, you know, one off properties here and there. I know, not true for Chicago. I know Toronto, we have a huge condo market. Like it basically is our purpose built market. Rental markets are extended, but you know, it's challenging when you only have a few one-offs. Where are you? What do you, what did you think, would you say is the biggest difference between the Chicago and Milwaukee market
Brie (28m 14s): Price point? Number one, you know, Chicago is much more expensive, but again, like each market, whether it be Chicago, Milwaukee, Indianapolis, Kansas city, they all have different, you know, ABC markets. So it just so happens that I got my start in investing in Chicago, which was more of a lead type market. I, my cashflow play is Milwaukee, which is the, I invest in a C class area. You know, I've looked at investing in a, Milwaukee's a B class areas.
And they're very similar returns where I get in Chicago for my air AB class areas here. So it just depends on what your strategy is, you know, at the end of the day. So part of that economist evaluation was also taking into effect or taking into account what my property values were. Right. And what if I were to sell everything, what I would would be at again, like my, my cashflow in Milwaukee per dollar spent is like almost triple what it is in Chicago.
So the end of the day, like, I always assumed like my, my money came from Milwaukee, right? Like it pays my bills at the end of the day. It did it. When you, when you throw in the appreciation I got from Chicago, like that's where I made my money. So I was looking at it again. There's two different strategies. At least I have two different strategies. Chicago is my wealth building. Right. My, my tenants call me once a year. You know, like they're generally very easy. They stay for a few years. It's not a high touch market.
You know, my property is just, I sit and maintain. Right. And then I'll get my money when I sell Milwaukee. On the other hand is the cashflow based market. That's where I bring in my, my monthly paycheck. We'll call it, you know, two totally different strategies. I like having the balance personally, but there's no right or wrong answer. There's no, you know, this is the best option I like having both.
Jesse (30m 12s): Yeah. Yeah. It makes sense. I'm curious. The something that is unavailable to us connects is the 10 31 exchange in the states, the differing of taxes into a likened kind asset for, for any of the listeners that haven't heard us banter about it before, is it, is it applicable to investment properties that are purely residential? Can you use it for you can use it for both. Okay.
Brie (30m 37s): We do again, we do, we do a few times a year, 10 31 exchanges within our brokerage side of the business, but it sucks. I just had one, the, oh, this is terrible situation, terrible. Like, whoa. It was me. The guy sold the million dollar properties, but he was selling, he was selling a property in California, wanted to parlay that funds into Chicago. This was just in like October where our market started to get really slow. Inventory was terrible. He was from the time he was selling, he was then, you know, you've got 45 days and two weeks he was leaving for Germany for a month.
So he's like, listen, you know, we gotta find this property in two weeks. And then we're in Germany. You know, we've got things to do. And it just so happened. Like the day after closing, he called me, like, we actually need to leave for Germany tomorrow. So they were in Germany the whole time. And I was trying to find them a property. But like when we were looking, you know, between like one and 1.5 million, which for a two to four unit property is completely adequate budget for Chicago. We couldn't find anything for him. And he ended up taking the cap, gain tech, but at the end of the day, that's better than buying a bad investment.
Right. So, but it was a, it was a very stressful experience because I'd never met him in person. He was never going to be able to fly to Chicago and see the property. And I had 45 days to put something on a contract for him and try to guess what he wanted and what he would like, you know, like, so it was all like videos and it was just, it's just, it is what it is, but
Jesse (32m 10s): You know, it's our world,
Brie (32m 12s): But is her world
Jesse (32m 14s): Sabrina. I want to talk, but just one more thing before we get to some of the questions we ask every guest, I am just mindful of the time here. We could probably do a, another 45 minutes on just the second half of this story. But before we get there, I'm curious to know the regulatory environment from the landlord tenant board perspective. I have a, you know, we talked a little bit about this before. I have a suspicion that it's very similar to our market, very tenant friendly. How does that compare to Milwaukee?
You know, what's your experience been?
Brie (32m 48s): You could, I don't think you can find two different while California. You can't really find two different markets. And again, they're only an hour and a half drive from each other. So both offers similar returns. I would say, as far as the investment market, but yeah, Chicago has one of the strictest landlord-tenant ordinances in the country. I still invest here. You know, we've got plenty of clients that still invest here. It's really, to me, the landlord tenant ordinance is not, it's not super strict, but you have to know the rules, right. And that's where people get in trouble.
If they don't know the rules, everything is quite reasonable. Right. If you, you know, a general repair, you have 14 days to correct it. That's not an unreasonable request when it comes to like heat, hot water, electricity, like, you know, those sorts of things, you have 48 hours to correct. You know, got not in a reasonable request. It, but our eviction process is beyond terrible. I just had to summer my first eviction ever in Chicago, where, you know, I gave a ton of in 50 days and always I was not renewing his lease.
He started, he understood it. I rented out his unit. Like he let me do showings. And then like the week before it was like, I've got nowhere to go. I'm not leaving. Like, well, that's not really an option. Like I have someone moving in in like five days. So it was what we would consider a hold over tonight, which is still allowed to evict, even though we had the memorandum here, but it took, you know, two months before we even got him served through our court process. Milwaukee on the other hand is very landlord friendly.
I can get, let's see, when I give someone a five day notice the next day I can go and file in court. Typically I get a court date within seven to 10 days. And you go, when you show up to court, they pretty much ask you one question, which is, can you prove the rent you owe to this landlord is not what they say. And they'll start, you know, well, they were a shit landlord and all that. I don't care. She says, you owe this, do you have proof otherwise? And they're like, no, and they'll start ranting. And they're like, okay.
So what do you want to do? They'll go to me like that is, that is the only piece of information that they want to know. Right? They don't, they don't care about the other things. One of the other great things about Milwaukee's market as far as evictions is which we use. It's a tool we use quite often is they have a payment plan process within the court system. So again, a lot of times, you know, they fall behind, right? And they're, they're communicating. It's not like we want to evict them so we can work out a payment plan.
It's a court ordered payment plan. And as soon as they miss one payment, I just go straight to the court, show them document, signed an affidavit, boom. Sheriff comes. So it just there's no, I don't have to go back to court and we don't have to go back to, you know, like starting all of the process over again. It just picks up where we left off. If I were to do a normal eviction. So also a really win-win situation. Right? If they say that they can make these payments and they can get caught up, right. And they do that, then they don't get evicted. But if they fall behind, we have the option of just picking things up and not starting over again.
Milwaukee also has some really great rental assistance programs for tenants that do fall behind as well versus like Chicago. We, you know, we had a ton of apply for rental assistance back in June. I just got it now in December, you know? And luckily if I wasn't so accommodating, right. You know, it was five months of background. Like that's a lot of rent to, to go back, but Milwaukee just moves faster and they are a lot more, there's a lot more options within that market.
Port options or rental assistance options.
Jesse (36m 36s): Does Chicago have rent control?
Brie (36m 38s): No. Okay. Hey.
Jesse (36m 41s): Yeah. The gas. Yeah. W I would have been 50 50 on that. I know it's tenant friendly, but I don't, I didn't know if they went that far.
Brie (36m 52s): So luckily for us, it is part of our state constitution. And once you get out of the state or city of Chicago, it is a very, very red state. So to, to have rent control in Chicago, you have to have this state constitution amended and there's way too many conservatives to allow that to happen. So every year it happened, like every year someone brings it up, right. And every year it goes to the process and every year everyone freaks out about it. And every year it gets stopped quite quickly.
But if it wasn't, if it was up to the actual like cities or counties, we would absolutely have rent control here. But luckily it's on a state level.
Jesse (37m 35s): Yeah. I think if I think Jersey, what is a Jersey, California, New York Mahershala, Washington. I think, I think we're the opposite. If you can find a, like a pretty sure across country, we have some form of rent stabilization. But the big thing for us is that is when we have new tenants, we mark the mark to market the rents. So you kind of reset at market levels, but it's a bit of a different animal. That's great. I, I want to talk or let listeners know where they can go and kind of reach out to you. But before we get there, we've got four questions.
We ask every guest. So if you're ready, I'll, I'll send them over to ya. I agree with something, at least one thing that you know, now in your career, you wish you knew when you first started out,
Brie (38m 17s): Oh gosh, just one thing I can do a whole podcast and all the things, You know, again, I, I'm a big believer in trusting your intuition, right. And figuring out what works for you, what works for me doesn't necessarily work for you. So that takes time. That takes your own learning lessons. But as long as, like you said, I've made obvious mistakes. As long as I was confident in my decision, right. I have no one to blame, but myself and that makes me sleep at night, knowing that like, Hey, this is, this is just a bump in the path and it's going to be a learning lesson down the road.
So my advice would be, you know, really focusing on what you're doing, what your goals are, what your needs are, right. Where, where you can grow personally and then create your own path.
Jesse (39m 10s): Gotcha. Okay. In terms of, if one thing or a few things you could say to new investors, people getting into our industry regarding mentorship, what would that be?
Brie (39m 24s): I'm not a fan of a mentorship thing. You know, I don't think it's a gun. Your mentorship to me is you're, you're learning from someone, but you're trying to replicate what they're doing. Right. And that's not always, right. So I'd like, I get all the time, like, Hey, what, what neighborhoods do you buy in? Cause I want to buy there. I'm like, well, I have haven't I have a Nissan Pathfinder. Do you want to buy my car? Because I have that car. Like, you know, that doesn't mean like what I have my needs and goals are. So it was back to the first thing of, you know, mentorship, you know, isn't, shouldn't be a immediate goal for someone, I think, you know, utilizing sites like bigger pockets, bigger pockets, right?
Learning about your market, listening to podcasts, right? Take a little bit of information from everything that you're hearing and learning and figuring out what works best for you. That's what you need. And then once you're ready, right. Finding a good team, a good agent, right. A good brokerage, good, you know, lenders, lawyers, whatever that will help support you and what your goals are. But you should be the one dictating what your path is. Not someone else telling you what to do.
Jesse (40m 32s): Fair enough. What's a resource or book that you find yourself constantly recommending.
Brie (40m 37s): Oh, getting things done. I love that book. It has completely changed. Like you guys, like not only do I not want a landlord, but I own a brokerage firm. I also plan an event for real estate investors. I'm nine months pregnant and I've got a two year old right there. You know, there's, there's a lot of different things that come at me at different times through the day with so many different moving parts. Right. So having like an organizational prioritizing to do list right.
To, to be effective has really important. So I read the book, maybe I was actually too busy to read the book. So I bought the cliff notes to be perfectly honest, about five years ago. And I went from working, you know, 60 hours a week in my business to probably working 30. I, you know, cut out all the nonsense and really transformed my work-life balance because of that book. Yeah.
Jesse (41m 36s): And I think they've updated. We've had a guest before recommend this and I think they've updated some of the, the concepts. Cause I, I it's, it's like the book for, for like task management and organization. So I think it w I can't remember what the release date, but a lot has changed technologically, but I still love the, how they systematize everything in that book.
Brie (41m 57s): I am so full though. I have to write everything down. Like
Jesse (42m 1s): I remember like the bin you'd have to move things from the bin. Yeah.
Brie (42m 5s): I have to like physically write things down and like physically cross things off of my paper. I can't do like a word, you know, or technology just doesn't work for me. I'm too old.
Jesse (42m 14s): So speaking of Pathfinders, our last question, first car making.
Brie (42m 19s): Oh, Ford Thunderbird. Terrible bomb. Yeah. I was at, it was my dad's car that I bought off him. Right. I'm a terrible driver. Do you understand this? No, I think it was a V6 or a V8, whatever. I crashed it so many times. I'm just a terrible driver. I still am a terrible driver. My husband drives pretty much. He will not, my husband will not let me drive a car if he's in it.
Jesse (42m 48s): I will say this though. It is, it was an upgrade back then from the four tourists, which, which I spent my childhood,
Brie (42m 55s): It was a beast of a car though. You know, I said, I ran over curbs and ran into walls with that card and like never scrape on me, you know, but yeah. Thank you so much for having me on the show.
Jesse (43m 9s): I really appreciate it. If anybody's, you know, in your local area or would like to just reach out to you where, where would be the best place to, to go
Brie (43m 17s): I'm on BiggerPockets almost every single day. Some messaging me on bigger pockets, Brie Schmidt, or you can check out my website. It's a second city spelled out dash R e.com.
Jesse (43m 30s): Okay. We'll send them there. My guest today has been breached brief. Thank you for being part of working
Brie (43m 36s): Capital. Thank you so much.
Jesse (43m 45s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse, for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Amanda is a CPA Specialising in Tax Strategies for Real Estate, Self-Directed Investing, and Individual Tax Planning for over 18 years. She’s been Investing in Real Estate herself for over 10 years with a Focus on Long-term Hold Residential and Multifamily Assets across Multiple States.
As both a Tax Strategist and Real Estate Investor, Amanda Combines her Passion of Real Estate Investing with her Expertise in Tax. Her Goal is to Help Investors with Strategies Designed to Supercharge their Wealth-Building Using Entity Structuring, Self-Directed Investing, and Income Offset Opportunities
In this episode we talked about:
- Amanda’s Journey in Real Estate
- Structuring Real Estate for Taxes
- Depreciation of Real Estate Investing
- Opportunity Zones
- Real Estate Investment Opportunities for 2022
- Mentorship, Resources and Lessons Learned
Useful links:
https://www.instagram.com/ahan127/
https://www.keystonecpa.com/About-Us
Shaun Leads the Team at Urbanation, Armed with a Background as an Economist and 15 years of Experience in Residential Market Analysis. Shaun is a Thought Leader in the Residential Development Industry and his Unique Perspectives on the Market Guide Urbanation's insights, Analytics and Research Strategy
In this episode we talked about:
• Urbanation Background
• Shaun’s Bio and First Steps in Real Estate
• Overview of Toronto Condo Market
• Shaun’s Thoughts on Purpose-built Rental Housing
• Rent Control
• The Size of Toronto Condo Market
• The Outlook on How Immigration Will Impact the Real Estate
• Inflation and Asset Growth
• Mentorship, Resources and Lessons Learned
• Book or Podcast
Useful links:
https://urbanation.ca
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, my name's Jennifer Gallan. You're listening to working capital the real estate podcast. My guest today is Shawn Hildebrand. Sean is the president of urban nation, Inc.
For those that don't know, urban nation was founded in 1981 by Eve Lewis, an industry leader and visionary. That's an emerging market opportunity for high rise condominiums in Toronto at a time when they were considered a niche product, how's it going? I'm doing great, Sean. We we're just chatting a little bit before the podcast and wanted to have you on for a little while for those that don't know urban nation. Maybe you could give a little bit of a background as to what you guys do and kind of how that company has evolved over the years with your involvement.
Shaun (1m 7s): Sure. Yeah. So as you mentioned, Urbanation was founded basically 40 years ago and began actually from Eve Louis's graduate thesis at the time. So condos were sort of a new product in the housing market in Toronto, and, you know, she studied the market, collected all the data and realized that there was a business at that could be formulated out of this research. And over the years, Urbanation continued to collect on a quarterly basis, new condominium apartment market activity by serving directly the developers that were active in the market, putting out our quarterly condo market survey publication.
And eventually over time, as, as technology evolves, moving the data and reporting into an online format. I joined the company almost nine years ago in early 2013. So at that point we were, we were just sort of really launching the full database. So that was kind of my first initiative as I, as I began to take over leadership in the company. And over the years, we've, we've continued to expand that database and the technology behind it.
We've also sort of branched out our research into more than just condominiums, but now tracking what's happening in the purpose-built rental markets. That's been a big focal point for the company over the last number of years is tracking all of the new rentals that are coming into the market, surveying them in the same sort of way that you would survey a new condo project by going directly to the building owner or property manager and collecting data such as vacancy rates and rents and, and producing a separate quarterly reports in conjunction to our previous reporting that was being done on the secondary condo rental market.
So individual condo investors, which has been sort of the biggest supplier of new rentals in Toronto for a number of years, but now we're starting to see, you know, traditional rental development happening. So it's, it's really sort of allowing us to have a more holistic lens of what's happening across real estate development. We've also expanded into tracking the land sale market as well. So through, through research that we do leveraging our relationship with CareNet and using land registry, we track all of the land acquisitions that are occurring.
So again, allows us to, to further expand our reach into the real estate market research area and, and track projects from, from a very early stage. So we, we offer this information for a subscription module. So our, our, our subscribers are very diverse. They include obviously all of the top developers in the region, but also financial institutions, private equity, other types of lenders and suppliers, government organizations, appraisers brokers, and, you know, what, what really drew me to Urbanation when I joined the company, was that it was, it was more than just a data, right?
So previously before I joined the company, I was working as the lead analyst at Canada mortgage housing corporation. And my job was to forecast the Toronto housing markets and provide a market intelligence to senior government officials. And I leveraged Urbanation to a great degree and trying to really try to figure out what was happening in the condo market at the time. This is sort of in the, in the mid to early two thousands. And in the later two thousands, there was a big focus on whether or not we were, we were over supplying the market with, with condos and having ordination was an invaluable resource to be able to really dig into the data and understand what was happening.
And, you know, w what drew me to company was that, again, it was more than just, you know, supplying the industry with levers. It was, it was really kind of putting meaning behind that, that, that, that, that research, and to be able to analyze the data and provide market intelligence that provides guidance and insights as to what's actually going on, you know, across the market. So that's something that we continue to expand. You know, we, we, when we, when we, when we enter into a new area of research, it's not just about supplying the data and the stats it's, you know, what's actually behind these numbers, what's driving them.
And from that, we've, we've really started to evolve our advisory practice. So we, we, we produce custom market feasibility reports for individual sites that developers are looking to bring to market. And over the years that that's become a very large part of our business as well. So we're continuing to expand on all fronts. We're looking into new markets in terms of our geographic expansion. We've been extremely active in sort of the tertiary markets that surrounded GTA within Ontario and very meaningfully within Ottawa on what's been a big part of our expansion recently, as we've been doing a lot of market work in that area and collecting data on every new rental developments.
And we've pumped a project that's active in the market there.
Jesse (6m 27s): Yeah. Fair enough. On the point of CMHC for those that don't know, I guess the equivalent for the states would be a Fannie Mae, Freddie Mac, just kind of an institutional crown corporation, is that I think that's correct. In terms of just on that note, was your background always in real estate? Was it always kind of in the economics of real estate world, or did you come at it from a different angle?
Shaun (6m 51s): Well, I went to school to study economics, both undergraduate and graduate degrees. And when I was doing my master's, you know, I found it to be very theoretical as a lot of graduate programs are. And, you know, I had a hard time really understanding what I was, what I was being taught and, and trying to think about it in practical terms. And, you know, at the time there weren't any, at least within my program, real estate economics classes, but I was really interested in the housing market, which was, which was kind of starting to take off at that point in time.
And I felt that when I applied the economic concepts that I was being taught to, to real estate, it all kind of started to make sense because, you know, all of the, the sort of macro economic theories could be put into practice when you're understanding what's happening in the housing market. And eventually I did my, my, my graduate thesis on the housing market. And from there really started to focus my, my, my career aspirations in, in real estate economics.
And initially I was, I was working in Ottawa for the bank of Canada and the federal government for a little bit of time, and then eventually moved to private consulting in Toronto, and then to see an HC. And then now over the past homeless nine years with termination.
Jesse (8m 16s): Yeah, it's interesting. We've had people on the show before and I call it the Paul Samuelson ization of economics, where you start getting more mathematical and more statistical where you're kind of turning out economy nutritions rather than, than policy a policy makers are employees at companies. I'm curious, you've got a great graph or kind of timeline for anybody that's interested. You can go to urban nation.ca where it basically from the inception of the company to today. So, you know, in 1981 or urban nation launches to today, the global pandemic, but on the way you see such a, such an interesting story of, of condo sales and development in Toronto, for those that don't understand, or, or those that aren't aware of the condo market in Toronto or, or Ontario for that matter, how would you describe it to somebody, you know, looking in from say, another state or another country where their world is housing and purpose-built and condos are kind of a, you know, a smaller piece of, of the market.
Whereas for us, it's, it's all we know in, in large part.
Shaun (9m 24s): Yeah, very, very much. So Toronto is quite unique in the context of north America, where the bulk of, of high-rise development here locally happens within the condo sector, as opposed to the purpose built rental market. In fact, as of the third quarter, we had six times as many condoms, either construction as we did rental apartments, which is usually the inverse when you go to another large market in United States. So the condo market has worked very well in Toronto through, through pre-sales and investment activity.
So the typical course is that a, any project will launch offer their units through the broker channel who typically access investor purchasers, who, who buy very quickly and early on. And that helps fund the construction to be able to proceed with the development and investors have been extremely active in the Toronto market over the last 20 years and continue to be so in today's market, typically we'll sell 20 to 25,000 new condo units.
And then we're going to get in here this year will probably be somewhere around 27, 20 8,000. So it's going to be probably the second highest year on record behind 2017 for new condo sales. And, you know, it's, it's, it's one where we're seeing the market mature. So where as in the past condo development in pre-sale activity was very much focused within the central core of the city. It is now expanding out geographically across the region.
So the greater Toronto area includes the city of Toronto and the sofa in the suburbs that surround it. And for the first time this year, we're actually seeing more new condo sales happening in what we call a nine oh five region of the GTA, the suburban areas of the GTA, then actually within the city proper. And I think this really speaks to the affordability and, and, and, and, and sort of the history of the call, the market and why it's caught fire in that. You know, we, we don't build very many single family homes anymore in the GTA for a number of reasons, which we could probably have a whole podcast on its own, but basically condos are the dominant form of new housing developments in the region.
And as this has happened, single family housing has become scarce even more so during the pandemic, as a lot of buyers look for more space, backyards, larger properties, they weren't commuting as much. So they felt more comfortable buying my larger homes outside of, outside of the core. And the price for single family housing was just skyrocket. And this is something that's unique to Toronto. It's obviously happening across Canada and a lot of markets in the U S as well, but it's created an abnormal divergence between price appreciation and the low rise market and price appreciation in the high rise market.
And it's created this very large gap in pricing between a house and an apartment. One that is, is very, very abnormal. So if you look at the average price of a house right now, it's $1.5 million in the GTA, look at the average price of a condo it's about $700,000 or so. So that, that gap over around 800 grand has never been as large as, as it is right now. And in fact, it's increased by about 50% since the pandemic. So affordability has become an even bigger issue after the pandemic.
And a lot of the trends that I would say that they were seeing pre pandemic have only just accelerated as a result of COVID-19. So, you know, the condo market was harder initially because, you know, people were adverse to buying high rise units located in the core because of, you know, issues around the pandemic. And in the fact that a lot of businesses were closed downtown, you didn't necessarily need to be downtown. And there was probably some health concerns as well with, you know, being a very densely populated areas, but the kind of market has staged and remarkable turnaround.
And now you're starting to see, you know, double digit inflation once again, but that gap still persists. And I think it's one of those things that continues to drive demand for condos, whether they be downtown or whether they be in the suburban markets. And it's been, it's been fascinating to see, you know, how quickly a condo project can pre-sell, whether it's, you know, located at center ice downtown, or whether it's located in a suburb, you know, a hundred kilometers from, from, from the city core in almost every case, the project will sell out extremely quickly and you'll still get quite a lot of investor purchasers, even if the, the development isn't located downtown.
So I think this speaks to how the market has evolved over time and has continued to consistently produce sales volumes that, you know, are meeting or exceeding 20,000 units a year, which is, which is remarkable for us. But, you know, w in the context of the overall housing market, probably not enough to satisfy, you know, population growth is coming into the region.
Jesse (14m 32s): So in terms of the, the market itself, you, you mentioned that we're starting to build more purpose-built purpose-built apartment buildings, and you mentioned Ottawa as you know, one of those areas. I'm curious to get your thoughts. I, I talk with a lot of, a lot of individuals in our industry that are older than I, that have had lived through the eighties and nineties. And we had on the podcast, Richard Epstein, who is a professor of law at NYU. And we did a podcast on the history of rent control and rent stabilization in New York.
And I'm curious if you think that that had an effect on development of purpose-built over the last 20, 30, even 40 years in Ontario, or a few things, there was another, another factor that basically resulted in an over not overdevelopment, but leaning towards condos, as opposed to purpose-built because for those that don't know, the, the stock of purpose-built up until recently has been pretty old stock. And I was always curious if, if it was an actual thing with policy, or if it was more of a cultural thing of, of owning, owning a property rather than renting,
Shaun (15m 41s): I think it's a, it's a combination of things like rent control introduced in the seventies and evolved over time has, has certainly played a role. So capping the amount of increase that can be passed off to a tenant, obviously with strict revenue growth for, for that asset class and makes it economically less attractive to develop new as a result. So that that's, that's one factor, I think for sure, but I think, you know, part of it is the fact that, you know, during, during the mid mid two thousands, I'd say there was a big push from the government to put renters into the home ownership market, right?
This was a way of kind of reviving the economy, reviving the housing market after, you know, a pretty significant slope during the very most of the 1990s. And you saw, you know, things like 40 year amortizations get introduced to 0% down mortgages cash back at closing. I think it was, it was almost, you know, you're, you're almost a fool to, to rent at the time because it was, it was so much easier to get into the housing market and to arrest pepper, to buy than it is than it was to rent. So for a period of time, you saw this massive outflow of, of renters from the existing rental stock into the home ownership market.
And on an annual basis, we were actually losing renters as a population because we were adding so many of you to the ownership market and the home ownership rate is wrong, or just skyrocketed from between, you know, 2001 up until around 2011, 2016. And, you know, there wasn't really command to be building new rental apartments because the demand was all on the ownership side. And that's where kind of condominiums started to really take off because this was around the same time.
And since then the dynamics that started to change somewhat. So as, as, as the housing market has entered into the, you know, the later stages of this purchase cycle and, and housing has become so expensive, it's, it's had a huge impact on affordability. And as a result, homeownership rates have actually started to decline a little, and you're starting to see most of the household growth occurring within Toronto, actually happening within the rental space.
And this has pushed rents up, or at least a decrease in that dynamic to a level that started to make better economic sense to build than to invest in, you know, existing low cap rate buildings that were rent controlled. So, you know, starting, I would say around 20 15, 20 16, we started to notice that, you know, there were requests for market studies that were coming across our desks were starting to shift from condo to purpose-built rental, and you started to get a lot more institutional interests kind of coming into the marketplace.
So developers and, and investment partners looking at Toronto from a longer-term lens than they have in the past. So, you know, it was, it was pretty much entirely common development, presale the units getting move on to the next project. Whereas now it's, you know, how can we, how can we invest into the markets for the longterm and recognize that the population is expanding, we're going to in a, in a, in a, in a rental market that has structurally low vacancy rates at an average, you know, around a 2% for the last 10 to 20 years, we know that the population is going to continue to expand.
We know that whole ownership affordability is going to continue to be restricted for first time buyers. So how do we plan ahead for the future? And so, you know, a lot of the development proposals that are actually coming into the markets, they are for traditional purpose built rental, and we're, we're at a stage now where I think according to our latest report, we had about a hundred thousand units in the proposed pipeline that were expected to be developed as traditional rentals. And I'd say there's probably at least another 50,000 above that, that we've been looking at, haven't actually been officially submitted yet.
So we're building up the supply pipeline for the future. I think the next challenge is actually getting it through the development cycle because, you know, less than 20,000 units are actually in the pipeline and approved for development. So it's, you know, it's, it's, it's tough, you know, the, with, with COVID, you know, the rental market was hit pretty hard, particularly downtown and rents are only starting to come back now in our latest report, we've gotten that rents were up on a year, over year basis for the first time, since the pandemic in the third quarter, but there's still about four or 5% below what those pre COVID highs were.
So I think there's been a lot of uncertainty about, you know, when the market's going to come back, you know, what sort of a rent growth projection should, should we be incorporating into our performance? And, you know, has the outlook changed at all? Or is it even looking stronger because of increased immigration targets? And what's happened to housing prices since COVID-19, so it be interesting, it's interesting times, and, you know, th the development applications that are coming in or are starting to be, you know, more geographically dispersed.
So, you know, traditionally it only really made sense to build rental downtown because you could get $4 a square foot plus rents. But now one of the, one of the trends that we've seen since COVID-19 was that the suburban areas of the GTA were pretty much untouched in terms of the rental markets. And these are low supply markets that had, you know, very little existing purpose-built rental stock to begin with. They were entirely relying on, on Palmdale stock for rentals, which there wasn't that much out as well, because investors were mostly focused downtown then in the suburbs.
And then you saw this infusion of demand as the population began to sort of spread itself out around the region. And rents actually are, you know, higher today than where they were pre COVID vacancy rates are still stuck at around one to 2%. And, and I think developers are starting to notice this and, and, and a lot of development slated for master plan communities around existing shopping centers located on the group of fringe. And, and then I don't buy. And, you know, it's not just a matter of, you know, getting a site and throwing up a tower.
It's, you know, how do we, how do we make a complete community here? How do we make it mixed use near transit, integrated with retail office, other commercial components that can make a new place, a new living environment for, for renters. And it'll be fascinating to see how this evolves over the next 10 to 20 years, because you know, the, the old model of, of renting in Toronto, it's going to dramatically change as we move through the next couple of decades.
Jesse (22m 22s): I got to get your thoughts on the 2018 bill. That was a, I believe it was 2018 bill that was basically buildings built after 2018 were exempt for the most part, I believe from, from rent control, built buildings built prior to that, you know, the stabilization we have in our various provinces, at least for Ontario would stay status quo. Do you think that had a, had a, an effect on, on the, you know, this push to more purpose-built developments?
Shaun (22m 53s): I think so, you know, the, the data did show that after, after November, 2018, we did, we did begin to see a greater inflow of development applications come in for rental. They were building before that, but we did see that pace of, of, of, of, of, of submissions actually accelerate. But I, I think there's, there's probably some level of skepticism w within the development industry, that this policy could change with the change of government, right.
Quite, quite easily, and quick, quickly, particularly in this environment where we're housing it is is, is forefront on political issues. And, you know, if another government takes over the province, you know, we could see that change fast. So I think, I think, I think developers realize that, you know, it could be forced to, to, to, to have rent control units in the builds. And, you know, for the most part, for, for those that we do work with, they don't typically have aggressive rent, growth assumptions.
Like they need to be able to make these numbers work with conservative growth estimates. So they're, they're looking at rents today. They're, you know, they're factoring in a rebound pre COVID numbers in the short term, which is like, which is, I think, a realistic, but also looking at, you know, a historical rate of rent projection that is consistent with what we've been seeing over the last 10 to 15 years, which is, you know, I think we're probably carrying around if we're going to have 4%, which is, which is, I think a conservative given the fact that it won't be long before we're back to, you know, 2% or less vacancy rates across the city.
And our latest data shows that we're, we're pretty much on our way there.
Jesse (24m 42s): So I guess one of the, one of the benefits with the new, I mean, the newer build, even if the policy did reverse, like you're saying whether it's two or 3%, maybe 4% rental growth projections, I think it's just as a in competition or with the backdrop of you can buy an existing apartment building. And it's really the issue. There is the mark to market of rents where you have historically low rents. I'm curious on your thoughts. You know what I mean? These things are completely interwoven in our city, but the, the shadow market or the condo market, there's different names for it, where that these condo owners rent out their space.
And it's kind of, you know, typically mom and pop, I have a couple of condos I rent out and it's kind of taking the place of the apartment buildings. Purpose-built how big of a market is that, you know, like what, from, from your data, w what size of the market would you say that that encapsulates?
Shaun (25m 40s): So what 40% of condos in Toronto are used as, as rental properties, so that that's grown over the years. I think it was 20 to 25%, maybe, maybe 10 to 15 years ago. So it, it tends to rise, but it's, it's rising at a slower pace than it has in the past. It seems like we're kind of reaching a, an equilibrium of around 40%. And I think, you know, it's, it's been, it's been easy for investors to buy units and hold onto them because the economics of doing so and so favorable, right?
You could buy a unit three construction, and you don't have to close on it for four or five years. So you have that timeframe for rents to inflate, to a level that will make the unit cashflow positive. And historically that's always worked out very well. In fact, we did a study on all of the condo units in the GTA at rich completion in 2020. And we looked at what their closing price was. We looked at the rents that they were able to at closing, and we also teamed up with land registry to understand what their mortgage costs were.
So we were able to actually calculate on a unit by unit basis, what, what cash flow actually realized was, and what we found was that most investors still were cash flow positive or cashflow neutral, though. Two thirds of them are, and less than 40% were, were at cashflow negative position. And really it was only investors that were comfortable negative or only those that had remortgaged the unit at closing. So if you closed on the unit at the, at the secure pre-sale price from several years ago, and you also were able to take advantage of interest rates that were on historical lows.
I mean, it was, it was so easy to, to, to just get it out, even at right levels that were somewhat depressed last year, but this all kind of looks backwards at the fact that, you know, investors were closing on units that were bought before the big jump up the condo crisis. So when we looked at the average price per square foot for units that closed in 2020, it was less than $700. So less than $700 a square foot, the average new condo price in the GTA right now is $1,200 a square foot.
And for the units that are going to be closing in, let's say, 20, 24, 20 25, they're going to be closing at a presale price of around $1,300 a square foot. So I was bullish as the next guy on the rental market. I think we'll, we'll, we'll see good rent inflation in the next few years, but that's going to require about 75% growth in rents from where they are right now for investors to continue to be cashflow neutral or cashflow positive in, in, you know, four years time, let's say.
So I think the shadow market is going to change. It may not be as, as, as, as strong as it's been in the past because of the big jump in prices. And the fact that this is going to make it tougher for an investor to hold on to their units. And, you know, investors are generally okay with being cashflow negative so long as the unit continues to appreciate. So if we get into a situation where, you know, the, the cashflow is isn't there, and, you know, the, the price of the unit is appreciating perhaps slowly, there's going to be less of an incentive to hold onto the unit for, for, for as long as they have historically.
So I think this represents an opportunity for the primary market to step up, right? Like you're, you're not going to have as much competition with the secondary market because of the fact that they're going to have to be pushing rents to $6 a square foot by 2025, if they're going to have any chance of making these units cashflow positive and probably higher than that, if we're factoring in some increases in interest rates. So the other thing is that the shadow market, the secondary condo rental market tends to be heavily skewed towards small units, right?
So you've got a small one bedroom units, some studios that are favorable amongst investors because they have a lowest price tag. And historically they're able to generate the greatest rental yields, but the demographics of renters are much more diverse than just having a 500 square foot unit. And this is where purpose-built rental development helps to fill a void. You see that, that, that purpose-built rental projects typically have a larger average suite size and it called the rental window, usually about a hundred, hundred square feet larger, much more, much, much more diverse in terms of its unit mix, some more tubings suites, for instance, that could accommodate, you know, couples, small families, roommate situations, it's, you know, gas sizers.
We're seeing quite a, quite a few of those gravitating towards the rental market. So liquidating the primary residence and using that to help fund retirement and, and actually downsizing into a rental as opposed to purchasing a similar sized condo unit, which would be well over a million dollars in today's marketplace. So I think, you know, purposeful rental is, is, is, is evolving the apartment market in general by, you know, looking more towards the future demographic trends and also from a product standpoint, right?
There's, you know, when you, when you, when you, when you build a building and you're holding it, you have to kind of resell it over time, right. To the next tenant that's been moved in. So there's much more attention that gets paid to the amenities spaces, the Walgreens, the experience of living in the building resident services. So I think you're, you're, you're seeing some in a lot of cases, higher quality buildings coming in. And I know that the developers that are active in today's space are looking quite closely to what's been happening in the us, right?
Like the U S is much more advanced than we are in building new multi-family housing. So, you know, understanding what's worked and what hassles and bringing in professional management and into those new buildings, it's, it's been interesting to see, and it's, I think it's a learning exercise. And even within, you know, a small number of new rentals that are being built, you know, I I'm seeing that product evolve from where it was even just a few years ago.
Jesse (31m 50s): Yeah. I think that's a positive thing. And even on the consumer level or the, you know, the renter, if there's that more certainty that you're not going to get evicted, or that there's a certainty of, of tenancy, as opposed to having a condo where you can be in a precarious situation, I want to switch gears to some of the supply aspects. You mentioned immigration, obviously COVID has had an impact on, on the whole world, Canada, generally speaking, we're pro-immigration country countries built by immigrants in terms of the effect that you think that we'll have in the next few years, given the numbers, being slightly adjusted to where they were a few years ago, but basically your outlook on how immigration will impact real estate.
And if you think that we are, we are, we have enough supply because I know you mentioned 20, 21 would be a record year for condo units, I believe, but, but is there still a supply constraint given the fact that we could have, you know, more population growth?
Shaun (32m 54s): Yeah, for sure. So if you look at the last 12 months for permanent immigrants admissions into Toronto, then it's written back about a hundred thousand, but for the last fall, last of September, 2021. So a lot of this is the conversion of non permanent residents into permanent residence. So a lot of them may already be living here, but the government seems to be very, very focused on continuing to raise those integration targets over the next few years, and as travel returns to more normal levels, you'll actually see that begin to materialize into actual population growth.
So I think that's partly important to understand Toronto typically receives about 35% of all the immigrants that come to a public country. And unfortunately we're not building a pace that's going to be able to satisfy that level of demographic demand. So we've been pretty much stuck at building at a pace of under 40,000 housing units a year for the GTA for the past 20 years.
Housing construction generally across the province has risen in, in, in the last number of months. So it is responding to demand and anticipating future demand, but it's been that growth has been entirely focused outside of the GTA. So it's happening in less supply constrained markets within the province. And in fact, for the first time in a long time, there's more housing being built outside of Toronto in other parts of the province than there is within Toronto. So I think, you know, this is, this is, this is a policy problem that you're introducing higher immigration targets, but you're not necessarily looking towards housing supply to, to accommodate that growth.
And inevitably what happens is that the new immigrants get, get shut out of the Toronto housing market because there just simply isn't any supply. And they begin to move into areas where perhaps there is more supply and that may not be economically the right thing to do because you know, a lot of the immigrant new immigrate immigrants are, are working in, in, in, in, in economic hubs, which are mostly located in central areas of Toronto. So, you know, there's more commuting and that sort of thing that goes on.
So I think, you know, more certainly needs to be done. W we will see a lot of condo completions in 20 20, 22. And you can look at this through, you know, the historical relationship between presale launch launches. And then there's normally a five-year lag between when they actually get delivered a record year in 2017 for launches. So it stands to reason that next year there's going to be a pretty big year for, for condo occupancies. Most of those will be offered for rent still, I believe. So. I think you're going to have, you know, a little bit of an increase in supply to meet that additional demand, but by no means, will we be building a pace that's going to satisfy the, the level of population growth that's going to be coming into the market in the next few years.
So, unfortunately, there's, there's really, isn't much that can be done about this in the interim, because all of the supply that's going to be coming to market, I would say over the next seven years has already been spoken for, we already know how many units are under construction. We already know how many units are approved for development. So we know generally how much supply is going to be coming in, you know, within the next five, seven years. And it simply isn't going to be enough. And if you look at kind of how the dynamics are going to be shifting between ownership and renting, there's going to be an even larger deficit of rental units.
Then we then we've seen in the past. So it won't be long before we're, we're back to 1% vacancy rates and rents that are inflating much, much higher than, than, than, than historical norms. You know, it just, in the first quarter of this year, we were recording vacancy rates in downtown Toronto at 9%, six months later, they were below 4% and another six months they'll probably be below 2%. And this is without immigration, right? This is, this is, this is happening, you know, before that big surge in population happens.
So, you know, what it's going to look like in the next few years is, you know, much of what we were seeing pre COVID, but, you know, amplify to a degree.
Jesse (37m 10s): So we asked four questions at the end of the show with all the guests, but before we get there, I wanted to kind of, you talked a little bit about it, but a prognosticate a little bit about the next few years for development, you know, you touched on rental rental growth. I can assume I can infer from that, that as we have compression of vacancy rates, that rents will go up. Do you see a, a point where, you know, we've seen, at least in, in, in our brokerage, we've seen record prices, record cap rates.
You know, I've said for the last 10 years, interest rates can't get any lower and they continue to get lower. Where do you see if at all that we come up to a wall when it comes to whether it's asset inflation or rental growth?
Shaun (37m 55s): Well, for per housing crisis, I think you're going to see some resistance next year as is inflation numbers. And the communication coming from the central bank made it quite clear that interest going to start to revise it soft point probably early next year. And you know, the market's pricing in at least four moves by Canada. So, you know, given where housing prices are, that's going to have an impact on affordability, for sure. I mean, that's the been one of the biggest drivers of, of the asset inflation that we've been seeing, it's the record, low interest rates. And as those start to normalize, you begin to see some headwinds in terms of that growth.
So whether that happens, you know, the first half of the second half or the early 20, 23, it's hard know because you know what impact that's having on the broader economy. But certainly I think, you know, the narrative is going to shift from one where we're seeing housing prices grow by 20 to 30% to one where they're starting to at least level out, but usually there's, there's trade off there, right? As you see big increases in housing prices inflation, it tends to lead to higher rates of rent inflation.
And we haven't seen it yet, but I think we will see it. But to your point, you know, when you're looking at rental growth in rent inflation, you're constrained by incomes, right? Like there's only so much that a you can afford. And yes, we're seeing higher income, new immigrants coming into the GTA that can afford higher rents. But, you know, even though there's going to be some, some resistance levels, if you look at the average price of a new purpose built rental in the, in the GTA, it's about $2,400 a month. So the average new new immigrant coming in, you know, is, is probably earning something that, that, that would make that kind of on the fringe of being affordable.
But if you relate it to the average ownership costs for a condo, for instance, it's a thousand dollars a month cheaper. So it is really the de facto way of introducing a affordable housing supply in the GTA that, that is geared to the market. So at a certain point, though, you know, you will, you will start to see some resistance and we actually did begin to see that pre COVID. So once rest started to rise to 25, 20 $600 a month, you began to see renters pull back a little bit and, and, and, and the demand didn't dissipate, it just started to move into less expensive markets.
So I think that that's something that will, that will reemerge, like right now, the hottest segment of the market for rental growth is the downtown market because it's in that recovery phase. But once it starts to exceed those preached pre pandemic levels, you'll probably begin to see, you know, renters look for more affordable pockets of the market, and that will help to manage, I suppose, the, the continued growth that we're expecting.
Jesse (40m 42s): Fair enough. All right, Sean, we have four questions if you're ready to go all LABA, Matt. Yeah. All right. Something, you know, now in your career, whether business or in the real estate industry, you wish you knew when you first started out
Shaun (40m 57s): Something that I know now, geez, I guess it's, you know, the market never works the way that you're going to expect it to work. You know, you can, you can have the best economic model, but you know, there there's, there's, there's so much human emotion in real estate, in psychological elements that, you know, sometimes I think, you know, we'd be better equipped to be a psychologist and an economist when trying to evaluate the market outlook.
So learning to, to understand that a forecast is, is more than opinion and, and, and, you know, it's subject to a lot of variability. I think every economist in marketing analyst there has had to learn over the last several years
Jesse (41m 47s): In terms of mentorship, somebody that's just breaking into or thinking about breaking into our industry, what would you say to that person
Shaun (41m 57s): Learn as much as you possibly can, you know, a firm such as organation is great at, at learning the industry from the ground up. So understanding the data, gaining, getting exposed to, you know, the development industry across the board, I think is incredibly valuable. So, you know, you know, we're working for a large organization is, is great, or a boutique organization such as organization as well, but being exposed to understanding how the market works and learning the data, learning how to source information and how the, the market functions practically I think is probably a great starting point
Jesse (42m 36s): Booker podcasts you could recommend to listeners
Shaun (42m 41s): Or podcast. Geez, I'm not big on both. To be honest, I, I, I, I read the news. Like I slipped a little, little, little time that I, I try to consume media through, through the newspaper. So I'm probably one of the few people that actually still get a printed global mail delivered to me every morning. And that's really all the time I have to spend on, on, on consuming media is, is when I sit down and actually read through the paper, you know, I think I was, I was starting to get into podcasts a little bit more before the pandemic, while I was commuting into work, but not having that time to sit down and listen to podcasts anymore is, you know, reverted back to traditional media and said, okay,
Jesse (43m 30s): All right. And for those that aren't, aren't watching this and listening, Sean, you look like you're, you're 35. So that's, that's awesome that you're still getting the, the paper. Last question, you know, this is the toughie first car make and model
Shaun (43m 44s): My first car. That was my own, that, that wasn't provided to me by my parents was a Chevrolet cavalier.
Jesse (43m 54s): I was very close. That was the Sunfire. That's great. That's great too. We've had, we've had some interesting cars on the show over the last 80 episodes. That's awesome. Shine. I really appreciate you taking the time for those that want to learn a bit more about urban nation or, you know, reach out to you. What's the best, best approach
Shaun (44m 13s): You can visit our website. urbanation.ca. We have a lot of information there. You can send an inquiry into the, the general line in Cote urbanation.ca or myself, Shawn S H a U n@urbanation.ca. Happy to answer any questions that may come up,
Jesse (44m 29s): I guess today has been Shawn Hildebrand. Sean, thanks for being part of working capital. Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse, for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.
Founder and CEO of DeRosa Group Matt is a Regular Contributor and Podcast Guest on Bigger Pockets.com, Has an Active YouTube Channel Dedicated to Educating Investors, and the Author of the Amazon Best Seller, Raising Private Capital, how to Build your Real Estate Empire with Other People's Money
In this episode we talked about:
• Matt’s First Steps in Real Estate
• Scaling: the jump from 49 Units Up
• Raising Private Capital
• Advice to Individuals Who Haven’t Raised Capital yet
• Matt’s View on the Real Estate Market
Useful links:
https://derosagroup.com
https://www.instagram.com/themattfaircloth/
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, my name's Jesper gala and you're listening to working capital the real estate podcast. My guests today are returning guests, Matt fare, cloth, founder, and CEO of the DeRosa group.
Matt has been a full-time investor for over 15 years. Just talked a little bit about the deal volume here over a hundred million in real estate transactions and controlling over 1000 units in multifamily mats, a regular contributor and podcast guests on biggerpockets.com has an active YouTube channel dedicated to educating investors and the author of the Amazon bestseller. Highly recommend raising private capital. How to build your real estate empire with other people's money. Matt, how's it going?
Matt (59s): Good. I'm good, Jesse. It's great being here, man. Am I, did I, did you tell me a bit at BiggerPockets conferences? This is that I'm your first repeat appearance on your podcast?
Jesse (1m 8s): No, the first repeat appearance was definitely the BR Brandon Turner. So
Matt (1m 13s): Yeah, you're right. Yeah,
Jesse (1m 15s): But you're there though. You know, you're very generous in the, the first, first few episodes. I think you were you're right on. I think that was right when you started marketing the book, but you know, I think at that point I read half of it completed it a long time ago. A great book. I thought it was, I thought it was just for us, at least it was very perfect timing, which is fine.
Matt (1m 37s): I gotta be here, man. I should get like, we should do like the SNL jacket thing, like finding it loud when there's repeat guests, you know, like we should do like the, like the special, like the number five collab or whatever it is. I'm in the number two clubs now at Brandon. So I want to, I'm glad to be back here with you, man. Thanks for that.
Jesse (1m 52s): It's great to have you, you know what, I didn't even ask before we started. Are you still, are you still in out of Jersey right now or
Matt (1m 59s): So we have an office building in Jersey, but we, we work, but my wife and I have since moved to Pennsylvania just across the bridge, across the river from New Jersey. And now we live just north of Philly in a little town called new hope, Pennsylvania.
Jesse (2m 14s): Nice, nice. And how long has this, how long have you been there now? Three years. Awesome. Cool. Is that you guys doing some deals out there or was it just more of a, a kind of a personal things to
Matt (2m 25s): We move? I, you know, Jesse, I never thought I would be the guy to live in like a, like a suburban development, you know, but you know what, man, I, I got like the whole modern family house. I got, I live in a cul-de-sac and everything like that. The kids go out and play. I know my neighbors, circuitry, Katrina, the bomb, that, that whole thing. So w my wife and I are both urbanites, you know, I've, I've lived in or around urban cores for most of my life. And now we're in the burbs man.
And I, and I love it. I don't know if I'll be in the burbs forever, but for right now with two young kids, this is kind of the, where you want to be. So, no, that's perfect. Yeah. It's been a big, big, big change for us. Well, that's great.
Jesse (3m 6s): So I guess, you know, for listeners, just to catch us up to speed, it's been a, it's been quite a while since we spoke, you know, we've had a couple of major global situations. We've probably the last few years for, you have been a pretty interesting with the book and to see how that's been going. So maybe you could catch us up to speed a little, what you've been up to the last, the last year or two.
Matt (3m 29s): Yeah, man, what's interesting is that when, at my I've been investing for 16 years full-time and what, what I've in, in the beginning part of our career, we were into single family homes. We were in a, you know, a small office complex that, you know, the one down there and Trenton, we would do a lot, a lot of mixed use buildings here and there. And we were invested in, in what a lot of beginning and newer investors would, would consider to be, you know, like the typical deal, like single family, home, small, multi, you know, those kinds of things.
And we ended up scaling up to a reasonable portfolio of those kinds of things. But then, you know, through, through just being able to prove the proof in the pudding for ourselves to show that we were able to, what we were able to do for investors at a scale out best practice as we grew. And so we did, like, we stretched up a little bit into a 10 unit apartment building. Then we stretched a little bit further and did an 18 unit. Then we special bowl further into 49 unit. Right. And that's probably about when you and I had talked, right.
Or is a 49 unit apartment building. Then we went and did 198 unit in, in North Carolina. And then we, we realized the scalability and, and the, and that once we had proven that street cred to our investor base and to ourselves and to prop and, and that we were able to take best practices. We had learned in doing the small stuff and to the larger staff that that's been, our primary focus is, is a mid to large real estate deals for, you know, mid-size multifamily.
And so what I, to answer your question, what I've been focusing on in my time doing the last couple of years, scaling out a team of people that helped me run the larger real estate stuff. And I've got an, a plus team now, th that, that run all that. And I've been spending my time leading that team and, and charging us through COVID and, you know, inflation and all that stuff, but also working on the things that we still own, right. I mean, a couple of years ago, we still owned a lot of that single family homes and duplexes and triplexes and that kind of stuff, and slowly divesting those things and, you know, taking, doing our best to care of the investors that are in those projects and giving them, giving them the best trends that we could so that we can put our focus on just on the larger deals while we still properly unwind and take care of the small stuff.
So we've really been becoming like all grows up, you know, in the last couple of years, as, as a real estate company, you really just focusing on, you know, bigger and large stuff, well, maintaining and selling the small stuff. So the last couple of years Jesse's been all about the focus, transition optimization of, of, of the optimization and of the smaller things while leading and growing into new territory for us on the larger deals.
Jesse (6m 21s): Yeah. It sounds like at that point, you're, you're dealing with scale scaling with systems in terms of the, I think it was the 49 unit probably was the last time we spoke. So that one that jumped from the 49 unit up, how was that different if it was two from the one prior to the 49? And I think that was like an 18 unit or something, right from the 1849. So was that, was that transition from the 18 to 49, different from that transition from 49 to the, to the larger stuff you guys are doing.
So
Matt (6m 52s): The 18 to 49 was probably the biggest chunk and he will here's. This is interesting. Here's why, right. So what we decided to do when we were running everything, I even wrote an article for BiggerPockets years ago. And the article said, why I will never buy a deal outside of 30 minutes away from my office. Right. I had to eat the, I literally, if I, if those words were on paper, I'd pull it up and eat them right now. Right. Literally like little hot sauce on it. Now it ethos words, because at that time it made sense for me to scale out with in-house property management.
Like these are my employees, in-house maintenance, property management interface between the tenants, office manager, bookkeeper, that kind of thing. So I had a reasonable size team. We ran, you know, like, like a north of a hundred unit portfolio with, and it ran well, and it could have, we could have scaled that up to, you know, in, in, into the mid to high hundreds, or even floated with a thousand units or whatever of in-house owned, in-house manages managed units. And when we, the 18 unit we managed in house, and so had that down at the protocol down, had the process orientation down for that, then this 49 unit shows up and that one's two hours away from the 18 unit.
And I was like, man, I wrote that article, I guess I probably, you know, I don't know, but it's in a great location, great market, you know, love the location that it's in. It's, it's just all everything added up and the numbers added up on it and everything worked. And we had proven ourselves on many other smaller deals to investors and private lenders that we get enough people lined up to get into a larger deal. So we said, you know what, let's tackle this larger project. Like, w let's give it, let's give it a bit, let's get into this. We think we can do it.
Problem is Jesse, we'd hire a third party manager to run that property. So I, and this, at the time, God blessed my wife. She's like my muse, you know, I told her we're going to scale up property management, two hours away from our home in Lancaster. And she was like, why don't you just give it a shot to run third-party management? Because if you don't like third-party management, or if they're not doing a good job, you could just fire them and bring it in house. But why don't you try using another management company? And I think that she saw that that's, that, that, that was really going to help us scale by taking a focus off management and focus on capital growth processes, you know, renovations, capital may, you know, capital improvements, those kinds of things.
And it was a huge shift in running a team, going from running a team that I managed and developed a protocol and they'll work for me. And they ran around. Yeah. Right. They're my people versus going to a team that was not my people, third-party property management. It's a major shift, but it was a game changer.
Jesse (9m 46s): So curious about that, cause we we've dealt with a third department property management and I'm sure listeners that are invested, you know, either having in-house or having third party. Was there anything specific or kind of the big things that, that were the hardest to get over with that transition, whether it's them, you know, having their systems as opposed to using your systems, was there anything major that, you know, it was, it was just really that it was a challenging one to, to kind of relinquish a little power.
Matt (10m 12s): Well, the accounting thing, you know, you figure out the accounting stuff, cause it's not like they're, they're keeping your books, you know, on the back of a napkin. Right. That's it, that's an easier transition than people think it is. They call, well, we use QuickBooks and they use that folio. How we can we get, you know, what give you, I'll give you an hour or two, you probably figure it out. You know, that's way, way easier than the real. Then the real deal stuff. It's like, well, what are the interfaces? And what are the decision-making what's the decision-making protocol? How much rent should I charge for that vacant apartment?
Right. Should I, or should I not replay, like I have a leak in the ceiling, should I patch the roof? Or should I open up the ceiling to see if there's something inside it that's causing the leak from HVHC doctor or something like that. Right. Yeah. So it's, it's the, if this, then that type of protocol, that is the biggest shift and this level of trust you have to have for the property management team and for their protocol. And just to understand that there's things that are going to happen over here and you're just not even gonna know about it, you know? And so there's a level of having the faith and trust to go a little bit more hands-off and trust that they're going to be able to implement your ideas and visions, but you still got to have your finger on them to the point where you can, you know, catch issues or be like, Hey, we've that ceiling's been leaking for the last three weeks, three months.
And the tenant keeps calling back and they're saying that their HVHC is not working, you know, or that tenants complained of bugs four times in a row. Well, maybe it's because they're not living. Maybe it's because of an issue they're causing versus something that's actually in the building. You know what I'm saying? Stuff like that, that, that you still have to have your finger on as an owner, you cannot hands off and too many owners just go like this completely. But it's like, what's the level of me letting them run their business while I still manage the asset. And that's where the concept of asset management comes in.
Jesse (12m 4s): Yeah. I was going to say, it's like the, you give up a little bit on the property management or everything, depending on what you're doing, but then your internal controls have to go up, right? You need to have those systems of, and it could be as easy as, even on a smaller scale, you know, you're spending X amount of dollars, anything over this, we need executive approval or anything related to this. We need, you know, you have a process, like you said, if then, you know what F and then have a decision tree, you know, between, between you, the property manager,
Matt (12m 31s): Except that their protocol is that, well, we don't call an owner unless we have an expensive of 500 bucks and you have to be okay with that. Like, okay, well, do I want to get calls at a lower number or whatever it is. It's about understanding the process and accepting certain things. And knowing like, this is something I could probably live with. And this is something that I needed to change protocol for. Right. That was probably one of the bigger shifts. And just knowing you don't want to, here's here, I'll give you the term because everybody uses this term now cause attraction and stuff like that, the book attraction is KPIs and determining what the KPIs are for property management, that you need to keep your finger on and stuff that you can just let them run.
And not that it doesn't matter, but it's not going to really affect the things that it's not going to go direct to bottom line. And, and if, if it gets really bad, it'll trigger a KPI, you know, and that, so what are the things on the property management side that I have to hold them accountable to? And what can I just let them run? And if it gets really squirrely, I'll see it. Yeah, yeah, sure.
Jesse (13m 33s): You know, you can control so much of the input, but it's sometimes easier to just have the output. Did we hit this? Did we hit, you know, whatever that KPI is, then you can kind of look back if, if things are, if there's an issue, something needs to be changed. Matt, how was the process of, you know, you wrote, you wrote this book, raising private capital, how did your journey with these properties going from 1849 plus, you know, you're, you're now over a thousand units, I think in terms of the raising capital aspect of your business, how did that, how did that evolve?
Matt (14m 3s): It's a, well, it's funny. The first one I talk about in raising private capital was like, literally somebody, my wife went to college with and she was, I think like we connected with them on like a column like Dan, or maybe she saw him at like an alumni event or w w w w whatever, the, whatever it was. She mentioned to this colleague of hers from college that her and I had gotten into real estate investing. And he was like real estate investing. That's interesting. You know, I've always, I've always wanted to get involved in real estate, but I've never had the time. And it's like, oh, well, you know, my husband has the time, you know, like you should, you should talk to my husband.
And so that you start there and it just something we just stumbled into. And I had to call a lawyer to say, Hey, I've got this guy wants to give me money. What should I do? And he's like, okay, slow down. Let's talk about what is this going to be a equity or debt? And my lawyer was very patient and talk me through, you know, loan agreements and whatnot. And this was, you know, 12 years ago when we were first figuring this whole thing out fast forward to, you know, taking it. Step-by-step one foot in front of the other to, again, you know, again, not to like be a systems dork again, but I guess I'm an engineer by trade.
So I just, that's just how I think in that we started to develop systems and processes around raising private capital and, you know, everything from webinars to funnels to it. Like, you know, having those that want to invest with you participate in some sort of a process to where you can understand who needs to go, where, and your system it's, that's been the journey in, in really taking us to the next level in, in, in marketing and making people aware of us, but also in, in making, you know, making sure that people, the right leads go to the right places.
And that's all been all systems and systems and processes and trial, trial, and error kind of thing.
Jesse (15m 49s): So on the, on the point of systems, I talked with a lot of investors that are at that point where they've raised capital maybe for one or two deals, asset specific, or property specific capital. They're not yet at the size, or at least they don't think they're at the size to justify, you know, a, an actual portal, a fund portal or syndication portal. You know, what point do you, do you see investors really starting to put the systems in? Is it a, is it, is it a size of deal perspective or is it a amount of investors perspective?
How do you think about that?
Matt (16m 21s): I think the most people wait too long to do it. I got talked to one guy who had like 20 million in an equity under management, and he was running it on Excel, bless for anybody, man, he's running it using Excel spreadsheet. Right. And, and, and that, and it almost like you need to go next level, man, you need to look at it. You've got to get this wacky internet machine here. You need to take a look at, you know, and so I, I find that most people probably wait too long to handle capital management investor.
And it just, it just makes your life easy. And you don't have to, like, there are softwares out there now that are not 20,000 a year, you know, to, to buy, we use a software called invest next. And I, you know, I, I'm not, you know, I just have, I happen to know they have a low dollar amount, buy it to get in. If you, if you're managing just a couple of investors, they're, they're, I think it's, it might've been, it might be a hundred bucks a month or a little bit more than that to manage a couple of investors.
And of course it scales up as you have people in, but I find that as an investor, if I were past it and I'd do some passive investing too. But if I, you know, if I were passing, investing with somebody, knowing they've got their web interface, that goes to a portal, I can split my K one there in my data's all in their portal. And I can just pull it down when I need it. And everything like that is so much easier than knowing I got to go ping somebody or bother somebody. If I got a question or want to know how things are going, or what did you send me last month or whatever it is. And it's all in the portal, it's all in that system.
So I think it also just makes your company feel a little more professional as a syndicator, or as somebody offering any kind of, whether it's debt or equity, whatever, whatever you're offering your investor base. Those portals, I think are phenomenal that you've covered is whatever you're using.
Jesse (18m 12s): It's a it's cleaner too. I mean, you, you trade so much paper in the deal, especially with deals like this, and you have a bunch of investors and, you know, even, even today with, with the internet and emailing, it's just a lot where you can just say, here's this area. And I dunno for invest next. That's actually the first time I've heard of that, I don't know if that's something where, you know, you have your accountants or lawyers have access to that where they can dump data there. But I find, yeah, it's just, like you said, it, it makes it it's a professionalism aspect, but then it streamlines a lot of what you're doing.
Matt (18m 42s): Yeah. I mean, and that, that world is changing as I think that, that people become more, have more affinity and trust for things that are not wall street based from an investing standpoint. I think that you're going to see more and more of these kinds of interfaces for people to show up people to participate in. And so right now that's who we use, but who knows. I mean, maybe like, you know, QuickBooks gets into the business of that. At some point it becomes like super easy plug and play or whatever.
And so as we, I think as, as people start investing in things that are outside of wall street, more and more, there'll be more and more options. And that, and people just want like an easy professional interface. I can go get the data I need without me having to go to an individual to, to get what I want. So I think it's, it's a changing, evolving space. And there's some, I mean, just a couple of years ago, there were no portals now there's like, you know, a billion of them. And so I think that we'll see more and more services like that, that allow people like, you know, real estate investors or whatever, kind of a syndicator or business offering a person to be able to put their things out there and have it feel more and more professional for investors to participate in.
Yeah. It can be, Hey, we're just getting started on what?
Jesse (19m 53s): Yeah. And it's funny, like 10 years ago you were 15 years ago, you would have thought, oh, you can't, you know, you have to be one of the big banks or you have to be this investment house to have that. Whereas now, you know, like you said, who knows if it's a plugin or add onto QuickBooks in a couple of years in terms of the, for investors. So I'm sure you've got, we were at new Orleans at the BP cons, a lot of good talks there. You know, we, we chatted a little bit about, you know, how you've, you know, what you've been doing the last year or two years. I'm curious, you've probably had a number of people come up to you about the book on all different levels of where they're at in their investing career.
For those individuals that are say they haven't raised their first property, or maybe they've done one, but for the most part up to up to today, it's been bootstrapped. What kind of advice do you give individuals like that that are, that are maybe don't yet think that they have the confidence to be able to raise capital? And the other thing, probably thinking that, you know, why would somebody trust me to raise capital if I haven't done it before?
Matt (20m 52s): I think it's more important that you've got some real estate investing experience or real estate exposure versus whether or not you've raised capital from your network before I, and I think that that has to do with whether or not your network believes that you know, what you're doing with regards to, you know, that site. So I, if I, I tell people, if you can, you know, do your own deals, your own money, you know, or borrow money with collateralized, collateralized loans and that kind of stuff, and do a couple of deals on your own before you go put it out there or attach yourself to a larger operator, that's got a huge portfolio with tons of experience and everything like that with regards to accessing your network or having the right to ask them for money or whatever.
Raising private capital talks about the concept that everybody knows people with money. And those that tell me, they don't know, people with money are likely afraid to go to their network or concern, or just embarrassed or whatever, to go and make the ask. You know, I mean, my own immediate family is invested with me, you know, and I'm proud to say that and people, and I've, I've asked people like, well, would you allow your mom to invest with you? You know, and like, oh no, no, no, no. I'd never put my mother's money at risk.
Is that, well, let's take an examination on your business, but you'll let your mom go buy something off wall street, but you won't let her invest in something that you are operating, that you are driving or you have your finger on, on her behalf or your father's behalf, whatever it is. So I think that there's a, there's a look yourself in the mirror moment that people need to do to make sure that they've got an, a faith in what it is. They're building. That the people that are closest to them, they would trust involved in it. If that's not the case, then tighten up your hat, your investment houses to the point where that, that, that is something you're willing to stand behind and then you'll have enough confidence to, to take it to the, to take it public by then.
Jesse (22m 43s): Yeah. And it's something you talked about in the book and we talked about last time was there's a lot of people thinking that what they're doing is an ask where a think you reframe it as your it's an opportunity. And it sounds, it sounds funny and like, oh, it's just a, you know, it's whatever it's nomenclature, but it really is. It's no, no. It's, if you really believe in what you're raising capital for, whatever it is, whether it's a, you know, a movie in LA or it's a real estate piece of real estate and, you know, in Pennsylvania, it's really you saying here's an opportunity. Here's something I think, you know, I'm not asking you for money. I'm, I'm giving you an opportunity.
And I think, yeah,
Matt (23m 15s): I've been that embarrassed person want to give me some money from a real estate deal. I've been there. You know? And I mean, I get that. It's embarrassing at first. And it's tough asking people for anything for money specifically. Right. But if you reframe it for yourself, like, Hey, listen, I got a question for you, neighbor Bob, what's the stock market going to do tomorrow? You know, I don't know. You probably don't either, right? But I'll tell you what I have tenants and they're likely going to pay their rent. And if they don't every course, or I have loans out, and if you loan me money for my real estate stuff, you have collateral, meaning like you have a lien on the property, which means you can come take it if I don't pay you back.
You know? So I, I, I believe that there's this level of Moxy, if you will love a confidence that it takes to, to take yourself, to, to really show people that, that the, what you've got is going to work. And once you've got has, if this, the gnats, and, and then in some ways it has a lot of mortar, a lot of more of those than a typical wall street paper investment does. Yeah.
Jesse (24m 18s): In terms of getting into a little bit more complexity, you know, that, especially in the states right now, the fund to funds model is pretty big. And for, you know, for those that don't know a lot of, a lot of what we talk about here is syndication where it's deal specific capital raising, where when we started getting into fund of funds, you can be an LP, but you represent a larger pool of your own LPs in a say, limited partnership structure. I'm curious your view on that. Cause I don't think we've talked about this before the fund to funds model in general and you know, the associated type of fees or, you know, the different return that maybe you can ask for or demand based on the fact that you're bringing in an outsized LP size.
Yeah.
Matt (24m 58s): There's a lot of those out there. And I mean, from a syndicators perspective, that's kind of what you want is to be in a fund to funds because I can't tell you Jesse, how many times people call me up saying, Hey, I want to invest with you. And I love your deal. They will love what you guys do. Love your website, love your transparency, love all this stuff. And like, okay, great. I don't know the deal. I'll call you when I do. And then a couple months later when we have a deal to call them up and say, Hey, we have a deal. Remember the, remember the whole song you were singing about a great I was. And how I greet you on invest with being, let's go back to singing that song for a second.
And they're like, oh no, no, no. We already give that money to the next person that we called five minutes after we hung up with you. Right. Forgot the words
Jesse (25m 34s): To that song.
Matt (25m 35s): Yeah. Right. Oh, I forgot. Yeah. Yeah. What was that song again? Can you hold that only? Can you home the tone? Yeah. No. So there are, and I've been there myself and I think a lot of the syndicators out there just wanted to have a level of uniformity and a level of like an open door thing that's available whenever. And they just went, investors want to, are excited to get into something. You have the door open that they can hop in and that they can, you know, put their capital with a syndicator they trust. Right. What, what gets, and I see a lot of people that have a lot of deal flow, do that.
People that you and I both know that are, you know, talking heads in the world, I'll have, I'll have a lot of those now what makes me, I say nervous, but what you have to, as an investor, you have to make sure you vet completely as people that are raising capital. And then they're going to take that capital, invest with other people, right? Like who like, like, like it's a derivative fund, right. So it's like, well, why wouldn't I just go give it to that person? Oh, you're going to diversify me. I get it. Okay. Well, how much, what fee structure are you taking off the top?
You know, that I'm, that I'm now getting diluted by. Right. So I think it's just it's it's okay. Cause you do probably get diversification. You get, you know, diversified exposure across the board or whatever, maybe different asset classes. I know people that are running like a blended fund like that that's invested in self storage and flex industrial space and mobile home parks. Well, great. You get, you know, a little bit of everything and maybe geographic diversity to all kinds of cool stuff, but you want to make sure they're not just picking anybody.
They're not just shotgun approaching it. And just like, Hey, whoever's got a deal. I'll give you money. And th they, that they're properly vetting their operators. And then they're not taking too much of a fee in exchange for doing something that you arguably could do yourself too. You know, because I could call each one of those people. Now, it doesn't mean I don't believe in, in blended funds or whatever. It's something that we are doing as well. Although our blended fund does not invest in, it's not just a fund that invest in a bunch of multi-family. We see that there are things that are missing from syndications and those things are liquidity.
You can't get your money back in a syndication. If you will, if you invest in a syndication, you're locked in for five or more years, right. You can't compound your returns in a syndication. Right. I can't take the returns that you give me if I invest with you and recycle those returns back upon themselves and participate in compounding interest, which is Einstein said is the eighth merit eighth wonder of the world. Right. So I think more powerful. Yeah. So I can't, what, what a blended fund done properly can allow you to do.
If you invest with the right operator is something that allows you to compound your returns and get your money back when you want it. And not just how old the property is not going to sell for another four years and I can get you your money back. Right. So those are the, those are the things that we've worked on to blend in and you can't do just one asset class or one thing with one timeline, it's got to have multiple timelines of money coming in, coming out. Like it's got to have a short-term aspect and a long-term aspect. So that's the way we designed it. And in that, so it's something that we have active and it's something we did on a small scale because you don't have to have a $50 million fund.
It could be a couple million dollar fund and that, so that's something that we're doing, but I think that you're going to see more and more of them as capital becomes more. There's a lot of capital out there looking for a home. And so I think you're going to see more funds and not less because people are going to get, people are getting wise to it like, well, geez, I could just put up a sign that says I invest in real estate. And then, you know, I know a lot of luck. Well, a lot, a lot of capital's going to show up because there's a lot of capital looking for something different besides the wall beside wall street right now.
Jesse (29m 24s): And I think I'm just, I totally agree with your point where you're telling individuals, you know, just make sure that you're aware of what are the returns, sorry, what are the fees that are going to be taken on by the, by the person that's that is basically raising money for that fund, but then going to the other fund. And sometimes, you know, some people will say that absolutely not. They won't do fund to funds, but sometimes the returns are great. It's yeah, you're, it's a fee on a fee, but maybe you have an outsize preference promote that, that makes up for that, for that fee.
And the other thing too, you tell sometimes there's situations for investors where most likely, yeah, they have diversification, but most likely they couldn't have got into this particular dealer arrangement because you're putting, you know, you've raised 3 million for this one LP spot, so to speak. Whereas if you went in just on your own, you'd probably just be like all the other, you know, minimum say a hundred K or 50 K whatever the minimum investment is and your profile would probably look different.
Matt (30m 20s): Well, I mean, there are, when you get it, when you've aggregated that much money through a fund, you can kind of call your own shots, you know? And that's maybe what you're saying is that, you know, somebody calls up a syndicator in St. Louis and I see you're raising 10 million. Well, what if I give you half of that? Yeah. You know, w what would you be able to do for me? Can you pay my investors a little higher rate of return? Can you, you know, whatever. And instead of that investor, th that syndicator saying, oh, yeah, I'm going to go and raise this at, you know, I'm going to go and get the 150 of my best friends to invest in this deal with me.
You know, I can just go to you. And maybe some of my, some of my best friends to, and maybe you make my life a lot easier. I believe that's what they're doing. As I've seen that happen. We've been approached by that too, for people that, that have, you know, kind of like assembled a lot of money and you can call you, you know, what was your oyster at that point? And so maybe if you're a good negotiator, you can kind of like, you know, put up, put together a win-win.
Jesse (31m 19s): Yeah. And I think there's a, to your point of, we're going to see a lot more funds. I think we'll see a lot more of this too, just in the same way. Specialization usually happens in an industry and you might have somebody that's great at raising capital, but maybe it is not the operator. And they go to the DeRosa group and they say, Hey guys, do you have anything on the spigot right now? We'd love to be, be an investor on your deal. And they see you as a great operator. And they, you know, they want that LP spot. But I think, I think we're definitely seeing more and more of it in the market.
Matt (31m 47s): Yeah. And you will, and we will, as I think that, you know, what we do becomes less and less of a secret, and there are, there's even bigger wall street, you know, money working its way into like, not like owning it to an apartment building, but working its way into LP level syndications, you know, what broker dealers coming around going like, say, Hey, listen, we used to, you know, only raise a hundred million for big, big, big, big, big operators. Now, guess what, if you need 10 million, we'll go raise that for you.
Or, you know, like the broker dealers are dropping what they're willing to raise for because it's, they're seeing their clients wanting exposure to private placements and things like that. So we've been approached by a few broker dealers. I think it's beginning of the, of, of the amount of capital that's going to come into the real estate space. And maybe it's all through maybe a lot of it's through funds
Jesse (32m 40s): Problems. It's something that I'm very curious how this kind of rolls out because even in our Canadian context, in the U S similarly, the broker, it's always been a bit of a gray area where, you know, if you, if you raise for a fund, okay, you're, you're not necessarily a broker dealer, then you keep doing it and keep doing it. It's like, w you know, at what point do you have to be, to be a pure broker dealer, or, you know, I'm not sure how it works in your state, but I think there is, as, as it gets more and more, what would you say institutionalized?
You feel like some of the, some of the legal framework, I don't know if that will evolve or change, but definitely a lot going on there.
Matt (33m 16s): It's starting to the sec has already changed up the whole Kappa. They're changing the capital raiser laws. They've also changed up. There's some call that out, came a, it was a couple of years ago, but nobody's really, it's becoming popular now. And it's called regulation CF, which allows you to sell more micro sheriffs. The non-accredited investments. We did shares of one of our syndications that a thousand dollars a piece. So now that's not that wasn't, the, the whole syndication was much, much larger share prices, but we, we broke off a small chunk of the deal just to test it out, to see how it goes.
Cause not to, like my personal mission is to offer what we do as syndicators and his real estate investments to everyone. Like, I want everyone to be able to get into some sort of a passive investment if they choose to, without having to read an enormous check or go to put any of their tone time in or whatever. And so I think the world's going to change to the point where more and more people are going to be allowed to, or aware of alternative ways to make money and alternative ways to invest outside of just buying a stock off wall street. They can still do that.
And I don't think there's anything wrong with that, but I think it's wrong is that that's the only choice that many people have had, unless you're in the know or in like the country club or silver spoon network or something like that, then you knew about other things, other ways, other, you know, good old boy network plays that you could do investing well, that's all busted up and now it's a lot wider, but I think that there's a lot more widening that can happen for more and more people. And eventually everyone to invest in these kinds of things. And the rules are slowly, you know, it's it's government velocity, Jessie.
So the lows are there. The rules are slowly changing. Yeah.
Jesse (34m 59s): Well, it ties in with what we were saying before, too, as the systems increase, improve, you have the ability for operators like yourself to unitize and get smaller. And then you offer that down to the retail, you know, quotations, retail, I guess, customer
Matt (35m 12s): I'll give you a big vision. I have one day and I mean, I might make an, a, we have a deal under contract right now that I might try it. I don't know how it's going to go, which means like on this, but I want to buy an apartment building and I want to offer for people that live there, the right to buy equity in the apartment building.
Jesse (35m 30s): Hmm. That's interesting. That's almost like a co-op model.
Matt (35m 34s): Yeah. But they're not, they don't have to own the whole in a co-op typically the people that live there are the only ones that aren't all right. They all ages. If you live there, you own it. Right. And it's considered home ownership right now. I'm Todd. This still be a syndication to pass a mess, but I'm not. I'm talking about going to the tenants that are living in a 200 unit building and saying, Hey, listen, how about for 500 bucks? I'll let you own a little bit of the sticks and bricks of where you live. You pay him cash flow, you pay him upside residual. You give him a K one, you pay them the whole thing. And because of those portals, we just talked about, I can post a K one.
I can post their ACH payments and everything like that. It's, it's just as simple. It's all spreadsheets, you know? So 20 people or 200 people, or 4,000 people are technically just as easy to manage through an online portal. Right. And that's, that's a wacky idea. I have, I'll probably get talked out of it, but my team that are more, more pragmatic than I am, but
Jesse (36m 31s): I just don't write another blog Gus, and you'll never do it. I
Matt (36m 34s): Know. Right, right, right. Yeah. I will. I'll do it. I'll make it happen. If I go out there and say, I will never know you will, you know,
Jesse (36m 43s): Well that I want to be mindful of the time we were coming up to the end here, but I'd love to get your thoughts, you know, before we can talk a little bit about how people can reach you and talk, you know, we're where they can find the book. Cheers. Your, your view on the market right now in, I know you're an optimist like myself, but w you know, where do you see the opportunities in the next let's call it short term? Are you thinking differently given, given the last year?
Matt (37m 8s): Okay. I'll give a few different opportunities that I see that I think not in a people are focusing on right now. And then I'll think I'll tell you where I think the market's going to, you know, for, for, for go break out my crystal ball, right? So I think that not enough people are focusing on revitalizing industrial applications in the United States. I think that there should be more industrial flex space. As we continue to become more Amazon defied in our world, there's going to need to be more flex space. More people leasing like three to 4,000 square foot of small warehouse to do light, light, industrial manufacturing, or light storage with a little bit of office space sitting there as, as we get into more of, of the right now economy of, of, you know, shipping small products or whatever, to peoples it's in people's homes and selling things online or whatever.
And boutique brokerage buddy of mine owns a small flex space. And he's got a guy that sells exotic fish out of a little flex space. And he's got fish tanks, probably 30,000 gallons where the fish tanks and this little industrial space, and he's got every kind of fish you'd ever think of. And you can buy them from this guy online and they'll ship them off to you for a, for a crazy price. You can buy these really cool fish for people that are hardcore, you know, fish collectors that can't just go to PetSmart to get their, the fish that they want.
They want something really cool. That's been bred. And you know, that specific or whatever, because of the internet, the magic internet box, things like that are becoming more and more applicable. Right? So I think that there's, we're going to see, we're going to need a lot more of that kind of space in this country have a lot of spaces like that are tired and drawn down. Additionally, this could be an opportunity to repurpose things that are no longer applicable anymore in America. Like we don't, we probably got too much office space, probably got too much retail space in, in, in, in north America, let's say America and Canada.
So I think there's gonna be an opportunity for somebody to think of cool applications for the rundown strip center, down the street, from their house or for the office building. That's 50% dark. You guys think of that idea. You know what, whatever, whatever ways maybe it's living space, maybe it's a school. I don't know. You guys think of it and do something amazing right now with regards to multi-family as much as feel like it's overheated, it's overpriced or whatever. I think, unfortunately, we are going to be looking at some inflation in the next couple of years now. I think it's actually going to drive up.
It's going to drive up wages. It's going to drive up cost of goods and it's going to drive up breaths. And I think that that's going to overall, if not keep multifamily as a high priced asset, it'll maybe drive it up a little bit more. I don't see rates going up anytime soon, maybe a little teeny bit, but not like double or triple or whatever, because I don't think the fed the U S government can't afford to raise rates, you know, given what it would do to our debt if, if rates went up. So I don't think we're going to see huge, huge spike in rates. Maybe a little bit sticker just to try and keep up with inflation, but believe it or not, I think multi-family is going to continue to be a hot commodity.
It's not, I don't see any fundamental that makes it crash anytime soon. And so I think maybe it slows down a little bit. It'd be nice if it kind of hit a ceiling a little bit and slowed down just a nudge. But I do think that it's not, nothing's going to clip it anytime soon. And I think it'll be a good asset to be in for the foreseeable future because we're just not building enough housing and there's becoming more and more people. And we're the housing construction we're building is nowhere near keeping up with the population demand for it. So that's my 2 cents Jesse, and it could be completely wrong on all that stuff, but that's what I think I was going to say,
Jesse (40m 43s): No, that was the, the quickest crystal ball three minutes. And you heard it here first folks. Yeah. I could agree with you more on that. I mean, we pretty much, you know, what, what are we a lagging indicator for the states, despite what you would read and see in the media? You guys continue to be a big player when it comes to immigration and population growth in some of the major cities in the states and Canada. And I think that to your point, I don't know who is more supply constraint. I know we are from a multi-racial standpoint, continue to be.
So, you know, until, until we start seeing more supply, it's really hard to say that multi-family is going to do anything, but at least stay where it's at. If not, like you said in shop, I think for, from my point of view, it's, it's going to be the prices. The prices are going to get to a point where I feel that's not going to be the deciding factor of if they continue to go up, it's going to be the, the, the net operating income side. It's going to be the affordability side. Now, how much higher can that go?
Matt (41m 39s): You can't sit root capris. Can't go much lower. But I mean, I think America is finally realizing that maybe Canada has it, right. Maybe you ought to pay people a real living wage for doing what they do. And, and that $7 an hour is probably not enough, you know? And that, so you see companies like, you know, Amazon McDonald's Starbucks that are paying 15, 20, 20 $5 an hour, which is to be straight, man. That's really what it takes to get by, to raise them. You can't raise a family on seven or $10 an hour, $12 an hour, forget it. You know, there is a family you can feed yourself on that, you know?
And so the fat and the, and it's just not fair that some Americans to keep their lights on, have to work two, maybe three jobs, you know, that ain't right either. And so we're going to see, I think, a correction on living wage and a wage, one, what, what an acceptable wage rate would be in the U S and that unfortunately is going to push up cost of living so
Jesse (42m 34s): Well, I appreciate that Matt, we will look in a year if that prognostication is correct, and we'll hold you to it,
Matt (42m 41s): I've drawn a year from now. We'll just listen to this episode and disagree with everything you and I said, yeah, they're
Jesse (42m 46s): Just a bunch of talks about how
Matt (42m 48s): Wrong with those two guys, right?
Jesse (42m 50s): Matt, in terms of you've done the final four before. So I will skip that. But in terms of where people can reach out to you, aside from a Google search of Matt grouper DeRosa, where can I send them?
Matt (43m 3s): They can go to Instagram at the mat, fair cloth to check me out there. They can go to my company website, which is DeRosa right there behind me, D E R O S a group.com DeRosa group.com. And they can do all kinds of cool stuff, like check out a copy of my book, which they can buy on my website. They can, you know, check out our YouTube channel. They can join our mailing list. It can hear all about the passive cool stuff that we're doing as well@derosagroup.com.
Jesse (43m 28s): My guest today has been Matt Faircloth, cloth, Matt, thanks for being part of working capital.
Matt (43m 33s): Thank you, Jesse.
Jesse (43m 40s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, my name's Jesper gala and you're listening to working capital the real estate podcast. My guests today are returning guests, Matt fare, cloth, founder, and CEO of the DeRosa group.
Matt has been a full-time investor for over 15 years. Just talked a little bit about the deal volume here over a hundred million in real estate transactions and controlling over 1000 units in multifamily mats, a regular contributor and podcast guests on biggerpockets.com has an active YouTube channel dedicated to educating investors and the author of the Amazon bestseller. Highly recommend raising private capital. How to build your real estate empire with other people's money. Matt, how's it going?
Matt (59s): Good. I'm good, Jesse. It's great being here, man. Am I, did I, did you tell me a bit at BiggerPockets conferences? This is that I'm your first repeat appearance on your podcast?
Jesse (1m 8s): No, the first repeat appearance was definitely the BR Brandon Turner. So
Matt (1m 13s): Yeah, you're right. Yeah,
Jesse (1m 15s): But you're there though. You know, you're very generous in the, the first, first few episodes. I think you were you're right on. I think that was right when you started marketing the book, but you know, I think at that point I read half of it completed it a long time ago. A great book. I thought it was, I thought it was just for us, at least it was very perfect timing, which is fine.
Matt (1m 37s): I gotta be here, man. I should get like, we should do like the SNL jacket thing, like finding it loud when there's repeat guests, you know, like we should do like the, like the special, like the number five collab or whatever it is. I'm in the number two clubs now at Brandon. So I want to, I'm glad to be back here with you, man. Thanks for that.
Jesse (1m 52s): It's great to have you, you know what, I didn't even ask before we started. Are you still, are you still in out of Jersey right now or
Matt (1m 59s): So we have an office building in Jersey, but we, we work, but my wife and I have since moved to Pennsylvania just across the bridge, across the river from New Jersey. And now we live just north of Philly in a little town called new hope, Pennsylvania.
Jesse (2m 14s): Nice, nice. And how long has this, how long have you been there now? Three years. Awesome. Cool. Is that you guys doing some deals out there or was it just more of a, a kind of a personal things to
Matt (2m 25s): We move? I, you know, Jesse, I never thought I would be the guy to live in like a, like a suburban development, you know, but you know what, man, I, I got like the whole modern family house. I got, I live in a cul-de-sac and everything like that. The kids go out and play. I know my neighbors, circuitry, Katrina, the bomb, that, that whole thing. So w my wife and I are both urbanites, you know, I've, I've lived in or around urban cores for most of my life. And now we're in the burbs man.
And I, and I love it. I don't know if I'll be in the burbs forever, but for right now with two young kids, this is kind of the, where you want to be. So, no, that's perfect. Yeah. It's been a big, big, big change for us. Well, that's great.
Jesse (3m 6s): So I guess, you know, for listeners, just to catch us up to speed, it's been a, it's been quite a while since we spoke, you know, we've had a couple of major global situations. We've probably the last few years for, you have been a pretty interesting with the book and to see how that's been going. So maybe you could catch us up to speed a little, what you've been up to the last, the last year or two.
Matt (3m 29s): Yeah, man, what's interesting is that when, at my I've been investing for 16 years full-time and what, what I've in, in the beginning part of our career, we were into single family homes. We were in a, you know, a small office complex that, you know, the one down there and Trenton, we would do a lot, a lot of mixed use buildings here and there. And we were invested in, in what a lot of beginning and newer investors would, would consider to be, you know, like the typical deal, like single family, home, small, multi, you know, those kinds of things.
And we ended up scaling up to a reasonable portfolio of those kinds of things. But then, you know, through, through just being able to prove the proof in the pudding for ourselves to show that we were able to, what we were able to do for investors at a scale out best practice as we grew. And so we did, like, we stretched up a little bit into a 10 unit apartment building. Then we stretched a little bit further and did an 18 unit. Then we special bowl further into 49 unit. Right. And that's probably about when you and I had talked, right.
Or is a 49 unit apartment building. Then we went and did 198 unit in, in North Carolina. And then we, we realized the scalability and, and the, and that once we had proven that street cred to our investor base and to ourselves and to prop and, and that we were able to take best practices. We had learned in doing the small stuff and to the larger staff that that's been, our primary focus is, is a mid to large real estate deals for, you know, mid-size multifamily.
And so what I, to answer your question, what I've been focusing on in my time doing the last couple of years, scaling out a team of people that helped me run the larger real estate stuff. And I've got an, a plus team now, th that, that run all that. And I've been spending my time leading that team and, and charging us through COVID and, you know, inflation and all that stuff, but also working on the things that we still own, right. I mean, a couple of years ago, we still owned a lot of that single family homes and duplexes and triplexes and that kind of stuff, and slowly divesting those things and, you know, taking, doing our best to care of the investors that are in those projects and giving them, giving them the best trends that we could so that we can put our focus on just on the larger deals while we still properly unwind and take care of the small stuff.
So we've really been becoming like all grows up, you know, in the last couple of years, as, as a real estate company, you really just focusing on, you know, bigger and large stuff, well, maintaining and selling the small stuff. So the last couple of years Jesse's been all about the focus, transition optimization of, of, of the optimization and of the smaller things while leading and growing into new territory for us on the larger deals.
Jesse (6m 21s): Yeah. It sounds like at that point, you're, you're dealing with scale scaling with systems in terms of the, I think it was the 49 unit probably was the last time we spoke. So that one that jumped from the 49 unit up, how was that different if it was two from the one prior to the 49? And I think that was like an 18 unit or something, right from the 1849. So was that, was that transition from the 18 to 49, different from that transition from 49 to the, to the larger stuff you guys are doing.
So
Matt (6m 52s): The 18 to 49 was probably the biggest chunk and he will here's. This is interesting. Here's why, right. So what we decided to do when we were running everything, I even wrote an article for BiggerPockets years ago. And the article said, why I will never buy a deal outside of 30 minutes away from my office. Right. I had to eat the, I literally, if I, if those words were on paper, I'd pull it up and eat them right now. Right. Literally like little hot sauce on it. Now it ethos words, because at that time it made sense for me to scale out with in-house property management.
Like these are my employees, in-house maintenance, property management interface between the tenants, office manager, bookkeeper, that kind of thing. So I had a reasonable size team. We ran, you know, like, like a north of a hundred unit portfolio with, and it ran well, and it could have, we could have scaled that up to, you know, in, in, into the mid to high hundreds, or even floated with a thousand units or whatever of in-house owned, in-house manages managed units. And when we, the 18 unit we managed in house, and so had that down at the protocol down, had the process orientation down for that, then this 49 unit shows up and that one's two hours away from the 18 unit.
And I was like, man, I wrote that article, I guess I probably, you know, I don't know, but it's in a great location, great market, you know, love the location that it's in. It's, it's just all everything added up and the numbers added up on it and everything worked. And we had proven ourselves on many other smaller deals to investors and private lenders that we get enough people lined up to get into a larger deal. So we said, you know what, let's tackle this larger project. Like, w let's give it, let's give it a bit, let's get into this. We think we can do it.
Problem is Jesse, we'd hire a third party manager to run that property. So I, and this, at the time, God blessed my wife. She's like my muse, you know, I told her we're going to scale up property management, two hours away from our home in Lancaster. And she was like, why don't you just give it a shot to run third-party management? Because if you don't like third-party management, or if they're not doing a good job, you could just fire them and bring it in house. But why don't you try using another management company? And I think that she saw that that's, that, that, that was really going to help us scale by taking a focus off management and focus on capital growth processes, you know, renovations, capital may, you know, capital improvements, those kinds of things.
And it was a huge shift in running a team, going from running a team that I managed and developed a protocol and they'll work for me. And they ran around. Yeah. Right. They're my people versus going to a team that was not my people, third-party property management. It's a major shift, but it was a game changer.
Jesse (9m 46s): So curious about that, cause we we've dealt with a third department property management and I'm sure listeners that are invested, you know, either having in-house or having third party. Was there anything specific or kind of the big things that, that were the hardest to get over with that transition, whether it's them, you know, having their systems as opposed to using your systems, was there anything major that, you know, it was, it was just really that it was a challenging one to, to kind of relinquish a little power.
Matt (10m 12s): Well, the accounting thing, you know, you figure out the accounting stuff, cause it's not like they're, they're keeping your books, you know, on the back of a napkin. Right. That's it, that's an easier transition than people think it is. They call, well, we use QuickBooks and they use that folio. How we can we get, you know, what give you, I'll give you an hour or two, you probably figure it out. You know, that's way, way easier than the real. Then the real deal stuff. It's like, well, what are the interfaces? And what are the decision-making what's the decision-making protocol? How much rent should I charge for that vacant apartment?
Right. Should I, or should I not replay, like I have a leak in the ceiling, should I patch the roof? Or should I open up the ceiling to see if there's something inside it that's causing the leak from HVHC doctor or something like that. Right. Yeah. So it's, it's the, if this, then that type of protocol, that is the biggest shift and this level of trust you have to have for the property management team and for their protocol. And just to understand that there's things that are going to happen over here and you're just not even gonna know about it, you know? And so there's a level of having the faith and trust to go a little bit more hands-off and trust that they're going to be able to implement your ideas and visions, but you still got to have your finger on them to the point where you can, you know, catch issues or be like, Hey, we've that ceiling's been leaking for the last three weeks, three months.
And the tenant keeps calling back and they're saying that their HVHC is not working, you know, or that tenants complained of bugs four times in a row. Well, maybe it's because they're not living. Maybe it's because of an issue they're causing versus something that's actually in the building. You know what I'm saying? Stuff like that, that, that you still have to have your finger on as an owner, you cannot hands off and too many owners just go like this completely. But it's like, what's the level of me letting them run their business while I still manage the asset. And that's where the concept of asset management comes in.
Jesse (12m 4s): Yeah. I was going to say, it's like the, you give up a little bit on the property management or everything, depending on what you're doing, but then your internal controls have to go up, right? You need to have those systems of, and it could be as easy as, even on a smaller scale, you know, you're spending X amount of dollars, anything over this, we need executive approval or anything related to this. We need, you know, you have a process, like you said, if then, you know what F and then have a decision tree, you know, between, between you, the property manager,
Matt (12m 31s): Except that their protocol is that, well, we don't call an owner unless we have an expensive of 500 bucks and you have to be okay with that. Like, okay, well, do I want to get calls at a lower number or whatever it is. It's about understanding the process and accepting certain things. And knowing like, this is something I could probably live with. And this is something that I needed to change protocol for. Right. That was probably one of the bigger shifts. And just knowing you don't want to, here's here, I'll give you the term because everybody uses this term now cause attraction and stuff like that, the book attraction is KPIs and determining what the KPIs are for property management, that you need to keep your finger on and stuff that you can just let them run.
And not that it doesn't matter, but it's not going to really affect the things that it's not going to go direct to bottom line. And, and if, if it gets really bad, it'll trigger a KPI, you know, and that, so what are the things on the property management side that I have to hold them accountable to? And what can I just let them run? And if it gets really squirrely, I'll see it. Yeah, yeah, sure.
Jesse (13m 33s): You know, you can control so much of the input, but it's sometimes easier to just have the output. Did we hit this? Did we hit, you know, whatever that KPI is, then you can kind of look back if, if things are, if there's an issue, something needs to be changed. Matt, how was the process of, you know, you wrote, you wrote this book, raising private capital, how did your journey with these properties going from 1849 plus, you know, you're, you're now over a thousand units, I think in terms of the raising capital aspect of your business, how did that, how did that evolve?
Matt (14m 3s): It's a, well, it's funny. The first one I talk about in raising private capital was like, literally somebody, my wife went to college with and she was, I think like we connected with them on like a column like Dan, or maybe she saw him at like an alumni event or w w w w whatever, the, whatever it was. She mentioned to this colleague of hers from college that her and I had gotten into real estate investing. And he was like real estate investing. That's interesting. You know, I've always, I've always wanted to get involved in real estate, but I've never had the time. And it's like, oh, well, you know, my husband has the time, you know, like you should, you should talk to my husband.
And so that you start there and it just something we just stumbled into. And I had to call a lawyer to say, Hey, I've got this guy wants to give me money. What should I do? And he's like, okay, slow down. Let's talk about what is this going to be a equity or debt? And my lawyer was very patient and talk me through, you know, loan agreements and whatnot. And this was, you know, 12 years ago when we were first figuring this whole thing out fast forward to, you know, taking it. Step-by-step one foot in front of the other to, again, you know, again, not to like be a systems dork again, but I guess I'm an engineer by trade.
So I just, that's just how I think in that we started to develop systems and processes around raising private capital and, you know, everything from webinars to funnels to it. Like, you know, having those that want to invest with you participate in some sort of a process to where you can understand who needs to go, where, and your system it's, that's been the journey in, in really taking us to the next level in, in, in marketing and making people aware of us, but also in, in making, you know, making sure that people, the right leads go to the right places.
And that's all been all systems and systems and processes and trial, trial, and error kind of thing.
Jesse (15m 49s): So on the, on the point of systems, I talked with a lot of investors that are at that point where they've raised capital maybe for one or two deals, asset specific, or property specific capital. They're not yet at the size, or at least they don't think they're at the size to justify, you know, a, an actual portal, a fund portal or syndication portal. You know, what point do you, do you see investors really starting to put the systems in? Is it a, is it, is it a size of deal perspective or is it a amount of investors perspective?
How do you think about that?
Matt (16m 21s): I think the most people wait too long to do it. I got talked to one guy who had like 20 million in an equity under management, and he was running it on Excel, bless for anybody, man, he's running it using Excel spreadsheet. Right. And, and, and that, and it almost like you need to go next level, man, you need to look at it. You've got to get this wacky internet machine here. You need to take a look at, you know, and so I, I find that most people probably wait too long to handle capital management investor.
And it just, it just makes your life easy. And you don't have to, like, there are softwares out there now that are not 20,000 a year, you know, to, to buy, we use a software called invest next. And I, you know, I, I'm not, you know, I just have, I happen to know they have a low dollar amount, buy it to get in. If you, if you're managing just a couple of investors, they're, they're, I think it's, it might've been, it might be a hundred bucks a month or a little bit more than that to manage a couple of investors.
And of course it scales up as you have people in, but I find that as an investor, if I were past it and I'd do some passive investing too. But if I, you know, if I were passing, investing with somebody, knowing they've got their web interface, that goes to a portal, I can split my K one there in my data's all in their portal. And I can just pull it down when I need it. And everything like that is so much easier than knowing I got to go ping somebody or bother somebody. If I got a question or want to know how things are going, or what did you send me last month or whatever it is. And it's all in the portal, it's all in that system.
So I think it also just makes your company feel a little more professional as a syndicator, or as somebody offering any kind of, whether it's debt or equity, whatever, whatever you're offering your investor base. Those portals, I think are phenomenal that you've covered is whatever you're using.
Jesse (18m 12s): It's a it's cleaner too. I mean, you, you trade so much paper in the deal, especially with deals like this, and you have a bunch of investors and, you know, even, even today with, with the internet and emailing, it's just a lot where you can just say, here's this area. And I dunno for invest next. That's actually the first time I've heard of that, I don't know if that's something where, you know, you have your accountants or lawyers have access to that where they can dump data there. But I find, yeah, it's just, like you said, it, it makes it it's a professionalism aspect, but then it streamlines a lot of what you're doing.
Matt (18m 42s): Yeah. I mean, and that, that world is changing as I think that, that people become more, have more affinity and trust for things that are not wall street based from an investing standpoint. I think that you're going to see more and more of these kinds of interfaces for people to show up people to participate in. And so right now that's who we use, but who knows. I mean, maybe like, you know, QuickBooks gets into the business of that. At some point it becomes like super easy plug and play or whatever.
And so as we, I think as, as people start investing in things that are outside of wall street, more and more, there'll be more and more options. And that, and people just want like an easy professional interface. I can go get the data I need without me having to go to an individual to, to get what I want. So I think it's, it's a changing, evolving space. And there's some, I mean, just a couple of years ago, there were no portals now there's like, you know, a billion of them. And so I think that we'll see more and more services like that, that allow people like, you know, real estate investors or whatever, kind of a syndicator or business offering a person to be able to put their things out there and have it feel more and more professional for investors to participate in.
Yeah. It can be, Hey, we're just getting started on what?
Jesse (19m 53s): Yeah. And it's funny, like 10 years ago you were 15 years ago, you would have thought, oh, you can't, you know, you have to be one of the big banks or you have to be this investment house to have that. Whereas now, you know, like you said, who knows if it's a plugin or add onto QuickBooks in a couple of years in terms of the, for investors. So I'm sure you've got, we were at new Orleans at the BP cons, a lot of good talks there. You know, we, we chatted a little bit about, you know, how you've, you know, what you've been doing the last year or two years. I'm curious, you've probably had a number of people come up to you about the book on all different levels of where they're at in their investing career.
For those individuals that are say they haven't raised their first property, or maybe they've done one, but for the most part up to up to today, it's been bootstrapped. What kind of advice do you give individuals like that that are, that are maybe don't yet think that they have the confidence to be able to raise capital? And the other thing, probably thinking that, you know, why would somebody trust me to raise capital if I haven't done it before?
Matt (20m 52s): I think it's more important that you've got some real estate investing experience or real estate exposure versus whether or not you've raised capital from your network before I, and I think that that has to do with whether or not your network believes that you know, what you're doing with regards to, you know, that site. So I, if I, I tell people, if you can, you know, do your own deals, your own money, you know, or borrow money with collateralized, collateralized loans and that kind of stuff, and do a couple of deals on your own before you go put it out there or attach yourself to a larger operator, that's got a huge portfolio with tons of experience and everything like that with regards to accessing your network or having the right to ask them for money or whatever.
Raising private capital talks about the concept that everybody knows people with money. And those that tell me, they don't know, people with money are likely afraid to go to their network or concern, or just embarrassed or whatever, to go and make the ask. You know, I mean, my own immediate family is invested with me, you know, and I'm proud to say that and people, and I've, I've asked people like, well, would you allow your mom to invest with you? You know, and like, oh no, no, no, no. I'd never put my mother's money at risk.
Is that, well, let's take an examination on your business, but you'll let your mom go buy something off wall street, but you won't let her invest in something that you are operating, that you are driving or you have your finger on, on her behalf or your father's behalf, whatever it is. So I think that there's a, there's a look yourself in the mirror moment that people need to do to make sure that they've got an, a faith in what it is. They're building. That the people that are closest to them, they would trust involved in it. If that's not the case, then tighten up your hat, your investment houses to the point where that, that, that is something you're willing to stand behind and then you'll have enough confidence to, to take it to the, to take it public by then.
Jesse (22m 43s): Yeah. And it's something you talked about in the book and we talked about last time was there's a lot of people thinking that what they're doing is an ask where a think you reframe it as your it's an opportunity. And it sounds, it sounds funny and like, oh, it's just a, you know, it's whatever it's nomenclature, but it really is. It's no, no. It's, if you really believe in what you're raising capital for, whatever it is, whether it's a, you know, a movie in LA or it's a real estate piece of real estate and, you know, in Pennsylvania, it's really you saying here's an opportunity. Here's something I think, you know, I'm not asking you for money. I'm, I'm giving you an opportunity.
And I think, yeah,
Matt (23m 15s): I've been that embarrassed person want to give me some money from a real estate deal. I've been there. You know? And I mean, I get that. It's embarrassing at first. And it's tough asking people for anything for money specifically. Right. But if you reframe it for yourself, like, Hey, listen, I got a question for you, neighbor Bob, what's the stock market going to do tomorrow? You know, I don't know. You probably don't either, right? But I'll tell you what I have tenants and they're likely going to pay their rent. And if they don't every course, or I have loans out, and if you loan me money for my real estate stuff, you have collateral, meaning like you have a lien on the property, which means you can come take it if I don't pay you back.
You know? So I, I, I believe that there's this level of Moxy, if you will love a confidence that it takes to, to take yourself, to, to really show people that, that the, what you've got is going to work. And once you've got has, if this, the gnats, and, and then in some ways it has a lot of mortar, a lot of more of those than a typical wall street paper investment does. Yeah.
Jesse (24m 18s): In terms of getting into a little bit more complexity, you know, that, especially in the states right now, the fund to funds model is pretty big. And for, you know, for those that don't know a lot of, a lot of what we talk about here is syndication where it's deal specific capital raising, where when we started getting into fund of funds, you can be an LP, but you represent a larger pool of your own LPs in a say, limited partnership structure. I'm curious your view on that. Cause I don't think we've talked about this before the fund to funds model in general and you know, the associated type of fees or, you know, the different return that maybe you can ask for or demand based on the fact that you're bringing in an outsized LP size.
Yeah.
Matt (24m 58s): There's a lot of those out there. And I mean, from a syndicators perspective, that's kind of what you want is to be in a fund to funds because I can't tell you Jesse, how many times people call me up saying, Hey, I want to invest with you. And I love your deal. They will love what you guys do. Love your website, love your transparency, love all this stuff. And like, okay, great. I don't know the deal. I'll call you when I do. And then a couple months later when we have a deal to call them up and say, Hey, we have a deal. Remember the, remember the whole song you were singing about a great I was. And how I greet you on invest with being, let's go back to singing that song for a second.
And they're like, oh no, no, no. We already give that money to the next person that we called five minutes after we hung up with you. Right. Forgot the words
Jesse (25m 34s): To that song.
Matt (25m 35s): Yeah. Right. Oh, I forgot. Yeah. Yeah. What was that song again? Can you hold that only? Can you home the tone? Yeah. No. So there are, and I've been there myself and I think a lot of the syndicators out there just wanted to have a level of uniformity and a level of like an open door thing that's available whenever. And they just went, investors want to, are excited to get into something. You have the door open that they can hop in and that they can, you know, put their capital with a syndicator they trust. Right. What, what gets, and I see a lot of people that have a lot of deal flow, do that.
People that you and I both know that are, you know, talking heads in the world, I'll have, I'll have a lot of those now what makes me, I say nervous, but what you have to, as an investor, you have to make sure you vet completely as people that are raising capital. And then they're going to take that capital, invest with other people, right? Like who like, like, like it's a derivative fund, right. So it's like, well, why wouldn't I just go give it to that person? Oh, you're going to diversify me. I get it. Okay. Well, how much, what fee structure are you taking off the top?
You know, that I'm, that I'm now getting diluted by. Right. So I think it's just it's it's okay. Cause you do probably get diversification. You get, you know, diversified exposure across the board or whatever, maybe different asset classes. I know people that are running like a blended fund like that that's invested in self storage and flex industrial space and mobile home parks. Well, great. You get, you know, a little bit of everything and maybe geographic diversity to all kinds of cool stuff, but you want to make sure they're not just picking anybody.
They're not just shotgun approaching it. And just like, Hey, whoever's got a deal. I'll give you money. And th they, that they're properly vetting their operators. And then they're not taking too much of a fee in exchange for doing something that you arguably could do yourself too. You know, because I could call each one of those people. Now, it doesn't mean I don't believe in, in blended funds or whatever. It's something that we are doing as well. Although our blended fund does not invest in, it's not just a fund that invest in a bunch of multi-family. We see that there are things that are missing from syndications and those things are liquidity.
You can't get your money back in a syndication. If you will, if you invest in a syndication, you're locked in for five or more years, right. You can't compound your returns in a syndication. Right. I can't take the returns that you give me if I invest with you and recycle those returns back upon themselves and participate in compounding interest, which is Einstein said is the eighth merit eighth wonder of the world. Right. So I think more powerful. Yeah. So I can't, what, what a blended fund done properly can allow you to do.
If you invest with the right operator is something that allows you to compound your returns and get your money back when you want it. And not just how old the property is not going to sell for another four years and I can get you your money back. Right. So those are the, those are the things that we've worked on to blend in and you can't do just one asset class or one thing with one timeline, it's got to have multiple timelines of money coming in, coming out. Like it's got to have a short-term aspect and a long-term aspect. So that's the way we designed it. And in that, so it's something that we have active and it's something we did on a small scale because you don't have to have a $50 million fund.
It could be a couple million dollar fund and that, so that's something that we're doing, but I think that you're going to see more and more of them as capital becomes more. There's a lot of capital out there looking for a home. And so I think you're going to see more funds and not less because people are going to get, people are getting wise to it like, well, geez, I could just put up a sign that says I invest in real estate. And then, you know, I know a lot of luck. Well, a lot, a lot of capital's going to show up because there's a lot of capital looking for something different besides the wall beside wall street right now.
Jesse (29m 24s): And I think I'm just, I totally agree with your point where you're telling individuals, you know, just make sure that you're aware of what are the returns, sorry, what are the fees that are going to be taken on by the, by the person that's that is basically raising money for that fund, but then going to the other fund. And sometimes, you know, some people will say that absolutely not. They won't do fund to funds, but sometimes the returns are great. It's yeah, you're, it's a fee on a fee, but maybe you have an outsize preference promote that, that makes up for that, for that fee.
And the other thing too, you tell sometimes there's situations for investors where most likely, yeah, they have diversification, but most likely they couldn't have got into this particular dealer arrangement because you're putting, you know, you've raised 3 million for this one LP spot, so to speak. Whereas if you went in just on your own, you'd probably just be like all the other, you know, minimum say a hundred K or 50 K whatever the minimum investment is and your profile would probably look different.
Matt (30m 20s): Well, I mean, there are, when you get it, when you've aggregated that much money through a fund, you can kind of call your own shots, you know? And that's maybe what you're saying is that, you know, somebody calls up a syndicator in St. Louis and I see you're raising 10 million. Well, what if I give you half of that? Yeah. You know, w what would you be able to do for me? Can you pay my investors a little higher rate of return? Can you, you know, whatever. And instead of that investor, th that syndicator saying, oh, yeah, I'm going to go and raise this at, you know, I'm going to go and get the 150 of my best friends to invest in this deal with me.
You know, I can just go to you. And maybe some of my, some of my best friends to, and maybe you make my life a lot easier. I believe that's what they're doing. As I've seen that happen. We've been approached by that too, for people that, that have, you know, kind of like assembled a lot of money and you can call you, you know, what was your oyster at that point? And so maybe if you're a good negotiator, you can kind of like, you know, put up, put together a win-win.
Jesse (31m 19s): Yeah. And I think there's a, to your point of, we're going to see a lot more funds. I think we'll see a lot more of this too, just in the same way. Specialization usually happens in an industry and you might have somebody that's great at raising capital, but maybe it is not the operator. And they go to the DeRosa group and they say, Hey guys, do you have anything on the spigot right now? We'd love to be, be an investor on your deal. And they see you as a great operator. And they, you know, they want that LP spot. But I think, I think we're definitely seeing more and more of it in the market.
Matt (31m 47s): Yeah. And you will, and we will, as I think that, you know, what we do becomes less and less of a secret, and there are, there's even bigger wall street, you know, money working its way into like, not like owning it to an apartment building, but working its way into LP level syndications, you know, what broker dealers coming around going like, say, Hey, listen, we used to, you know, only raise a hundred million for big, big, big, big, big operators. Now, guess what, if you need 10 million, we'll go raise that for you.
Or, you know, like the broker dealers are dropping what they're willing to raise for because it's, they're seeing their clients wanting exposure to private placements and things like that. So we've been approached by a few broker dealers. I think it's beginning of the, of, of the amount of capital that's going to come into the real estate space. And maybe it's all through maybe a lot of it's through funds
Jesse (32m 40s): Problems. It's something that I'm very curious how this kind of rolls out because even in our Canadian context, in the U S similarly, the broker, it's always been a bit of a gray area where, you know, if you, if you raise for a fund, okay, you're, you're not necessarily a broker dealer, then you keep doing it and keep doing it. It's like, w you know, at what point do you have to be, to be a pure broker dealer, or, you know, I'm not sure how it works in your state, but I think there is, as, as it gets more and more, what would you say institutionalized?
You feel like some of the, some of the legal framework, I don't know if that will evolve or change, but definitely a lot going on there.
Matt (33m 16s): It's starting to the sec has already changed up the whole Kappa. They're changing the capital raiser laws. They've also changed up. There's some call that out, came a, it was a couple of years ago, but nobody's really, it's becoming popular now. And it's called regulation CF, which allows you to sell more micro sheriffs. The non-accredited investments. We did shares of one of our syndications that a thousand dollars a piece. So now that's not that wasn't, the, the whole syndication was much, much larger share prices, but we, we broke off a small chunk of the deal just to test it out, to see how it goes.
Cause not to, like my personal mission is to offer what we do as syndicators and his real estate investments to everyone. Like, I want everyone to be able to get into some sort of a passive investment if they choose to, without having to read an enormous check or go to put any of their tone time in or whatever. And so I think the world's going to change to the point where more and more people are going to be allowed to, or aware of alternative ways to make money and alternative ways to invest outside of just buying a stock off wall street. They can still do that.
And I don't think there's anything wrong with that, but I think it's wrong is that that's the only choice that many people have had, unless you're in the know or in like the country club or silver spoon network or something like that, then you knew about other things, other ways, other, you know, good old boy network plays that you could do investing well, that's all busted up and now it's a lot wider, but I think that there's a lot more widening that can happen for more and more people. And eventually everyone to invest in these kinds of things. And the rules are slowly, you know, it's it's government velocity, Jessie.
So the lows are there. The rules are slowly changing. Yeah.
Jesse (34m 59s): Well, it ties in with what we were saying before, too, as the systems increase, improve, you have the ability for operators like yourself to unitize and get smaller. And then you offer that down to the retail, you know, quotations, retail, I guess, customer
Matt (35m 12s): I'll give you a big vision. I have one day and I mean, I might make an, a, we have a deal under contract right now that I might try it. I don't know how it's going to go, which means like on this, but I want to buy an apartment building and I want to offer for people that live there, the right to buy equity in the apartment building.
Jesse (35m 30s): Hmm. That's interesting. That's almost like a co-op model.
Matt (35m 34s): Yeah. But they're not, they don't have to own the whole in a co-op typically the people that live there are the only ones that aren't all right. They all ages. If you live there, you own it. Right. And it's considered home ownership right now. I'm Todd. This still be a syndication to pass a mess, but I'm not. I'm talking about going to the tenants that are living in a 200 unit building and saying, Hey, listen, how about for 500 bucks? I'll let you own a little bit of the sticks and bricks of where you live. You pay him cash flow, you pay him upside residual. You give him a K one, you pay them the whole thing. And because of those portals, we just talked about, I can post a K one.
I can post their ACH payments and everything like that. It's, it's just as simple. It's all spreadsheets, you know? So 20 people or 200 people, or 4,000 people are technically just as easy to manage through an online portal. Right. And that's, that's a wacky idea. I have, I'll probably get talked out of it, but my team that are more, more pragmatic than I am, but
Jesse (36m 31s): I just don't write another blog Gus, and you'll never do it. I
Matt (36m 34s): Know. Right, right, right. Yeah. I will. I'll do it. I'll make it happen. If I go out there and say, I will never know you will, you know,
Jesse (36m 43s): Well that I want to be mindful of the time we were coming up to the end here, but I'd love to get your thoughts, you know, before we can talk a little bit about how people can reach you and talk, you know, we're where they can find the book. Cheers. Your, your view on the market right now in, I know you're an optimist like myself, but w you know, where do you see the opportunities in the next let's call it short term? Are you thinking differently given, given the last year?
Matt (37m 8s): Okay. I'll give a few different opportunities that I see that I think not in a people are focusing on right now. And then I'll think I'll tell you where I think the market's going to, you know, for, for, for go break out my crystal ball, right? So I think that not enough people are focusing on revitalizing industrial applications in the United States. I think that there should be more industrial flex space. As we continue to become more Amazon defied in our world, there's going to need to be more flex space. More people leasing like three to 4,000 square foot of small warehouse to do light, light, industrial manufacturing, or light storage with a little bit of office space sitting there as, as we get into more of, of the right now economy of, of, you know, shipping small products or whatever, to peoples it's in people's homes and selling things online or whatever.
And boutique brokerage buddy of mine owns a small flex space. And he's got a guy that sells exotic fish out of a little flex space. And he's got fish tanks, probably 30,000 gallons where the fish tanks and this little industrial space, and he's got every kind of fish you'd ever think of. And you can buy them from this guy online and they'll ship them off to you for a, for a crazy price. You can buy these really cool fish for people that are hardcore, you know, fish collectors that can't just go to PetSmart to get their, the fish that they want.
They want something really cool. That's been bred. And you know, that specific or whatever, because of the internet, the magic internet box, things like that are becoming more and more applicable. Right? So I think that there's, we're going to see, we're going to need a lot more of that kind of space in this country have a lot of spaces like that are tired and drawn down. Additionally, this could be an opportunity to repurpose things that are no longer applicable anymore in America. Like we don't, we probably got too much office space, probably got too much retail space in, in, in, in north America, let's say America and Canada.
So I think there's gonna be an opportunity for somebody to think of cool applications for the rundown strip center, down the street, from their house or for the office building. That's 50% dark. You guys think of that idea. You know what, whatever, whatever ways maybe it's living space, maybe it's a school. I don't know. You guys think of it and do something amazing right now with regards to multi-family as much as feel like it's overheated, it's overpriced or whatever. I think, unfortunately, we are going to be looking at some inflation in the next couple of years now. I think it's actually going to drive up.
It's going to drive up wages. It's going to drive up cost of goods and it's going to drive up breaths. And I think that that's going to overall, if not keep multifamily as a high priced asset, it'll maybe drive it up a little bit more. I don't see rates going up anytime soon, maybe a little teeny bit, but not like double or triple or whatever, because I don't think the fed the U S government can't afford to raise rates, you know, given what it would do to our debt if, if rates went up. So I don't think we're going to see huge, huge spike in rates. Maybe a little bit sticker just to try and keep up with inflation, but believe it or not, I think multi-family is going to continue to be a hot commodity.
It's not, I don't see any fundamental that makes it crash anytime soon. And so I think maybe it slows down a little bit. It'd be nice if it kind of hit a ceiling a little bit and slowed down just a nudge. But I do think that it's not, nothing's going to clip it anytime soon. And I think it'll be a good asset to be in for the foreseeable future because we're just not building enough housing and there's becoming more and more people. And we're the housing construction we're building is nowhere near keeping up with the population demand for it. So that's my 2 cents Jesse, and it could be completely wrong on all that stuff, but that's what I think I was going to say,
Jesse (40m 43s): No, that was the, the quickest crystal ball three minutes. And you heard it here first folks. Yeah. I could agree with you more on that. I mean, we pretty much, you know, what, what are we a lagging indicator for the states, despite what you would read and see in the media? You guys continue to be a big player when it comes to immigration and population growth in some of the major cities in the states and Canada. And I think that to your point, I don't know who is more supply constraint. I know we are from a multi-racial standpoint, continue to be.
So, you know, until, until we start seeing more supply, it's really hard to say that multi-family is going to do anything, but at least stay where it's at. If not, like you said in shop, I think for, from my point of view, it's, it's going to be the prices. The prices are going to get to a point where I feel that's not going to be the deciding factor of if they continue to go up, it's going to be the, the, the net operating income side. It's going to be the affordability side. Now, how much higher can that go?
Matt (41m 39s): You can't sit root capris. Can't go much lower. But I mean, I think America is finally realizing that maybe Canada has it, right. Maybe you ought to pay people a real living wage for doing what they do. And, and that $7 an hour is probably not enough, you know? And that, so you see companies like, you know, Amazon McDonald's Starbucks that are paying 15, 20, 20 $5 an hour, which is to be straight, man. That's really what it takes to get by, to raise them. You can't raise a family on seven or $10 an hour, $12 an hour, forget it. You know, there is a family you can feed yourself on that, you know?
And so the fat and the, and it's just not fair that some Americans to keep their lights on, have to work two, maybe three jobs, you know, that ain't right either. And so we're going to see, I think, a correction on living wage and a wage, one, what, what an acceptable wage rate would be in the U S and that unfortunately is going to push up cost of living so
Jesse (42m 34s): Well, I appreciate that Matt, we will look in a year if that prognostication is correct, and we'll hold you to it,
Matt (42m 41s): I've drawn a year from now. We'll just listen to this episode and disagree with everything you and I said, yeah, they're
Jesse (42m 46s): Just a bunch of talks about how
Matt (42m 48s): Wrong with those two guys, right?
Jesse (42m 50s): Matt, in terms of you've done the final four before. So I will skip that. But in terms of where people can reach out to you, aside from a Google search of Matt grouper DeRosa, where can I send them?
Matt (43m 3s): They can go to Instagram at the mat, fair cloth to check me out there. They can go to my company website, which is DeRosa right there behind me, D E R O S a group.com DeRosa group.com. And they can do all kinds of cool stuff, like check out a copy of my book, which they can buy on my website. They can, you know, check out our YouTube channel. They can join our mailing list. It can hear all about the passive cool stuff that we're doing as well@derosagroup.com.
Jesse (43m 28s): My guest today has been Matt Faircloth, cloth, Matt, thanks for being part of working capital.
Matt (43m 33s): Thank you, Jesse.
Jesse (43m 40s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, my name's Jesper gala and you're listening to working capital the real estate podcast. My guests today are returning guests, Matt fare, cloth, founder, and CEO of the DeRosa group.
Matt has been a full-time investor for over 15 years. Just talked a little bit about the deal volume here over a hundred million in real estate transactions and controlling over 1000 units in multifamily mats, a regular contributor and podcast guests on biggerpockets.com has an active YouTube channel dedicated to educating investors and the author of the Amazon bestseller. Highly recommend raising private capital. How to build your real estate empire with other people's money. Matt, how's it going?
Matt (59s): Good. I'm good, Jesse. It's great being here, man. Am I, did I, did you tell me a bit at BiggerPockets conferences? This is that I'm your first repeat appearance on your podcast?
Jesse (1m 8s): No, the first repeat appearance was definitely the BR Brandon Turner. So
Matt (1m 13s): Yeah, you're right. Yeah,
Jesse (1m 15s): But you're there though. You know, you're very generous in the, the first, first few episodes. I think you were you're right on. I think that was right when you started marketing the book, but you know, I think at that point I read half of it completed it a long time ago. A great book. I thought it was, I thought it was just for us, at least it was very perfect timing, which is fine.
Matt (1m 37s): I gotta be here, man. I should get like, we should do like the SNL jacket thing, like finding it loud when there's repeat guests, you know, like we should do like the, like the special, like the number five collab or whatever it is. I'm in the number two clubs now at Brandon. So I want to, I'm glad to be back here with you, man. Thanks for that.
Jesse (1m 52s): It's great to have you, you know what, I didn't even ask before we started. Are you still, are you still in out of Jersey right now or
Matt (1m 59s): So we have an office building in Jersey, but we, we work, but my wife and I have since moved to Pennsylvania just across the bridge, across the river from New Jersey. And now we live just north of Philly in a little town called new hope, Pennsylvania.
Jesse (2m 14s): Nice, nice. And how long has this, how long have you been there now? Three years. Awesome. Cool. Is that you guys doing some deals out there or was it just more of a, a kind of a personal things to
Matt (2m 25s): We move? I, you know, Jesse, I never thought I would be the guy to live in like a, like a suburban development, you know, but you know what, man, I, I got like the whole modern family house. I got, I live in a cul-de-sac and everything like that. The kids go out and play. I know my neighbors, circuitry, Katrina, the bomb, that, that whole thing. So w my wife and I are both urbanites, you know, I've, I've lived in or around urban cores for most of my life. And now we're in the burbs man.
And I, and I love it. I don't know if I'll be in the burbs forever, but for right now with two young kids, this is kind of the, where you want to be. So, no, that's perfect. Yeah. It's been a big, big, big change for us. Well, that's great.
Jesse (3m 6s): So I guess, you know, for listeners, just to catch us up to speed, it's been a, it's been quite a while since we spoke, you know, we've had a couple of major global situations. We've probably the last few years for, you have been a pretty interesting with the book and to see how that's been going. So maybe you could catch us up to speed a little, what you've been up to the last, the last year or two.
Matt (3m 29s): Yeah, man, what's interesting is that when, at my I've been investing for 16 years full-time and what, what I've in, in the beginning part of our career, we were into single family homes. We were in a, you know, a small office complex that, you know, the one down there and Trenton, we would do a lot, a lot of mixed use buildings here and there. And we were invested in, in what a lot of beginning and newer investors would, would consider to be, you know, like the typical deal, like single family, home, small, multi, you know, those kinds of things.
And we ended up scaling up to a reasonable portfolio of those kinds of things. But then, you know, through, through just being able to prove the proof in the pudding for ourselves to show that we were able to, what we were able to do for investors at a scale out best practice as we grew. And so we did, like, we stretched up a little bit into a 10 unit apartment building. Then we stretched a little bit further and did an 18 unit. Then we special bowl further into 49 unit. Right. And that's probably about when you and I had talked, right.
Or is a 49 unit apartment building. Then we went and did 198 unit in, in North Carolina. And then we, we realized the scalability and, and the, and that once we had proven that street cred to our investor base and to ourselves and to prop and, and that we were able to take best practices. We had learned in doing the small stuff and to the larger staff that that's been, our primary focus is, is a mid to large real estate deals for, you know, mid-size multifamily.
And so what I, to answer your question, what I've been focusing on in my time doing the last couple of years, scaling out a team of people that helped me run the larger real estate stuff. And I've got an, a plus team now, th that, that run all that. And I've been spending my time leading that team and, and charging us through COVID and, you know, inflation and all that stuff, but also working on the things that we still own, right. I mean, a couple of years ago, we still owned a lot of that single family homes and duplexes and triplexes and that kind of stuff, and slowly divesting those things and, you know, taking, doing our best to care of the investors that are in those projects and giving them, giving them the best trends that we could so that we can put our focus on just on the larger deals while we still properly unwind and take care of the small stuff.
So we've really been becoming like all grows up, you know, in the last couple of years, as, as a real estate company, you really just focusing on, you know, bigger and large stuff, well, maintaining and selling the small stuff. So the last couple of years Jesse's been all about the focus, transition optimization of, of, of the optimization and of the smaller things while leading and growing into new territory for us on the larger deals.
Jesse (6m 21s): Yeah. It sounds like at that point, you're, you're dealing with scale scaling with systems in terms of the, I think it was the 49 unit probably was the last time we spoke. So that one that jumped from the 49 unit up, how was that different if it was two from the one prior to the 49? And I think that was like an 18 unit or something, right from the 1849. So was that, was that transition from the 18 to 49, different from that transition from 49 to the, to the larger stuff you guys are doing.
So
Matt (6m 52s): The 18 to 49 was probably the biggest chunk and he will here's. This is interesting. Here's why, right. So what we decided to do when we were running everything, I even wrote an article for BiggerPockets years ago. And the article said, why I will never buy a deal outside of 30 minutes away from my office. Right. I had to eat the, I literally, if I, if those words were on paper, I'd pull it up and eat them right now. Right. Literally like little hot sauce on it. Now it ethos words, because at that time it made sense for me to scale out with in-house property management.
Like these are my employees, in-house maintenance, property management interface between the tenants, office manager, bookkeeper, that kind of thing. So I had a reasonable size team. We ran, you know, like, like a north of a hundred unit portfolio with, and it ran well, and it could have, we could have scaled that up to, you know, in, in, into the mid to high hundreds, or even floated with a thousand units or whatever of in-house owned, in-house manages managed units. And when we, the 18 unit we managed in house, and so had that down at the protocol down, had the process orientation down for that, then this 49 unit shows up and that one's two hours away from the 18 unit.
And I was like, man, I wrote that article, I guess I probably, you know, I don't know, but it's in a great location, great market, you know, love the location that it's in. It's, it's just all everything added up and the numbers added up on it and everything worked. And we had proven ourselves on many other smaller deals to investors and private lenders that we get enough people lined up to get into a larger deal. So we said, you know what, let's tackle this larger project. Like, w let's give it, let's give it a bit, let's get into this. We think we can do it.
Problem is Jesse, we'd hire a third party manager to run that property. So I, and this, at the time, God blessed my wife. She's like my muse, you know, I told her we're going to scale up property management, two hours away from our home in Lancaster. And she was like, why don't you just give it a shot to run third-party management? Because if you don't like third-party management, or if they're not doing a good job, you could just fire them and bring it in house. But why don't you try using another management company? And I think that she saw that that's, that, that, that was really going to help us scale by taking a focus off management and focus on capital growth processes, you know, renovations, capital may, you know, capital improvements, those kinds of things.
And it was a huge shift in running a team, going from running a team that I managed and developed a protocol and they'll work for me. And they ran around. Yeah. Right. They're my people versus going to a team that was not my people, third-party property management. It's a major shift, but it was a game changer.
Jesse (9m 46s): So curious about that, cause we we've dealt with a third department property management and I'm sure listeners that are invested, you know, either having in-house or having third party. Was there anything specific or kind of the big things that, that were the hardest to get over with that transition, whether it's them, you know, having their systems as opposed to using your systems, was there anything major that, you know, it was, it was just really that it was a challenging one to, to kind of relinquish a little power.
Matt (10m 12s): Well, the accounting thing, you know, you figure out the accounting stuff, cause it's not like they're, they're keeping your books, you know, on the back of a napkin. Right. That's it, that's an easier transition than people think it is. They call, well, we use QuickBooks and they use that folio. How we can we get, you know, what give you, I'll give you an hour or two, you probably figure it out. You know, that's way, way easier than the real. Then the real deal stuff. It's like, well, what are the interfaces? And what are the decision-making what's the decision-making protocol? How much rent should I charge for that vacant apartment?
Right. Should I, or should I not replay, like I have a leak in the ceiling, should I patch the roof? Or should I open up the ceiling to see if there's something inside it that's causing the leak from HVHC doctor or something like that. Right. Yeah. So it's, it's the, if this, then that type of protocol, that is the biggest shift and this level of trust you have to have for the property management team and for their protocol. And just to understand that there's things that are going to happen over here and you're just not even gonna know about it, you know? And so there's a level of having the faith and trust to go a little bit more hands-off and trust that they're going to be able to implement your ideas and visions, but you still got to have your finger on them to the point where you can, you know, catch issues or be like, Hey, we've that ceiling's been leaking for the last three weeks, three months.
And the tenant keeps calling back and they're saying that their HVHC is not working, you know, or that tenants complained of bugs four times in a row. Well, maybe it's because they're not living. Maybe it's because of an issue they're causing versus something that's actually in the building. You know what I'm saying? Stuff like that, that, that you still have to have your finger on as an owner, you cannot hands off and too many owners just go like this completely. But it's like, what's the level of me letting them run their business while I still manage the asset. And that's where the concept of asset management comes in.
Jesse (12m 4s): Yeah. I was going to say, it's like the, you give up a little bit on the property management or everything, depending on what you're doing, but then your internal controls have to go up, right? You need to have those systems of, and it could be as easy as, even on a smaller scale, you know, you're spending X amount of dollars, anything over this, we need executive approval or anything related to this. We need, you know, you have a process, like you said, if then, you know what F and then have a decision tree, you know, between, between you, the property manager,
Matt (12m 31s): Except that their protocol is that, well, we don't call an owner unless we have an expensive of 500 bucks and you have to be okay with that. Like, okay, well, do I want to get calls at a lower number or whatever it is. It's about understanding the process and accepting certain things. And knowing like, this is something I could probably live with. And this is something that I needed to change protocol for. Right. That was probably one of the bigger shifts. And just knowing you don't want to, here's here, I'll give you the term because everybody uses this term now cause attraction and stuff like that, the book attraction is KPIs and determining what the KPIs are for property management, that you need to keep your finger on and stuff that you can just let them run.
And not that it doesn't matter, but it's not going to really affect the things that it's not going to go direct to bottom line. And, and if, if it gets really bad, it'll trigger a KPI, you know, and that, so what are the things on the property management side that I have to hold them accountable to? And what can I just let them run? And if it gets really squirrely, I'll see it. Yeah, yeah, sure.
Jesse (13m 33s): You know, you can control so much of the input, but it's sometimes easier to just have the output. Did we hit this? Did we hit, you know, whatever that KPI is, then you can kind of look back if, if things are, if there's an issue, something needs to be changed. Matt, how was the process of, you know, you wrote, you wrote this book, raising private capital, how did your journey with these properties going from 1849 plus, you know, you're, you're now over a thousand units, I think in terms of the raising capital aspect of your business, how did that, how did that evolve?
Matt (14m 3s): It's a, well, it's funny. The first one I talk about in raising private capital was like, literally somebody, my wife went to college with and she was, I think like we connected with them on like a column like Dan, or maybe she saw him at like an alumni event or w w w w whatever, the, whatever it was. She mentioned to this colleague of hers from college that her and I had gotten into real estate investing. And he was like real estate investing. That's interesting. You know, I've always, I've always wanted to get involved in real estate, but I've never had the time. And it's like, oh, well, you know, my husband has the time, you know, like you should, you should talk to my husband.
And so that you start there and it just something we just stumbled into. And I had to call a lawyer to say, Hey, I've got this guy wants to give me money. What should I do? And he's like, okay, slow down. Let's talk about what is this going to be a equity or debt? And my lawyer was very patient and talk me through, you know, loan agreements and whatnot. And this was, you know, 12 years ago when we were first figuring this whole thing out fast forward to, you know, taking it. Step-by-step one foot in front of the other to, again, you know, again, not to like be a systems dork again, but I guess I'm an engineer by trade.
So I just, that's just how I think in that we started to develop systems and processes around raising private capital and, you know, everything from webinars to funnels to it. Like, you know, having those that want to invest with you participate in some sort of a process to where you can understand who needs to go, where, and your system it's, that's been the journey in, in really taking us to the next level in, in, in marketing and making people aware of us, but also in, in making, you know, making sure that people, the right leads go to the right places.
And that's all been all systems and systems and processes and trial, trial, and error kind of thing.
Jesse (15m 49s): So on the, on the point of systems, I talked with a lot of investors that are at that point where they've raised capital maybe for one or two deals, asset specific, or property specific capital. They're not yet at the size, or at least they don't think they're at the size to justify, you know, a, an actual portal, a fund portal or syndication portal. You know, what point do you, do you see investors really starting to put the systems in? Is it a, is it, is it a size of deal perspective or is it a amount of investors perspective?
How do you think about that?
Matt (16m 21s): I think the most people wait too long to do it. I got talked to one guy who had like 20 million in an equity under management, and he was running it on Excel, bless for anybody, man, he's running it using Excel spreadsheet. Right. And, and, and that, and it almost like you need to go next level, man, you need to look at it. You've got to get this wacky internet machine here. You need to take a look at, you know, and so I, I find that most people probably wait too long to handle capital management investor.
And it just, it just makes your life easy. And you don't have to, like, there are softwares out there now that are not 20,000 a year, you know, to, to buy, we use a software called invest next. And I, you know, I, I'm not, you know, I just have, I happen to know they have a low dollar amount, buy it to get in. If you, if you're managing just a couple of investors, they're, they're, I think it's, it might've been, it might be a hundred bucks a month or a little bit more than that to manage a couple of investors.
And of course it scales up as you have people in, but I find that as an investor, if I were past it and I'd do some passive investing too. But if I, you know, if I were passing, investing with somebody, knowing they've got their web interface, that goes to a portal, I can split my K one there in my data's all in their portal. And I can just pull it down when I need it. And everything like that is so much easier than knowing I got to go ping somebody or bother somebody. If I got a question or want to know how things are going, or what did you send me last month or whatever it is. And it's all in the portal, it's all in that system.
So I think it also just makes your company feel a little more professional as a syndicator, or as somebody offering any kind of, whether it's debt or equity, whatever, whatever you're offering your investor base. Those portals, I think are phenomenal that you've covered is whatever you're using.
Jesse (18m 12s): It's a it's cleaner too. I mean, you, you trade so much paper in the deal, especially with deals like this, and you have a bunch of investors and, you know, even, even today with, with the internet and emailing, it's just a lot where you can just say, here's this area. And I dunno for invest next. That's actually the first time I've heard of that, I don't know if that's something where, you know, you have your accountants or lawyers have access to that where they can dump data there. But I find, yeah, it's just, like you said, it, it makes it it's a professionalism aspect, but then it streamlines a lot of what you're doing.
Matt (18m 42s): Yeah. I mean, and that, that world is changing as I think that, that people become more, have more affinity and trust for things that are not wall street based from an investing standpoint. I think that you're going to see more and more of these kinds of interfaces for people to show up people to participate in. And so right now that's who we use, but who knows. I mean, maybe like, you know, QuickBooks gets into the business of that. At some point it becomes like super easy plug and play or whatever.
And so as we, I think as, as people start investing in things that are outside of wall street, more and more, there'll be more and more options. And that, and people just want like an easy professional interface. I can go get the data I need without me having to go to an individual to, to get what I want. So I think it's, it's a changing, evolving space. And there's some, I mean, just a couple of years ago, there were no portals now there's like, you know, a billion of them. And so I think that we'll see more and more services like that, that allow people like, you know, real estate investors or whatever, kind of a syndicator or business offering a person to be able to put their things out there and have it feel more and more professional for investors to participate in.
Yeah. It can be, Hey, we're just getting started on what?
Jesse (19m 53s): Yeah. And it's funny, like 10 years ago you were 15 years ago, you would have thought, oh, you can't, you know, you have to be one of the big banks or you have to be this investment house to have that. Whereas now, you know, like you said, who knows if it's a plugin or add onto QuickBooks in a couple of years in terms of the, for investors. So I'm sure you've got, we were at new Orleans at the BP cons, a lot of good talks there. You know, we, we chatted a little bit about, you know, how you've, you know, what you've been doing the last year or two years. I'm curious, you've probably had a number of people come up to you about the book on all different levels of where they're at in their investing career.
For those individuals that are say they haven't raised their first property, or maybe they've done one, but for the most part up to up to today, it's been bootstrapped. What kind of advice do you give individuals like that that are, that are maybe don't yet think that they have the confidence to be able to raise capital? And the other thing, probably thinking that, you know, why would somebody trust me to raise capital if I haven't done it before?
Matt (20m 52s): I think it's more important that you've got some real estate investing experience or real estate exposure versus whether or not you've raised capital from your network before I, and I think that that has to do with whether or not your network believes that you know, what you're doing with regards to, you know, that site. So I, if I, I tell people, if you can, you know, do your own deals, your own money, you know, or borrow money with collateralized, collateralized loans and that kind of stuff, and do a couple of deals on your own before you go put it out there or attach yourself to a larger operator, that's got a huge portfolio with tons of experience and everything like that with regards to accessing your network or having the right to ask them for money or whatever.
Raising private capital talks about the concept that everybody knows people with money. And those that tell me, they don't know, people with money are likely afraid to go to their network or concern, or just embarrassed or whatever, to go and make the ask. You know, I mean, my own immediate family is invested with me, you know, and I'm proud to say that and people, and I've, I've asked people like, well, would you allow your mom to invest with you? You know, and like, oh no, no, no, no. I'd never put my mother's money at risk.
Is that, well, let's take an examination on your business, but you'll let your mom go buy something off wall street, but you won't let her invest in something that you are operating, that you are driving or you have your finger on, on her behalf or your father's behalf, whatever it is. So I think that there's a, there's a look yourself in the mirror moment that people need to do to make sure that they've got an, a faith in what it is. They're building. That the people that are closest to them, they would trust involved in it. If that's not the case, then tighten up your hat, your investment houses to the point where that, that, that is something you're willing to stand behind and then you'll have enough confidence to, to take it to the, to take it public by then.
Jesse (22m 43s): Yeah. And it's something you talked about in the book and we talked about last time was there's a lot of people thinking that what they're doing is an ask where a think you reframe it as your it's an opportunity. And it sounds, it sounds funny and like, oh, it's just a, you know, it's whatever it's nomenclature, but it really is. It's no, no. It's, if you really believe in what you're raising capital for, whatever it is, whether it's a, you know, a movie in LA or it's a real estate piece of real estate and, you know, in Pennsylvania, it's really you saying here's an opportunity. Here's something I think, you know, I'm not asking you for money. I'm, I'm giving you an opportunity.
And I think, yeah,
Matt (23m 15s): I've been that embarrassed person want to give me some money from a real estate deal. I've been there. You know? And I mean, I get that. It's embarrassing at first. And it's tough asking people for anything for money specifically. Right. But if you reframe it for yourself, like, Hey, listen, I got a question for you, neighbor Bob, what's the stock market going to do tomorrow? You know, I don't know. You probably don't either, right? But I'll tell you what I have tenants and they're likely going to pay their rent. And if they don't every course, or I have loans out, and if you loan me money for my real estate stuff, you have collateral, meaning like you have a lien on the property, which means you can come take it if I don't pay you back.
You know? So I, I, I believe that there's this level of Moxy, if you will love a confidence that it takes to, to take yourself, to, to really show people that, that the, what you've got is going to work. And once you've got has, if this, the gnats, and, and then in some ways it has a lot of mortar, a lot of more of those than a typical wall street paper investment does. Yeah.
Jesse (24m 18s): In terms of getting into a little bit more complexity, you know, that, especially in the states right now, the fund to funds model is pretty big. And for, you know, for those that don't know a lot of, a lot of what we talk about here is syndication where it's deal specific capital raising, where when we started getting into fund of funds, you can be an LP, but you represent a larger pool of your own LPs in a say, limited partnership structure. I'm curious your view on that. Cause I don't think we've talked about this before the fund to funds model in general and you know, the associated type of fees or, you know, the different return that maybe you can ask for or demand based on the fact that you're bringing in an outsized LP size.
Yeah.
Matt (24m 58s): There's a lot of those out there. And I mean, from a syndicators perspective, that's kind of what you want is to be in a fund to funds because I can't tell you Jesse, how many times people call me up saying, Hey, I want to invest with you. And I love your deal. They will love what you guys do. Love your website, love your transparency, love all this stuff. And like, okay, great. I don't know the deal. I'll call you when I do. And then a couple months later when we have a deal to call them up and say, Hey, we have a deal. Remember the, remember the whole song you were singing about a great I was. And how I greet you on invest with being, let's go back to singing that song for a second.
And they're like, oh no, no, no. We already give that money to the next person that we called five minutes after we hung up with you. Right. Forgot the words
Jesse (25m 34s): To that song.
Matt (25m 35s): Yeah. Right. Oh, I forgot. Yeah. Yeah. What was that song again? Can you hold that only? Can you home the tone? Yeah. No. So there are, and I've been there myself and I think a lot of the syndicators out there just wanted to have a level of uniformity and a level of like an open door thing that's available whenever. And they just went, investors want to, are excited to get into something. You have the door open that they can hop in and that they can, you know, put their capital with a syndicator they trust. Right. What, what gets, and I see a lot of people that have a lot of deal flow, do that.
People that you and I both know that are, you know, talking heads in the world, I'll have, I'll have a lot of those now what makes me, I say nervous, but what you have to, as an investor, you have to make sure you vet completely as people that are raising capital. And then they're going to take that capital, invest with other people, right? Like who like, like, like it's a derivative fund, right. So it's like, well, why wouldn't I just go give it to that person? Oh, you're going to diversify me. I get it. Okay. Well, how much, what fee structure are you taking off the top?
You know, that I'm, that I'm now getting diluted by. Right. So I think it's just it's it's okay. Cause you do probably get diversification. You get, you know, diversified exposure across the board or whatever, maybe different asset classes. I know people that are running like a blended fund like that that's invested in self storage and flex industrial space and mobile home parks. Well, great. You get, you know, a little bit of everything and maybe geographic diversity to all kinds of cool stuff, but you want to make sure they're not just picking anybody.
They're not just shotgun approaching it. And just like, Hey, whoever's got a deal. I'll give you money. And th they, that they're properly vetting their operators. And then they're not taking too much of a fee in exchange for doing something that you arguably could do yourself too. You know, because I could call each one of those people. Now, it doesn't mean I don't believe in, in blended funds or whatever. It's something that we are doing as well. Although our blended fund does not invest in, it's not just a fund that invest in a bunch of multi-family. We see that there are things that are missing from syndications and those things are liquidity.
You can't get your money back in a syndication. If you will, if you invest in a syndication, you're locked in for five or more years, right. You can't compound your returns in a syndication. Right. I can't take the returns that you give me if I invest with you and recycle those returns back upon themselves and participate in compounding interest, which is Einstein said is the eighth merit eighth wonder of the world. Right. So I think more powerful. Yeah. So I can't, what, what a blended fund done properly can allow you to do.
If you invest with the right operator is something that allows you to compound your returns and get your money back when you want it. And not just how old the property is not going to sell for another four years and I can get you your money back. Right. So those are the, those are the things that we've worked on to blend in and you can't do just one asset class or one thing with one timeline, it's got to have multiple timelines of money coming in, coming out. Like it's got to have a short-term aspect and a long-term aspect. So that's the way we designed it. And in that, so it's something that we have active and it's something we did on a small scale because you don't have to have a $50 million fund.
It could be a couple million dollar fund and that, so that's something that we're doing, but I think that you're going to see more and more of them as capital becomes more. There's a lot of capital out there looking for a home. And so I think you're going to see more funds and not less because people are going to get, people are getting wise to it like, well, geez, I could just put up a sign that says I invest in real estate. And then, you know, I know a lot of luck. Well, a lot, a lot of capital's going to show up because there's a lot of capital looking for something different besides the wall beside wall street right now.
Jesse (29m 24s): And I think I'm just, I totally agree with your point where you're telling individuals, you know, just make sure that you're aware of what are the returns, sorry, what are the fees that are going to be taken on by the, by the person that's that is basically raising money for that fund, but then going to the other fund. And sometimes, you know, some people will say that absolutely not. They won't do fund to funds, but sometimes the returns are great. It's yeah, you're, it's a fee on a fee, but maybe you have an outsize preference promote that, that makes up for that, for that fee.
And the other thing too, you tell sometimes there's situations for investors where most likely, yeah, they have diversification, but most likely they couldn't have got into this particular dealer arrangement because you're putting, you know, you've raised 3 million for this one LP spot, so to speak. Whereas if you went in just on your own, you'd probably just be like all the other, you know, minimum say a hundred K or 50 K whatever the minimum investment is and your profile would probably look different.
Matt (30m 20s): Well, I mean, there are, when you get it, when you've aggregated that much money through a fund, you can kind of call your own shots, you know? And that's maybe what you're saying is that, you know, somebody calls up a syndicator in St. Louis and I see you're raising 10 million. Well, what if I give you half of that? Yeah. You know, w what would you be able to do for me? Can you pay my investors a little higher rate of return? Can you, you know, whatever. And instead of that investor, th that syndicator saying, oh, yeah, I'm going to go and raise this at, you know, I'm going to go and get the 150 of my best friends to invest in this deal with me.
You know, I can just go to you. And maybe some of my, some of my best friends to, and maybe you make my life a lot easier. I believe that's what they're doing. As I've seen that happen. We've been approached by that too, for people that, that have, you know, kind of like assembled a lot of money and you can call you, you know, what was your oyster at that point? And so maybe if you're a good negotiator, you can kind of like, you know, put up, put together a win-win.
Jesse (31m 19s): Yeah. And I think there's a, to your point of, we're going to see a lot more funds. I think we'll see a lot more of this too, just in the same way. Specialization usually happens in an industry and you might have somebody that's great at raising capital, but maybe it is not the operator. And they go to the DeRosa group and they say, Hey guys, do you have anything on the spigot right now? We'd love to be, be an investor on your deal. And they see you as a great operator. And they, you know, they want that LP spot. But I think, I think we're definitely seeing more and more of it in the market.
Matt (31m 47s): Yeah. And you will, and we will, as I think that, you know, what we do becomes less and less of a secret, and there are, there's even bigger wall street, you know, money working its way into like, not like owning it to an apartment building, but working its way into LP level syndications, you know, what broker dealers coming around going like, say, Hey, listen, we used to, you know, only raise a hundred million for big, big, big, big, big operators. Now, guess what, if you need 10 million, we'll go raise that for you.
Or, you know, like the broker dealers are dropping what they're willing to raise for because it's, they're seeing their clients wanting exposure to private placements and things like that. So we've been approached by a few broker dealers. I think it's beginning of the, of, of the amount of capital that's going to come into the real estate space. And maybe it's all through maybe a lot of it's through funds
Jesse (32m 40s): Problems. It's something that I'm very curious how this kind of rolls out because even in our Canadian context, in the U S similarly, the broker, it's always been a bit of a gray area where, you know, if you, if you raise for a fund, okay, you're, you're not necessarily a broker dealer, then you keep doing it and keep doing it. It's like, w you know, at what point do you have to be, to be a pure broker dealer, or, you know, I'm not sure how it works in your state, but I think there is, as, as it gets more and more, what would you say institutionalized?
You feel like some of the, some of the legal framework, I don't know if that will evolve or change, but definitely a lot going on there.
Matt (33m 16s): It's starting to the sec has already changed up the whole Kappa. They're changing the capital raiser laws. They've also changed up. There's some call that out, came a, it was a couple of years ago, but nobody's really, it's becoming popular now. And it's called regulation CF, which allows you to sell more micro sheriffs. The non-accredited investments. We did shares of one of our syndications that a thousand dollars a piece. So now that's not that wasn't, the, the whole syndication was much, much larger share prices, but we, we broke off a small chunk of the deal just to test it out, to see how it goes.
Cause not to, like my personal mission is to offer what we do as syndicators and his real estate investments to everyone. Like, I want everyone to be able to get into some sort of a passive investment if they choose to, without having to read an enormous check or go to put any of their tone time in or whatever. And so I think the world's going to change to the point where more and more people are going to be allowed to, or aware of alternative ways to make money and alternative ways to invest outside of just buying a stock off wall street. They can still do that.
And I don't think there's anything wrong with that, but I think it's wrong is that that's the only choice that many people have had, unless you're in the know or in like the country club or silver spoon network or something like that, then you knew about other things, other ways, other, you know, good old boy network plays that you could do investing well, that's all busted up and now it's a lot wider, but I think that there's a lot more widening that can happen for more and more people. And eventually everyone to invest in these kinds of things. And the rules are slowly, you know, it's it's government velocity, Jessie.
So the lows are there. The rules are slowly changing. Yeah.
Jesse (34m 59s): Well, it ties in with what we were saying before, too, as the systems increase, improve, you have the ability for operators like yourself to unitize and get smaller. And then you offer that down to the retail, you know, quotations, retail, I guess, customer
Matt (35m 12s): I'll give you a big vision. I have one day and I mean, I might make an, a, we have a deal under contract right now that I might try it. I don't know how it's going to go, which means like on this, but I want to buy an apartment building and I want to offer for people that live there, the right to buy equity in the apartment building.
Jesse (35m 30s): Hmm. That's interesting. That's almost like a co-op model.
Matt (35m 34s): Yeah. But they're not, they don't have to own the whole in a co-op typically the people that live there are the only ones that aren't all right. They all ages. If you live there, you own it. Right. And it's considered home ownership right now. I'm Todd. This still be a syndication to pass a mess, but I'm not. I'm talking about going to the tenants that are living in a 200 unit building and saying, Hey, listen, how about for 500 bucks? I'll let you own a little bit of the sticks and bricks of where you live. You pay him cash flow, you pay him upside residual. You give him a K one, you pay them the whole thing. And because of those portals, we just talked about, I can post a K one.
I can post their ACH payments and everything like that. It's, it's just as simple. It's all spreadsheets, you know? So 20 people or 200 people, or 4,000 people are technically just as easy to manage through an online portal. Right. And that's, that's a wacky idea. I have, I'll probably get talked out of it, but my team that are more, more pragmatic than I am, but
Jesse (36m 31s): I just don't write another blog Gus, and you'll never do it. I
Matt (36m 34s): Know. Right, right, right. Yeah. I will. I'll do it. I'll make it happen. If I go out there and say, I will never know you will, you know,
Jesse (36m 43s): Well that I want to be mindful of the time we were coming up to the end here, but I'd love to get your thoughts, you know, before we can talk a little bit about how people can reach you and talk, you know, we're where they can find the book. Cheers. Your, your view on the market right now in, I know you're an optimist like myself, but w you know, where do you see the opportunities in the next let's call it short term? Are you thinking differently given, given the last year?
Matt (37m 8s): Okay. I'll give a few different opportunities that I see that I think not in a people are focusing on right now. And then I'll think I'll tell you where I think the market's going to, you know, for, for, for go break out my crystal ball, right? So I think that not enough people are focusing on revitalizing industrial applications in the United States. I think that there should be more industrial flex space. As we continue to become more Amazon defied in our world, there's going to need to be more flex space. More people leasing like three to 4,000 square foot of small warehouse to do light, light, industrial manufacturing, or light storage with a little bit of office space sitting there as, as we get into more of, of the right now economy of, of, you know, shipping small products or whatever, to peoples it's in people's homes and selling things online or whatever.
And boutique brokerage buddy of mine owns a small flex space. And he's got a guy that sells exotic fish out of a little flex space. And he's got fish tanks, probably 30,000 gallons where the fish tanks and this little industrial space, and he's got every kind of fish you'd ever think of. And you can buy them from this guy online and they'll ship them off to you for a, for a crazy price. You can buy these really cool fish for people that are hardcore, you know, fish collectors that can't just go to PetSmart to get their, the fish that they want.
They want something really cool. That's been bred. And you know, that specific or whatever, because of the internet, the magic internet box, things like that are becoming more and more applicable. Right? So I think that there's, we're going to see, we're going to need a lot more of that kind of space in this country have a lot of spaces like that are tired and drawn down. Additionally, this could be an opportunity to repurpose things that are no longer applicable anymore in America. Like we don't, we probably got too much office space, probably got too much retail space in, in, in, in north America, let's say America and Canada.
So I think there's gonna be an opportunity for somebody to think of cool applications for the rundown strip center, down the street, from their house or for the office building. That's 50% dark. You guys think of that idea. You know what, whatever, whatever ways maybe it's living space, maybe it's a school. I don't know. You guys think of it and do something amazing right now with regards to multi-family as much as feel like it's overheated, it's overpriced or whatever. I think, unfortunately, we are going to be looking at some inflation in the next couple of years now. I think it's actually going to drive up.
It's going to drive up wages. It's going to drive up cost of goods and it's going to drive up breaths. And I think that that's going to overall, if not keep multifamily as a high priced asset, it'll maybe drive it up a little bit more. I don't see rates going up anytime soon, maybe a little teeny bit, but not like double or triple or whatever, because I don't think the fed the U S government can't afford to raise rates, you know, given what it would do to our debt if, if rates went up. So I don't think we're going to see huge, huge spike in rates. Maybe a little bit sticker just to try and keep up with inflation, but believe it or not, I think multi-family is going to continue to be a hot commodity.
It's not, I don't see any fundamental that makes it crash anytime soon. And so I think maybe it slows down a little bit. It'd be nice if it kind of hit a ceiling a little bit and slowed down just a nudge. But I do think that it's not, nothing's going to clip it anytime soon. And I think it'll be a good asset to be in for the foreseeable future because we're just not building enough housing and there's becoming more and more people. And we're the housing construction we're building is nowhere near keeping up with the population demand for it. So that's my 2 cents Jesse, and it could be completely wrong on all that stuff, but that's what I think I was going to say,
Jesse (40m 43s): No, that was the, the quickest crystal ball three minutes. And you heard it here first folks. Yeah. I could agree with you more on that. I mean, we pretty much, you know, what, what are we a lagging indicator for the states, despite what you would read and see in the media? You guys continue to be a big player when it comes to immigration and population growth in some of the major cities in the states and Canada. And I think that to your point, I don't know who is more supply constraint. I know we are from a multi-racial standpoint, continue to be.
So, you know, until, until we start seeing more supply, it's really hard to say that multi-family is going to do anything, but at least stay where it's at. If not, like you said in shop, I think for, from my point of view, it's, it's going to be the prices. The prices are going to get to a point where I feel that's not going to be the deciding factor of if they continue to go up, it's going to be the, the, the net operating income side. It's going to be the affordability side. Now, how much higher can that go?
Matt (41m 39s): You can't sit root capris. Can't go much lower. But I mean, I think America is finally realizing that maybe Canada has it, right. Maybe you ought to pay people a real living wage for doing what they do. And, and that $7 an hour is probably not enough, you know? And that, so you see companies like, you know, Amazon McDonald's Starbucks that are paying 15, 20, 20 $5 an hour, which is to be straight, man. That's really what it takes to get by, to raise them. You can't raise a family on seven or $10 an hour, $12 an hour, forget it. You know, there is a family you can feed yourself on that, you know?
And so the fat and the, and it's just not fair that some Americans to keep their lights on, have to work two, maybe three jobs, you know, that ain't right either. And so we're going to see, I think, a correction on living wage and a wage, one, what, what an acceptable wage rate would be in the U S and that unfortunately is going to push up cost of living so
Jesse (42m 34s): Well, I appreciate that Matt, we will look in a year if that prognostication is correct, and we'll hold you to it,
Matt (42m 41s): I've drawn a year from now. We'll just listen to this episode and disagree with everything you and I said, yeah, they're
Jesse (42m 46s): Just a bunch of talks about how
Matt (42m 48s): Wrong with those two guys, right?
Jesse (42m 50s): Matt, in terms of you've done the final four before. So I will skip that. But in terms of where people can reach out to you, aside from a Google search of Matt grouper DeRosa, where can I send them?
Matt (43m 3s): They can go to Instagram at the mat, fair cloth to check me out there. They can go to my company website, which is DeRosa right there behind me, D E R O S a group.com DeRosa group.com. And they can do all kinds of cool stuff, like check out a copy of my book, which they can buy on my website. They can, you know, check out our YouTube channel. They can join our mailing list. It can hear all about the passive cool stuff that we're doing as well@derosagroup.com.
Jesse (43m 28s): My guest today has been Matt Faircloth, cloth, Matt, thanks for being part of working capital.
Matt (43m 33s): Thank you, Jesse.
Jesse (43m 40s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, my name's Jesper gala and you're listening to working capital the real estate podcast. My guests today are returning guests, Matt fare, cloth, founder, and CEO of the DeRosa group.
Matt has been a full-time investor for over 15 years. Just talked a little bit about the deal volume here over a hundred million in real estate transactions and controlling over 1000 units in multifamily mats, a regular contributor and podcast guests on biggerpockets.com has an active YouTube channel dedicated to educating investors and the author of the Amazon bestseller. Highly recommend raising private capital. How to build your real estate empire with other people's money. Matt, how's it going?
Matt (59s): Good. I'm good, Jesse. It's great being here, man. Am I, did I, did you tell me a bit at BiggerPockets conferences? This is that I'm your first repeat appearance on your podcast?
Jesse (1m 8s): No, the first repeat appearance was definitely the BR Brandon Turner. So
Matt (1m 13s): Yeah, you're right. Yeah,
Jesse (1m 15s): But you're there though. You know, you're very generous in the, the first, first few episodes. I think you were you're right on. I think that was right when you started marketing the book, but you know, I think at that point I read half of it completed it a long time ago. A great book. I thought it was, I thought it was just for us, at least it was very perfect timing, which is fine.
Matt (1m 37s): I gotta be here, man. I should get like, we should do like the SNL jacket thing, like finding it loud when there's repeat guests, you know, like we should do like the, like the special, like the number five collab or whatever it is. I'm in the number two clubs now at Brandon. So I want to, I'm glad to be back here with you, man. Thanks for that.
Jesse (1m 52s): It's great to have you, you know what, I didn't even ask before we started. Are you still, are you still in out of Jersey right now or
Matt (1m 59s): So we have an office building in Jersey, but we, we work, but my wife and I have since moved to Pennsylvania just across the bridge, across the river from New Jersey. And now we live just north of Philly in a little town called new hope, Pennsylvania.
Jesse (2m 14s): Nice, nice. And how long has this, how long have you been there now? Three years. Awesome. Cool. Is that you guys doing some deals out there or was it just more of a, a kind of a personal things to
Matt (2m 25s): We move? I, you know, Jesse, I never thought I would be the guy to live in like a, like a suburban development, you know, but you know what, man, I, I got like the whole modern family house. I got, I live in a cul-de-sac and everything like that. The kids go out and play. I know my neighbors, circuitry, Katrina, the bomb, that, that whole thing. So w my wife and I are both urbanites, you know, I've, I've lived in or around urban cores for most of my life. And now we're in the burbs man.
And I, and I love it. I don't know if I'll be in the burbs forever, but for right now with two young kids, this is kind of the, where you want to be. So, no, that's perfect. Yeah. It's been a big, big, big change for us. Well, that's great.
Jesse (3m 6s): So I guess, you know, for listeners, just to catch us up to speed, it's been a, it's been quite a while since we spoke, you know, we've had a couple of major global situations. We've probably the last few years for, you have been a pretty interesting with the book and to see how that's been going. So maybe you could catch us up to speed a little, what you've been up to the last, the last year or two.
Matt (3m 29s): Yeah, man, what's interesting is that when, at my I've been investing for 16 years full-time and what, what I've in, in the beginning part of our career, we were into single family homes. We were in a, you know, a small office complex that, you know, the one down there and Trenton, we would do a lot, a lot of mixed use buildings here and there. And we were invested in, in what a lot of beginning and newer investors would, would consider to be, you know, like the typical deal, like single family, home, small, multi, you know, those kinds of things.
And we ended up scaling up to a reasonable portfolio of those kinds of things. But then, you know, through, through just being able to prove the proof in the pudding for ourselves to show that we were able to, what we were able to do for investors at a scale out best practice as we grew. And so we did, like, we stretched up a little bit into a 10 unit apartment building. Then we stretched a little bit further and did an 18 unit. Then we special bowl further into 49 unit. Right. And that's probably about when you and I had talked, right.
Or is a 49 unit apartment building. Then we went and did 198 unit in, in North Carolina. And then we, we realized the scalability and, and the, and that once we had proven that street cred to our investor base and to ourselves and to prop and, and that we were able to take best practices. We had learned in doing the small stuff and to the larger staff that that's been, our primary focus is, is a mid to large real estate deals for, you know, mid-size multifamily.
And so what I, to answer your question, what I've been focusing on in my time doing the last couple of years, scaling out a team of people that helped me run the larger real estate stuff. And I've got an, a plus team now, th that, that run all that. And I've been spending my time leading that team and, and charging us through COVID and, you know, inflation and all that stuff, but also working on the things that we still own, right. I mean, a couple of years ago, we still owned a lot of that single family homes and duplexes and triplexes and that kind of stuff, and slowly divesting those things and, you know, taking, doing our best to care of the investors that are in those projects and giving them, giving them the best trends that we could so that we can put our focus on just on the larger deals while we still properly unwind and take care of the small stuff.
So we've really been becoming like all grows up, you know, in the last couple of years, as, as a real estate company, you really just focusing on, you know, bigger and large stuff, well, maintaining and selling the small stuff. So the last couple of years Jesse's been all about the focus, transition optimization of, of, of the optimization and of the smaller things while leading and growing into new territory for us on the larger deals.
Jesse (6m 21s): Yeah. It sounds like at that point, you're, you're dealing with scale scaling with systems in terms of the, I think it was the 49 unit probably was the last time we spoke. So that one that jumped from the 49 unit up, how was that different if it was two from the one prior to the 49? And I think that was like an 18 unit or something, right from the 1849. So was that, was that transition from the 18 to 49, different from that transition from 49 to the, to the larger stuff you guys are doing.
So
Matt (6m 52s): The 18 to 49 was probably the biggest chunk and he will here's. This is interesting. Here's why, right. So what we decided to do when we were running everything, I even wrote an article for BiggerPockets years ago. And the article said, why I will never buy a deal outside of 30 minutes away from my office. Right. I had to eat the, I literally, if I, if those words were on paper, I'd pull it up and eat them right now. Right. Literally like little hot sauce on it. Now it ethos words, because at that time it made sense for me to scale out with in-house property management.
Like these are my employees, in-house maintenance, property management interface between the tenants, office manager, bookkeeper, that kind of thing. So I had a reasonable size team. We ran, you know, like, like a north of a hundred unit portfolio with, and it ran well, and it could have, we could have scaled that up to, you know, in, in, into the mid to high hundreds, or even floated with a thousand units or whatever of in-house owned, in-house manages managed units. And when we, the 18 unit we managed in house, and so had that down at the protocol down, had the process orientation down for that, then this 49 unit shows up and that one's two hours away from the 18 unit.
And I was like, man, I wrote that article, I guess I probably, you know, I don't know, but it's in a great location, great market, you know, love the location that it's in. It's, it's just all everything added up and the numbers added up on it and everything worked. And we had proven ourselves on many other smaller deals to investors and private lenders that we get enough people lined up to get into a larger deal. So we said, you know what, let's tackle this larger project. Like, w let's give it, let's give it a bit, let's get into this. We think we can do it.
Problem is Jesse, we'd hire a third party manager to run that property. So I, and this, at the time, God blessed my wife. She's like my muse, you know, I told her we're going to scale up property management, two hours away from our home in Lancaster. And she was like, why don't you just give it a shot to run third-party management? Because if you don't like third-party management, or if they're not doing a good job, you could just fire them and bring it in house. But why don't you try using another management company? And I think that she saw that that's, that, that, that was really going to help us scale by taking a focus off management and focus on capital growth processes, you know, renovations, capital may, you know, capital improvements, those kinds of things.
And it was a huge shift in running a team, going from running a team that I managed and developed a protocol and they'll work for me. And they ran around. Yeah. Right. They're my people versus going to a team that was not my people, third-party property management. It's a major shift, but it was a game changer.
Jesse (9m 46s): So curious about that, cause we we've dealt with a third department property management and I'm sure listeners that are invested, you know, either having in-house or having third party. Was there anything specific or kind of the big things that, that were the hardest to get over with that transition, whether it's them, you know, having their systems as opposed to using your systems, was there anything major that, you know, it was, it was just really that it was a challenging one to, to kind of relinquish a little power.
Matt (10m 12s): Well, the accounting thing, you know, you figure out the accounting stuff, cause it's not like they're, they're keeping your books, you know, on the back of a napkin. Right. That's it, that's an easier transition than people think it is. They call, well, we use QuickBooks and they use that folio. How we can we get, you know, what give you, I'll give you an hour or two, you probably figure it out. You know, that's way, way easier than the real. Then the real deal stuff. It's like, well, what are the interfaces? And what are the decision-making what's the decision-making protocol? How much rent should I charge for that vacant apartment?
Right. Should I, or should I not replay, like I have a leak in the ceiling, should I patch the roof? Or should I open up the ceiling to see if there's something inside it that's causing the leak from HVHC doctor or something like that. Right. Yeah. So it's, it's the, if this, then that type of protocol, that is the biggest shift and this level of trust you have to have for the property management team and for their protocol. And just to understand that there's things that are going to happen over here and you're just not even gonna know about it, you know? And so there's a level of having the faith and trust to go a little bit more hands-off and trust that they're going to be able to implement your ideas and visions, but you still got to have your finger on them to the point where you can, you know, catch issues or be like, Hey, we've that ceiling's been leaking for the last three weeks, three months.
And the tenant keeps calling back and they're saying that their HVHC is not working, you know, or that tenants complained of bugs four times in a row. Well, maybe it's because they're not living. Maybe it's because of an issue they're causing versus something that's actually in the building. You know what I'm saying? Stuff like that, that, that you still have to have your finger on as an owner, you cannot hands off and too many owners just go like this completely. But it's like, what's the level of me letting them run their business while I still manage the asset. And that's where the concept of asset management comes in.
Jesse (12m 4s): Yeah. I was going to say, it's like the, you give up a little bit on the property management or everything, depending on what you're doing, but then your internal controls have to go up, right? You need to have those systems of, and it could be as easy as, even on a smaller scale, you know, you're spending X amount of dollars, anything over this, we need executive approval or anything related to this. We need, you know, you have a process, like you said, if then, you know what F and then have a decision tree, you know, between, between you, the property manager,
Matt (12m 31s): Except that their protocol is that, well, we don't call an owner unless we have an expensive of 500 bucks and you have to be okay with that. Like, okay, well, do I want to get calls at a lower number or whatever it is. It's about understanding the process and accepting certain things. And knowing like, this is something I could probably live with. And this is something that I needed to change protocol for. Right. That was probably one of the bigger shifts. And just knowing you don't want to, here's here, I'll give you the term because everybody uses this term now cause attraction and stuff like that, the book attraction is KPIs and determining what the KPIs are for property management, that you need to keep your finger on and stuff that you can just let them run.
And not that it doesn't matter, but it's not going to really affect the things that it's not going to go direct to bottom line. And, and if, if it gets really bad, it'll trigger a KPI, you know, and that, so what are the things on the property management side that I have to hold them accountable to? And what can I just let them run? And if it gets really squirrely, I'll see it. Yeah, yeah, sure.
Jesse (13m 33s): You know, you can control so much of the input, but it's sometimes easier to just have the output. Did we hit this? Did we hit, you know, whatever that KPI is, then you can kind of look back if, if things are, if there's an issue, something needs to be changed. Matt, how was the process of, you know, you wrote, you wrote this book, raising private capital, how did your journey with these properties going from 1849 plus, you know, you're, you're now over a thousand units, I think in terms of the raising capital aspect of your business, how did that, how did that evolve?
Matt (14m 3s): It's a, well, it's funny. The first one I talk about in raising private capital was like, literally somebody, my wife went to college with and she was, I think like we connected with them on like a column like Dan, or maybe she saw him at like an alumni event or w w w w whatever, the, whatever it was. She mentioned to this colleague of hers from college that her and I had gotten into real estate investing. And he was like real estate investing. That's interesting. You know, I've always, I've always wanted to get involved in real estate, but I've never had the time. And it's like, oh, well, you know, my husband has the time, you know, like you should, you should talk to my husband.
And so that you start there and it just something we just stumbled into. And I had to call a lawyer to say, Hey, I've got this guy wants to give me money. What should I do? And he's like, okay, slow down. Let's talk about what is this going to be a equity or debt? And my lawyer was very patient and talk me through, you know, loan agreements and whatnot. And this was, you know, 12 years ago when we were first figuring this whole thing out fast forward to, you know, taking it. Step-by-step one foot in front of the other to, again, you know, again, not to like be a systems dork again, but I guess I'm an engineer by trade.
So I just, that's just how I think in that we started to develop systems and processes around raising private capital and, you know, everything from webinars to funnels to it. Like, you know, having those that want to invest with you participate in some sort of a process to where you can understand who needs to go, where, and your system it's, that's been the journey in, in really taking us to the next level in, in, in marketing and making people aware of us, but also in, in making, you know, making sure that people, the right leads go to the right places.
And that's all been all systems and systems and processes and trial, trial, and error kind of thing.
Jesse (15m 49s): So on the, on the point of systems, I talked with a lot of investors that are at that point where they've raised capital maybe for one or two deals, asset specific, or property specific capital. They're not yet at the size, or at least they don't think they're at the size to justify, you know, a, an actual portal, a fund portal or syndication portal. You know, what point do you, do you see investors really starting to put the systems in? Is it a, is it, is it a size of deal perspective or is it a amount of investors perspective?
How do you think about that?
Matt (16m 21s): I think the most people wait too long to do it. I got talked to one guy who had like 20 million in an equity under management, and he was running it on Excel, bless for anybody, man, he's running it using Excel spreadsheet. Right. And, and, and that, and it almost like you need to go next level, man, you need to look at it. You've got to get this wacky internet machine here. You need to take a look at, you know, and so I, I find that most people probably wait too long to handle capital management investor.
And it just, it just makes your life easy. And you don't have to, like, there are softwares out there now that are not 20,000 a year, you know, to, to buy, we use a software called invest next. And I, you know, I, I'm not, you know, I just have, I happen to know they have a low dollar amount, buy it to get in. If you, if you're managing just a couple of investors, they're, they're, I think it's, it might've been, it might be a hundred bucks a month or a little bit more than that to manage a couple of investors.
And of course it scales up as you have people in, but I find that as an investor, if I were past it and I'd do some passive investing too. But if I, you know, if I were passing, investing with somebody, knowing they've got their web interface, that goes to a portal, I can split my K one there in my data's all in their portal. And I can just pull it down when I need it. And everything like that is so much easier than knowing I got to go ping somebody or bother somebody. If I got a question or want to know how things are going, or what did you send me last month or whatever it is. And it's all in the portal, it's all in that system.
So I think it also just makes your company feel a little more professional as a syndicator, or as somebody offering any kind of, whether it's debt or equity, whatever, whatever you're offering your investor base. Those portals, I think are phenomenal that you've covered is whatever you're using.
Jesse (18m 12s): It's a it's cleaner too. I mean, you, you trade so much paper in the deal, especially with deals like this, and you have a bunch of investors and, you know, even, even today with, with the internet and emailing, it's just a lot where you can just say, here's this area. And I dunno for invest next. That's actually the first time I've heard of that, I don't know if that's something where, you know, you have your accountants or lawyers have access to that where they can dump data there. But I find, yeah, it's just, like you said, it, it makes it it's a professionalism aspect, but then it streamlines a lot of what you're doing.
Matt (18m 42s): Yeah. I mean, and that, that world is changing as I think that, that people become more, have more affinity and trust for things that are not wall street based from an investing standpoint. I think that you're going to see more and more of these kinds of interfaces for people to show up people to participate in. And so right now that's who we use, but who knows. I mean, maybe like, you know, QuickBooks gets into the business of that. At some point it becomes like super easy plug and play or whatever.
And so as we, I think as, as people start investing in things that are outside of wall street, more and more, there'll be more and more options. And that, and people just want like an easy professional interface. I can go get the data I need without me having to go to an individual to, to get what I want. So I think it's, it's a changing, evolving space. And there's some, I mean, just a couple of years ago, there were no portals now there's like, you know, a billion of them. And so I think that we'll see more and more services like that, that allow people like, you know, real estate investors or whatever, kind of a syndicator or business offering a person to be able to put their things out there and have it feel more and more professional for investors to participate in.
Yeah. It can be, Hey, we're just getting started on what?
Jesse (19m 53s): Yeah. And it's funny, like 10 years ago you were 15 years ago, you would have thought, oh, you can't, you know, you have to be one of the big banks or you have to be this investment house to have that. Whereas now, you know, like you said, who knows if it's a plugin or add onto QuickBooks in a couple of years in terms of the, for investors. So I'm sure you've got, we were at new Orleans at the BP cons, a lot of good talks there. You know, we, we chatted a little bit about, you know, how you've, you know, what you've been doing the last year or two years. I'm curious, you've probably had a number of people come up to you about the book on all different levels of where they're at in their investing career.
For those individuals that are say they haven't raised their first property, or maybe they've done one, but for the most part up to up to today, it's been bootstrapped. What kind of advice do you give individuals like that that are, that are maybe don't yet think that they have the confidence to be able to raise capital? And the other thing, probably thinking that, you know, why would somebody trust me to raise capital if I haven't done it before?
Matt (20m 52s): I think it's more important that you've got some real estate investing experience or real estate exposure versus whether or not you've raised capital from your network before I, and I think that that has to do with whether or not your network believes that you know, what you're doing with regards to, you know, that site. So I, if I, I tell people, if you can, you know, do your own deals, your own money, you know, or borrow money with collateralized, collateralized loans and that kind of stuff, and do a couple of deals on your own before you go put it out there or attach yourself to a larger operator, that's got a huge portfolio with tons of experience and everything like that with regards to accessing your network or having the right to ask them for money or whatever.
Raising private capital talks about the concept that everybody knows people with money. And those that tell me, they don't know, people with money are likely afraid to go to their network or concern, or just embarrassed or whatever, to go and make the ask. You know, I mean, my own immediate family is invested with me, you know, and I'm proud to say that and people, and I've, I've asked people like, well, would you allow your mom to invest with you? You know, and like, oh no, no, no, no. I'd never put my mother's money at risk.
Is that, well, let's take an examination on your business, but you'll let your mom go buy something off wall street, but you won't let her invest in something that you are operating, that you are driving or you have your finger on, on her behalf or your father's behalf, whatever it is. So I think that there's a, there's a look yourself in the mirror moment that people need to do to make sure that they've got an, a faith in what it is. They're building. That the people that are closest to them, they would trust involved in it. If that's not the case, then tighten up your hat, your investment houses to the point where that, that, that is something you're willing to stand behind and then you'll have enough confidence to, to take it to the, to take it public by then.
Jesse (22m 43s): Yeah. And it's something you talked about in the book and we talked about last time was there's a lot of people thinking that what they're doing is an ask where a think you reframe it as your it's an opportunity. And it sounds, it sounds funny and like, oh, it's just a, you know, it's whatever it's nomenclature, but it really is. It's no, no. It's, if you really believe in what you're raising capital for, whatever it is, whether it's a, you know, a movie in LA or it's a real estate piece of real estate and, you know, in Pennsylvania, it's really you saying here's an opportunity. Here's something I think, you know, I'm not asking you for money. I'm, I'm giving you an opportunity.
And I think, yeah,
Matt (23m 15s): I've been that embarrassed person want to give me some money from a real estate deal. I've been there. You know? And I mean, I get that. It's embarrassing at first. And it's tough asking people for anything for money specifically. Right. But if you reframe it for yourself, like, Hey, listen, I got a question for you, neighbor Bob, what's the stock market going to do tomorrow? You know, I don't know. You probably don't either, right? But I'll tell you what I have tenants and they're likely going to pay their rent. And if they don't every course, or I have loans out, and if you loan me money for my real estate stuff, you have collateral, meaning like you have a lien on the property, which means you can come take it if I don't pay you back.
You know? So I, I, I believe that there's this level of Moxy, if you will love a confidence that it takes to, to take yourself, to, to really show people that, that the, what you've got is going to work. And once you've got has, if this, the gnats, and, and then in some ways it has a lot of mortar, a lot of more of those than a typical wall street paper investment does. Yeah.
Jesse (24m 18s): In terms of getting into a little bit more complexity, you know, that, especially in the states right now, the fund to funds model is pretty big. And for, you know, for those that don't know a lot of, a lot of what we talk about here is syndication where it's deal specific capital raising, where when we started getting into fund of funds, you can be an LP, but you represent a larger pool of your own LPs in a say, limited partnership structure. I'm curious your view on that. Cause I don't think we've talked about this before the fund to funds model in general and you know, the associated type of fees or, you know, the different return that maybe you can ask for or demand based on the fact that you're bringing in an outsized LP size.
Yeah.
Matt (24m 58s): There's a lot of those out there. And I mean, from a syndicators perspective, that's kind of what you want is to be in a fund to funds because I can't tell you Jesse, how many times people call me up saying, Hey, I want to invest with you. And I love your deal. They will love what you guys do. Love your website, love your transparency, love all this stuff. And like, okay, great. I don't know the deal. I'll call you when I do. And then a couple months later when we have a deal to call them up and say, Hey, we have a deal. Remember the, remember the whole song you were singing about a great I was. And how I greet you on invest with being, let's go back to singing that song for a second.
And they're like, oh no, no, no. We already give that money to the next person that we called five minutes after we hung up with you. Right. Forgot the words
Jesse (25m 34s): To that song.
Matt (25m 35s): Yeah. Right. Oh, I forgot. Yeah. Yeah. What was that song again? Can you hold that only? Can you home the tone? Yeah. No. So there are, and I've been there myself and I think a lot of the syndicators out there just wanted to have a level of uniformity and a level of like an open door thing that's available whenever. And they just went, investors want to, are excited to get into something. You have the door open that they can hop in and that they can, you know, put their capital with a syndicator they trust. Right. What, what gets, and I see a lot of people that have a lot of deal flow, do that.
People that you and I both know that are, you know, talking heads in the world, I'll have, I'll have a lot of those now what makes me, I say nervous, but what you have to, as an investor, you have to make sure you vet completely as people that are raising capital. And then they're going to take that capital, invest with other people, right? Like who like, like, like it's a derivative fund, right. So it's like, well, why wouldn't I just go give it to that person? Oh, you're going to diversify me. I get it. Okay. Well, how much, what fee structure are you taking off the top?
You know, that I'm, that I'm now getting diluted by. Right. So I think it's just it's it's okay. Cause you do probably get diversification. You get, you know, diversified exposure across the board or whatever, maybe different asset classes. I know people that are running like a blended fund like that that's invested in self storage and flex industrial space and mobile home parks. Well, great. You get, you know, a little bit of everything and maybe geographic diversity to all kinds of cool stuff, but you want to make sure they're not just picking anybody.
They're not just shotgun approaching it. And just like, Hey, whoever's got a deal. I'll give you money. And th they, that they're properly vetting their operators. And then they're not taking too much of a fee in exchange for doing something that you arguably could do yourself too. You know, because I could call each one of those people. Now, it doesn't mean I don't believe in, in blended funds or whatever. It's something that we are doing as well. Although our blended fund does not invest in, it's not just a fund that invest in a bunch of multi-family. We see that there are things that are missing from syndications and those things are liquidity.
You can't get your money back in a syndication. If you will, if you invest in a syndication, you're locked in for five or more years, right. You can't compound your returns in a syndication. Right. I can't take the returns that you give me if I invest with you and recycle those returns back upon themselves and participate in compounding interest, which is Einstein said is the eighth merit eighth wonder of the world. Right. So I think more powerful. Yeah. So I can't, what, what a blended fund done properly can allow you to do.
If you invest with the right operator is something that allows you to compound your returns and get your money back when you want it. And not just how old the property is not going to sell for another four years and I can get you your money back. Right. So those are the, those are the things that we've worked on to blend in and you can't do just one asset class or one thing with one timeline, it's got to have multiple timelines of money coming in, coming out. Like it's got to have a short-term aspect and a long-term aspect. So that's the way we designed it. And in that, so it's something that we have active and it's something we did on a small scale because you don't have to have a $50 million fund.
It could be a couple million dollar fund and that, so that's something that we're doing, but I think that you're going to see more and more of them as capital becomes more. There's a lot of capital out there looking for a home. And so I think you're going to see more funds and not less because people are going to get, people are getting wise to it like, well, geez, I could just put up a sign that says I invest in real estate. And then, you know, I know a lot of luck. Well, a lot, a lot of capital's going to show up because there's a lot of capital looking for something different besides the wall beside wall street right now.
Jesse (29m 24s): And I think I'm just, I totally agree with your point where you're telling individuals, you know, just make sure that you're aware of what are the returns, sorry, what are the fees that are going to be taken on by the, by the person that's that is basically raising money for that fund, but then going to the other fund. And sometimes, you know, some people will say that absolutely not. They won't do fund to funds, but sometimes the returns are great. It's yeah, you're, it's a fee on a fee, but maybe you have an outsize preference promote that, that makes up for that, for that fee.
And the other thing too, you tell sometimes there's situations for investors where most likely, yeah, they have diversification, but most likely they couldn't have got into this particular dealer arrangement because you're putting, you know, you've raised 3 million for this one LP spot, so to speak. Whereas if you went in just on your own, you'd probably just be like all the other, you know, minimum say a hundred K or 50 K whatever the minimum investment is and your profile would probably look different.
Matt (30m 20s): Well, I mean, there are, when you get it, when you've aggregated that much money through a fund, you can kind of call your own shots, you know? And that's maybe what you're saying is that, you know, somebody calls up a syndicator in St. Louis and I see you're raising 10 million. Well, what if I give you half of that? Yeah. You know, w what would you be able to do for me? Can you pay my investors a little higher rate of return? Can you, you know, whatever. And instead of that investor, th that syndicator saying, oh, yeah, I'm going to go and raise this at, you know, I'm going to go and get the 150 of my best friends to invest in this deal with me.
You know, I can just go to you. And maybe some of my, some of my best friends to, and maybe you make my life a lot easier. I believe that's what they're doing. As I've seen that happen. We've been approached by that too, for people that, that have, you know, kind of like assembled a lot of money and you can call you, you know, what was your oyster at that point? And so maybe if you're a good negotiator, you can kind of like, you know, put up, put together a win-win.
Jesse (31m 19s): Yeah. And I think there's a, to your point of, we're going to see a lot more funds. I think we'll see a lot more of this too, just in the same way. Specialization usually happens in an industry and you might have somebody that's great at raising capital, but maybe it is not the operator. And they go to the DeRosa group and they say, Hey guys, do you have anything on the spigot right now? We'd love to be, be an investor on your deal. And they see you as a great operator. And they, you know, they want that LP spot. But I think, I think we're definitely seeing more and more of it in the market.
Matt (31m 47s): Yeah. And you will, and we will, as I think that, you know, what we do becomes less and less of a secret, and there are, there's even bigger wall street, you know, money working its way into like, not like owning it to an apartment building, but working its way into LP level syndications, you know, what broker dealers coming around going like, say, Hey, listen, we used to, you know, only raise a hundred million for big, big, big, big, big operators. Now, guess what, if you need 10 million, we'll go raise that for you.
Or, you know, like the broker dealers are dropping what they're willing to raise for because it's, they're seeing their clients wanting exposure to private placements and things like that. So we've been approached by a few broker dealers. I think it's beginning of the, of, of the amount of capital that's going to come into the real estate space. And maybe it's all through maybe a lot of it's through funds
Jesse (32m 40s): Problems. It's something that I'm very curious how this kind of rolls out because even in our Canadian context, in the U S similarly, the broker, it's always been a bit of a gray area where, you know, if you, if you raise for a fund, okay, you're, you're not necessarily a broker dealer, then you keep doing it and keep doing it. It's like, w you know, at what point do you have to be, to be a pure broker dealer, or, you know, I'm not sure how it works in your state, but I think there is, as, as it gets more and more, what would you say institutionalized?
You feel like some of the, some of the legal framework, I don't know if that will evolve or change, but definitely a lot going on there.
Matt (33m 16s): It's starting to the sec has already changed up the whole Kappa. They're changing the capital raiser laws. They've also changed up. There's some call that out, came a, it was a couple of years ago, but nobody's really, it's becoming popular now. And it's called regulation CF, which allows you to sell more micro sheriffs. The non-accredited investments. We did shares of one of our syndications that a thousand dollars a piece. So now that's not that wasn't, the, the whole syndication was much, much larger share prices, but we, we broke off a small chunk of the deal just to test it out, to see how it goes.
Cause not to, like my personal mission is to offer what we do as syndicators and his real estate investments to everyone. Like, I want everyone to be able to get into some sort of a passive investment if they choose to, without having to read an enormous check or go to put any of their tone time in or whatever. And so I think the world's going to change to the point where more and more people are going to be allowed to, or aware of alternative ways to make money and alternative ways to invest outside of just buying a stock off wall street. They can still do that.
And I don't think there's anything wrong with that, but I think it's wrong is that that's the only choice that many people have had, unless you're in the know or in like the country club or silver spoon network or something like that, then you knew about other things, other ways, other, you know, good old boy network plays that you could do investing well, that's all busted up and now it's a lot wider, but I think that there's a lot more widening that can happen for more and more people. And eventually everyone to invest in these kinds of things. And the rules are slowly, you know, it's it's government velocity, Jessie.
So the lows are there. The rules are slowly changing. Yeah.
Jesse (34m 59s): Well, it ties in with what we were saying before, too, as the systems increase, improve, you have the ability for operators like yourself to unitize and get smaller. And then you offer that down to the retail, you know, quotations, retail, I guess, customer
Matt (35m 12s): I'll give you a big vision. I have one day and I mean, I might make an, a, we have a deal under contract right now that I might try it. I don't know how it's going to go, which means like on this, but I want to buy an apartment building and I want to offer for people that live there, the right to buy equity in the apartment building.
Jesse (35m 30s): Hmm. That's interesting. That's almost like a co-op model.
Matt (35m 34s): Yeah. But they're not, they don't have to own the whole in a co-op typically the people that live there are the only ones that aren't all right. They all ages. If you live there, you own it. Right. And it's considered home ownership right now. I'm Todd. This still be a syndication to pass a mess, but I'm not. I'm talking about going to the tenants that are living in a 200 unit building and saying, Hey, listen, how about for 500 bucks? I'll let you own a little bit of the sticks and bricks of where you live. You pay him cash flow, you pay him upside residual. You give him a K one, you pay them the whole thing. And because of those portals, we just talked about, I can post a K one.
I can post their ACH payments and everything like that. It's, it's just as simple. It's all spreadsheets, you know? So 20 people or 200 people, or 4,000 people are technically just as easy to manage through an online portal. Right. And that's, that's a wacky idea. I have, I'll probably get talked out of it, but my team that are more, more pragmatic than I am, but
Jesse (36m 31s): I just don't write another blog Gus, and you'll never do it. I
Matt (36m 34s): Know. Right, right, right. Yeah. I will. I'll do it. I'll make it happen. If I go out there and say, I will never know you will, you know,
Jesse (36m 43s): Well that I want to be mindful of the time we were coming up to the end here, but I'd love to get your thoughts, you know, before we can talk a little bit about how people can reach you and talk, you know, we're where they can find the book. Cheers. Your, your view on the market right now in, I know you're an optimist like myself, but w you know, where do you see the opportunities in the next let's call it short term? Are you thinking differently given, given the last year?
Matt (37m 8s): Okay. I'll give a few different opportunities that I see that I think not in a people are focusing on right now. And then I'll think I'll tell you where I think the market's going to, you know, for, for, for go break out my crystal ball, right? So I think that not enough people are focusing on revitalizing industrial applications in the United States. I think that there should be more industrial flex space. As we continue to become more Amazon defied in our world, there's going to need to be more flex space. More people leasing like three to 4,000 square foot of small warehouse to do light, light, industrial manufacturing, or light storage with a little bit of office space sitting there as, as we get into more of, of the right now economy of, of, you know, shipping small products or whatever, to peoples it's in people's homes and selling things online or whatever.
And boutique brokerage buddy of mine owns a small flex space. And he's got a guy that sells exotic fish out of a little flex space. And he's got fish tanks, probably 30,000 gallons where the fish tanks and this little industrial space, and he's got every kind of fish you'd ever think of. And you can buy them from this guy online and they'll ship them off to you for a, for a crazy price. You can buy these really cool fish for people that are hardcore, you know, fish collectors that can't just go to PetSmart to get their, the fish that they want.
They want something really cool. That's been bred. And you know, that specific or whatever, because of the internet, the magic internet box, things like that are becoming more and more applicable. Right? So I think that there's, we're going to see, we're going to need a lot more of that kind of space in this country have a lot of spaces like that are tired and drawn down. Additionally, this could be an opportunity to repurpose things that are no longer applicable anymore in America. Like we don't, we probably got too much office space, probably got too much retail space in, in, in, in north America, let's say America and Canada.
So I think there's gonna be an opportunity for somebody to think of cool applications for the rundown strip center, down the street, from their house or for the office building. That's 50% dark. You guys think of that idea. You know what, whatever, whatever ways maybe it's living space, maybe it's a school. I don't know. You guys think of it and do something amazing right now with regards to multi-family as much as feel like it's overheated, it's overpriced or whatever. I think, unfortunately, we are going to be looking at some inflation in the next couple of years now. I think it's actually going to drive up.
It's going to drive up wages. It's going to drive up cost of goods and it's going to drive up breaths. And I think that that's going to overall, if not keep multifamily as a high priced asset, it'll maybe drive it up a little bit more. I don't see rates going up anytime soon, maybe a little teeny bit, but not like double or triple or whatever, because I don't think the fed the U S government can't afford to raise rates, you know, given what it would do to our debt if, if rates went up. So I don't think we're going to see huge, huge spike in rates. Maybe a little bit sticker just to try and keep up with inflation, but believe it or not, I think multi-family is going to continue to be a hot commodity.
It's not, I don't see any fundamental that makes it crash anytime soon. And so I think maybe it slows down a little bit. It'd be nice if it kind of hit a ceiling a little bit and slowed down just a nudge. But I do think that it's not, nothing's going to clip it anytime soon. And I think it'll be a good asset to be in for the foreseeable future because we're just not building enough housing and there's becoming more and more people. And we're the housing construction we're building is nowhere near keeping up with the population demand for it. So that's my 2 cents Jesse, and it could be completely wrong on all that stuff, but that's what I think I was going to say,
Jesse (40m 43s): No, that was the, the quickest crystal ball three minutes. And you heard it here first folks. Yeah. I could agree with you more on that. I mean, we pretty much, you know, what, what are we a lagging indicator for the states, despite what you would read and see in the media? You guys continue to be a big player when it comes to immigration and population growth in some of the major cities in the states and Canada. And I think that to your point, I don't know who is more supply constraint. I know we are from a multi-racial standpoint, continue to be.
So, you know, until, until we start seeing more supply, it's really hard to say that multi-family is going to do anything, but at least stay where it's at. If not, like you said in shop, I think for, from my point of view, it's, it's going to be the prices. The prices are going to get to a point where I feel that's not going to be the deciding factor of if they continue to go up, it's going to be the, the, the net operating income side. It's going to be the affordability side. Now, how much higher can that go?
Matt (41m 39s): You can't sit root capris. Can't go much lower. But I mean, I think America is finally realizing that maybe Canada has it, right. Maybe you ought to pay people a real living wage for doing what they do. And, and that $7 an hour is probably not enough, you know? And that, so you see companies like, you know, Amazon McDonald's Starbucks that are paying 15, 20, 20 $5 an hour, which is to be straight, man. That's really what it takes to get by, to raise them. You can't raise a family on seven or $10 an hour, $12 an hour, forget it. You know, there is a family you can feed yourself on that, you know?
And so the fat and the, and it's just not fair that some Americans to keep their lights on, have to work two, maybe three jobs, you know, that ain't right either. And so we're going to see, I think, a correction on living wage and a wage, one, what, what an acceptable wage rate would be in the U S and that unfortunately is going to push up cost of living so
Jesse (42m 34s): Well, I appreciate that Matt, we will look in a year if that prognostication is correct, and we'll hold you to it,
Matt (42m 41s): I've drawn a year from now. We'll just listen to this episode and disagree with everything you and I said, yeah, they're
Jesse (42m 46s): Just a bunch of talks about how
Matt (42m 48s): Wrong with those two guys, right?
Jesse (42m 50s): Matt, in terms of you've done the final four before. So I will skip that. But in terms of where people can reach out to you, aside from a Google search of Matt grouper DeRosa, where can I send them?
Matt (43m 3s): They can go to Instagram at the mat, fair cloth to check me out there. They can go to my company website, which is DeRosa right there behind me, D E R O S a group.com DeRosa group.com. And they can do all kinds of cool stuff, like check out a copy of my book, which they can buy on my website. They can, you know, check out our YouTube channel. They can join our mailing list. It can hear all about the passive cool stuff that we're doing as well@derosagroup.com.
Jesse (43m 28s): My guest today has been Matt Faircloth, cloth, Matt, thanks for being part of working capital.
Matt (43m 33s): Thank you, Jesse.
Jesse (43m 40s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.
George Roberts III is a Data Scientist and a Principal at Horizon Multifamily as well a Real Estate Investor and Syndicator who focuses on Value at Opportunities in Central Florida
In this episode we talked about:
• George’s Podcast Details
• George’s Bio & Background
• Pivoting to Real Estate
• The First Real Estate Deal
• Financing Deals
• Capital Raising
• Effective Networking
• Sourcing Deals Approach
• Ways of Reaching Out to Brokers
• Real Estate Market Opportunities
• Macro Perspectives of Real Estate Space 2021-2022
• Mentorship, Resources and Lessons Learned
Useful links:
https://www.instagram.com/groberts0429/?hl=en
https://www.linkedin.com/in/georgerobertsiii/
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jennifer galleon. You're listening to working capital the real estate podcast. My special guest today is George Roberts. The third George is a data scientist and a principal at horizon multi-family as well as real estate investor and syndicator, or he focuses on value, add opportunities in central Florida, George, how's it going?
George (41s): Excellent. And thank you for having on the show, Jesse. Yeah,
Jesse (45s): Well, I'm happy to have you on, we were talking a little bit before the show. We heard you on the syndication show with Whitney Sewell. If you haven't listened to that podcast, it's fantastic. But George, you have a podcast of your own. Maybe before we get started, you can tell listeners where they can find that.
George (1m 3s): Sure. We're located just about everywhere you find the finer podcasts. We've got Spotify, apple. I love to find it on audible as well. So just take a look. We're also on YouTube. You can find us at the horizon multifamily channel. So it's called the Foundry where leaders are forged a daily. And I like to talk not just about a commercial real estate, but also about entrepreneurship in general. And that's, that's where we get the theme. The idea that entrepreneurship is an outstanding proving ground for leadership talent.
Jesse (1m 36s): Fantastic. Well, you have a bit of an interesting background, I would say, not a lot of data scientists on the show. So maybe for listeners, you can talk a little bit about your background in, in business and how you got started in real estate.
George (1m 50s): Yeah, sure. Well, I guess just to back it up two steps, I'm a recovering PhD. And so one of the things that you can do with an unused PhD is go into data science. That's possibly the best, best part to, to go into it. If, if you have that sort of analytic background, but how did I get into real estate is really, I just wanted something that was going to give me time to spend with the family. So I went more and more towards computer science that wasn't doing. It realized that entrepreneurship was really where I belonged started out maybe 11 years ago as a landlord, just loved that cashflow found that to be an amazing place to be help my sister launch a construction company about five years ago.
And I decided that, you know, this is, this is really my fate. I'm a serial entrepreneur. I just love to launch companies. I love to, to build things. And so it's the perfect place for me to be, but rather than going to the ground up, construction decided that value add is something a little bit better for me really loving my tech position. Didn't want to lose that. Didn't want to give that up. And so I wanted something that would be maybe just a little less intense, something that I could do on the side.
So value add multifamily ended up being just the perfect place for me to land
Jesse (3m 14s): Right on. So was there a, a, an inflection point or a light bulb moment when it came to kind of changing or pivoting or kind of moving into the real estate sphere, as opposed to staying on track with, with where you were focusing on in the PhD?
George (3m 30s): So I would just say it was basically a growing or gathering storm. Everything that I did in the entrepreneurial space really just clicked with me. You really don't have that sort of freedom as a bioscientist, you're really sort of chained to the benches. A lot of people say, and it's just amazing to have the idea that, you know, what I'm earning is not directly tied to the number of hours that I'm spending.
Jesse (3m 56s): Yeah. Fair enough. So your first deal, I think it was a, a deal in Orlando, correct me if I'm wrong, but for listeners, if you could talk a little bit about your first deal and what that, what that process was like.
George (4m 11s): Yeah. So it was almost two years ago, started looking for deals. A lot of people say, Hey, deals are hard to come by. They'll spend one or two years looking, you know, did what everybody else did. Looking at a couple of deals, underwriting, a couple deals each week have just an amazing team at horizon multifamily. One of our principals, who's also our GC and construction leader on the project. He was looking for properties in the area because he's very close to that area.
His son is working down there and just thought it would be amazing to, to find something that would Tuttle those threads together. And it was an amazing deal because it was during the coronavirus pandemic. When we had, you know, shut down one, we had this sort of interregnum for a little while everything seemed okay, people started shutting down again, nobody knew it was going to happen. We didn't know that there was a vaccine coming in a few months and there was some real deal fatigue, couple deals had fallen through and we had this great opportunity to get a really decent discounts on a 14 unit, just in, in south of Orlando, the south, I'm sorry to say, south, south Orlando, just south of the downtown area.
And it's an amazing area it's gentrifying. And, and again, we, we got in at literally the lowest per unit price in Orlando that year. It was, it was an amazing transaction. Yeah.
Jesse (5m 35s): And we're for listeners and myself where our prices on average in Orlando for, for that type of product.
George (5m 43s): So here I'd have to update. I've been looking into that. I'm looking at a couple other deals right now, but again, we got in, I think it was at a, if I do the quick mental math we were in at about 57 per unit and a class B even at that time was trading, you know, more like 120. So you can figure, we can put in a pretty decent rehab on that. And, and we have, I mean, I just, just this morning I was taking a look at some Google earth pictures, and it's amazing to see how the place looked with the old wooden fence now been replaced with aluminum.
So again, yeah, it was, it was a pretty amazing deal. And again, we're, we're looking at quite a bit of a higher quality product now after this heavy repossession.
Jesse (6m 37s): Yeah. Fair enough. So in terms of the strategy itself, so we kind of alluded to value add, I was, I was reading, I think it was earlier this week. I liked the phrase ology of, you know, there's buy and hold there's value, add, and then there's, there's a there's buy and watch and what the author meant by that was that they buy properties, they do value add, but then they watch the market. And if that means that it, you know, refinancing and holding or if it means having a sale. So when you approach these assets, what, what is your philosophy?
George (7m 13s): So I tend towards the, the buy and hold. I'm a big fan of Warren buffet. And one of the things that I really hate about real estate is the friction and the transaction. Ideally, we would buy assets that we can buy and hold for long periods. And again, total case by case basis. I love that quote. I'm going to go look that up because you know, it, it all depends on your plan, right? If you're in the syndication model, you're kind of locked in. People want that money back in five years.
And if they don't get that back in that timeframe, they, they feel like, you know, that you haven't been holding up your end of the bargain, but this was a joint venture. And that, that worked out just perfectly because there was some damage to the property during our due diligence period, we were not able to get a discount or any further discount because the seller was actually trying to wiggle out. Which again, I love that, you know, you got to feel like you're making a good deal when, when the seller is looking for every excuse to scuttle that deal.
And, and, and that felt pretty good. So what I'd like to get that discount, but again, we had some damage to the Eastern portion of the building and we really had to, we had to gut it and that was not in the business plan. So having put in a significantly larger amount of cap X than expected, you, you got to say that this is going to be a longer term hold. And with the joint venture, we can do that. So this one could be a, an indefinite hold.
Jesse (8m 43s): Fair enough. So in terms of the, the raise for this one by joint venture, I assume not your traditional syndication, how was the, how was the capital raise or the, how did that go for the, this particular property?
George (8m 58s): Yeah, well, that was amazing because mark, he actually negotiated seller financing for this. So our requirements were rather small, whereas many other deals that were getting done during the COVID pandemic timeframe had a lot more onerous restrictions. So that really helped us to get in at a decent price at a decent cash price. And so it wasn't very hard at all our down payment. If I remember correctly was only about 30% and again, there was no reserves required or anything like that.
We got a good interest rate and, and we got to, you know, get out of all the things that would normally happen with an under million transaction. We had a non recourse loan. And then of course, if you do with conventional financing, you know what happens? You have all these requirements, it's a very expensive loan. So it was really amazing to be able to do away with all that.
Jesse (9m 53s): Yeah. That's always helpful where there's, there's less training wheels, especially with when, depending on the type of debt that you get. So that's interesting. You did a, a vendor take-back or seller seller financing. Did that come about as, as something, as a sweetener to, for the, for the vendor to increase the price? Or was it, was it, you know, who, who approached to, to put forward the, the seller financing?
George (10m 17s): I remember we asked, but I think it was much in his favor because he had gotten this many, many years ago. And again, I can't remember the exact transaction date, but at this point there was going to be a pretty hefty tax bill. And I want to say he made like at least three acts on this already. So it was very much in his favor to do that. And without a doubt, a sophisticated seller. So there wasn't much pushback on that. Oh, if you don't mind, I have another great story about seller financing, doing a deal in east Tennessee that she closed in December 1st.
And there was a little pushback. So the, the lead on acquisitions and that deal, Tom Kirkpatrick, he went to the seller and said, Hey, would you like to give us seller financing? She said, no. And he said, well, Hey, you might having a conversation with your CPA to see what they think. And she came back and said, you know what? You know, we're open to that. And we had a feeling because this was again, another long-term hold something in which again, you're going to expect there's going to be a major tax bill. So I think that that's a great approach.
Again, you know, you don't want to go at it, you know, from a rough angle as always. It's, it's always, win-win, it's look from the other perspective. And I just got to say that in negotiation, I think that's been just about the best line I've ever heard. Why don't you talk it over to the CPA and see what they think?
Jesse (11m 42s): Yeah, that's great. We, we kind of on the brokerage and we were just dealing with a, with a client, very similar situation. We're basically saying, and the thrust of this was more on the environmental side. As you know, you probably know in and listeners, if they don't know a lot of times, the, the vendor take back is, is utilized when there is problems with the environmental, oftentimes you can't get traditional financing. So we often ask either the vendor, or if in this case, our client, would you be open to it and very bad taste in her mouth from, I guess, something in the past with, with maybe a VTB, but this is exactly what we said, you know, talk it over it with your CPA, see if it's beneficial for you.
And then I think oftentimes I think the reason that's so helpful is because it takes you out of the, kind of the pushy stance. And you're basically saying talk to your professional because part of it, wasn't just the tax deferral. It was the legal aspect, the worry that you're not going to be in first position or second position with the, with the asset. So I think once those things are alleviated, oftentimes sellers do want to engage with seller financing.
George (12m 54s): Yeah. Great story. I love it.
Jesse (12m 56s): So in terms of, you know, fast forwarding to today from that first purchase in Orlando, how, how has the strategy evolved if it has at all?
George (13m 7s): Well, for me, things have really taken off from just having great partners. So I got to be involved in two amazing deals over the last couple of months deals that people have brought to me. And so for me, I would like nothing more than just sit down with the numbers and underwrite deals. And I could do that all day if that's what I was allowed to do, but I do have a day job and it is difficult for me to be consistent with that. So I've moved a little bit more towards capital raising and sort of being the face of the company.
And I've just absolutely loved having these opportunities. And again, these are, these are deals that people had brought to me. And just again, in the last couple of months to be involved in two syndications is just amazing. So, I mean, one people take off in this industry, it's almost like a vertical climb.
Jesse (13m 60s): Yeah, for sure. So in terms of the actual capital raising from the joint venture, as opposed to doing more formal syndications, how was that a transition for you?
George (14m 11s): Yeah, well, there was a lot to it. I knew that there would be, and so I've done a lot. I launched a meetup in person in Detroit. We do the first Monday in Shelby township. I also have a Wednesday zoom call. Again. It's all about just building the brand. I've been building up the podcast, the YouTube channel, and it's been a lot of reaching out. I just reached a 2100 connections on LinkedIn. And I want to say even maybe six months ago, I might've been, you know, 15, 16, 1700.
So it's just been a matter of everyday building that network going out there and realizing that LinkedIn is not enough. It may be your best channel. A lot of people they're hanging out on Facebook. A lot of people these days that on Insta and I'm, these, these channels may not appeal to me, but you got to just get right out there. But anyway, there was one more wrinkle. Everybody starts out with 5 0 6 B. So just for your audience, I'm sure most people are aware, but those who are not, that allows you to raise money from just about anyone provided that you have a substantive relationship.
So your friends, your family, you get out, you jump on a call, you build that up, you get to learn their goals, and then you can include them in their deal. But both of these deals, I had experienced partners and they insisted that we do a 5 0 6 C. So that was a completely unexpected dimension after months and even well over a year of building up these substantive relationships, realizing that all, but a couple of those were not going to be useful moving forward.
But again, it was, it was all getting out there and networking, building the podcast, building the brand and really meeting people in person. So to start with a five or six C deal, what I found is really, again, these are people that I know or have reached out to in almost every case, but it's been going out to those meetups again, that was really key. So totally saved me and allowed me to make that transition.
Jesse (16m 15s): So, George, I always ask guests that come on the show, when it comes to meetups and networking, obviously the, the last year and a half has been a completely unprecedented time. Hopefully we're moving in the right direction and continue to do so. But for those that are just getting into real estate investing, or maybe transitioning from a partnership or bootstrapping to raising capital, you know, where, where should those people be looking in terms of networking and, and these meetups w you know, would you say go to the local Rhea, or would you say start online?
How would you approach it?
George (16m 50s): Yeah, I'm an, all of the above kind of guy. So I would say definitely, I mean, how many good meetups do you have in your area? I don't know. I'm in Detroit and we do have, let me see, we've got good meetups and some of them are run by multi-family professionals, but in my area, I'm just about the only one at this time. I know there's one in Troy, Michigan, about 15 miles from my house. And I think they're going to start up again in person.
But again, what I've found though, is that when you do go to your local, REIA, you'll find a lot of people who may be interested in multi-family. They may say, and this is what I was told. Hey, multifamily, that is an advanced strategy. And it is by the way, but you do have people that do start out in multi-family. And if you're willing to have maybe a longer on ramp, you may see your success grow much more quickly. And even if you take down, say like a 20 or 30 unit apartment building, just imagine, how long would it take you to get 20 or 30 single family homes under contract to do all that negotiation?
And then you're going to have a couple of different types of financing, right? Cause he can't do all conventional. They're going to cut you off at the bank. You got to go to the credit unions. You know, again, it's it's, I mean, at this point, sort of commonplace to say, you've got the economies of scale with multi-family, but again, if you're willing to have a slightly longer on ramp, you know, there's no reason why you can't start up there. So you're gonna find a lot of people like that. That may be a little apprehensive, but if you say, Hey, you know, I've done this. And my biggest, you know, I've been a landlord for over a decade.
My biggest regret is just not jumping into this earlier. I let people tell me, Hey, this is advanced, but what they didn't tell me is that, Hey, it's a team sport, so you're not going to play every position. You're not the quarterback and the receiver and the lineman you're going to, you're going to essentially pick your, what you're doing on the team. So yeah, I like capital raising. I also love the due diligence. I mean, just fascinating to go through a deal and see, you know, what works, what, doesn't the negotiations, the legal documents.
That's something most people don't like, but I love it because I see the law is how you get things done, right. That understanding. So you just find your place and you're not going to play every position on the team. You're going to figure out where you fit in. And so you can bring those people along and, and I've had success with that. So if you don't have a great multifamily meetup in your area, still go ahead, go to, to the single family meetup and see who we can bring along.
Jesse (19m 26s): Yeah. I mean, that, that makes a lot of sense. And in terms of, you know, raising capital and putting yourself out there now that you kind of have this, these networks, sorry, this network and these relationships establish when it comes to sourcing deals, what's your approach there? Just given the fact that it seems like there's always an inverse relationship between the, how easy it is to finance deals versus the amount of supply. And you know, when financing is very easy, supply seems to be constrained. And when supply is abundant, it seems that financing is challenging.
So from that perspective, when, when sourcing, how, how are you approaching that?
George (20m 5s): So, yeah, again, I mean, I've had people bring me the deals that hasn't been a bottleneck for me. And so I haven't really been looking a lot, but again, I do love reaching out and I've had a great time meeting, so many real estate brokers and, you know, getting that deal flow in. But again, lately I've been working not so much on the thin edge of the wedge in that equation.
Jesse (20m 30s): And in terms of the, the relationships you establish from the brokerage perspective, is there anything in particular you would recommend or suggest when you are reaching out to brokers in your area or, you know, even potentially out of state?
George (20m 45s): Yeah. Open houses are, that's the way you can meet people. And some of the most famous advice I'd ever gotten from a broker Joe LaFleur, he says like, don't, don't give me feedback on the deal, write me an offer. You know, don't, don't invite me out to coffee, just come to my open house. You know, let's take a look at this property. And I think that especially a lot of the elite brokers, they do think like that, sure. They might meet you for coffee, but again, if you're out there, they see at the open house, they see you writing the offer. And, and again, that's, that's hard advice because a lot of people, there's so many beginners in this industry because quite frankly, it's a great time to be in the industry.
And it makes sense that we would be expanding, but again, you know, stick with it and, and you will establish those relationships. And again, from the beginner's perspective, if you're out there establishing a relationship, realize it's going to be really hard unless you have a mentor or somebody very experienced on your team to meet those brokers that are handling the a hundred and up deals and that's completely different ballgame. So, you know, go ahead again, go ahead and follow the advice from, you know, your mentor or your coach or whoever you're, you're looking at your guru that says, you know, Hey, go get something a hundred units and up and enjoy the economies of scale.
If you can do that, that's great. If you can find the partners to take it down, but if not realize, you know, even five units, that's commercial, right? You get all the benefits of commercial real estate take down what you can. And before, you know, it, even, even taking down one commercial property, we'll give you a whole lot of respect with those hundred, not they're going to see like, oh yeah, this is not some tire kicker here. We've got a real player in the game and you'll find it so much easier to make those relationships with a hundred and up.
Jesse (22m 27s): Yeah. And it's hard to, it's hard to say to somebody, if they haven't kind of broken into that, that space of when, you know, so many times we have people on that are just like, I wish I scaled earlier, or I wish I, you know, I just did those larger deals quicker. It sounds, you know, it sounds, I guess, from somebody that hasn't done it that, oh, you know, that's, you're already doing it now, but the reality is oftentimes those deals are simpler at the end of the day when you're, you're raising money, debt or equity. And it's asset based rather than, you know, personally based when, when you're dealing with single family George, when it comes to, I mean, first of all, I, I totally agree with you on the fact that you got to get out, to see spaces and put, you know, it's about writing an LOI or offer.
We always say paper talks and our industry. And I mean, that's the brokerage community in a nutshell, they want to know that you're real. I kind of want to pivot to the, the, your outlook on the market. And like I said before, it's an upset, a number of times on the show, we are in a unprecedented time and the real estate, various real estate classes are doing better than others. Some are doing okay. Some are doing not so good. Your philosophy when it comes to dealing with a downturn or, and kind of navigating even the timeframe we're in
George (23m 47s): Right now. Right? Yeah. I'm totally analytic from my background. I mean, going back to a PhD in 2005, always look at the data. I love what Neil Bower says, that data beats your guts by like a thousand miles. Right. So go out there and get the data, look at that. Look what happened in, in prior downturns. One of the mistakes I see people making today is saying like, oh yeah, you know, real estate, market's going to crash. Well, well, it might, but it's really only done that about once in the last hundred years, you know, you can't keep fighting the last battle.
So we can't just look at what happened in 2008 in the financial crisis, which was very much a housing driven recession and expected the same thing will happen. So you want to go back and get those historical analogs, but again, take them with a grain of salt, a history doesn't repeat itself, but it does rhyme, you know, as for what's a, you want to be invested in or how you want to navigate that. You got to remember. And again, I'll just start from the very get-go remember that having cash reserves beats having a lot of equity in the property, it just does.
And I hear a lot of people and I, I, I don't really get where this comes from. Hey, just don't over leverage. Well, whoa. The only thing you can really do when things go bad, when it really hits the fan is if you have cash reserves, you have multiple streams of income. Other than that, there's really no way to, to navigate that. So make sure that you have a decent cash position. I mean, that goes into your underwriting. Of course, it's also something I would take a look at from the personal balance sheet perspective. But I love that you bring up other types of commercial real estate, because I think multifamily gets so much play these days.
I get so much love just because it is it's very stable and it's something that you can get into from the value, add perspective. Some other things that are very stable would be a senior and assisted living. Very, very stable. I heard a lot of people explain that more as a construction play. I've seen people do it successfully from the value add perspective or from the conversion perspective. But again, I think that I see that as maybe a harder way to go, but definitely a worthwhile.
And I think you've got to look out for those opportunities. A lot of people think that investing is just about like buy low and sell high, but you have to remember the first rule of investing. Is that just because it's cheap or just because it's priced as low doesn't mean it's cheap. So you got to look at some of these things and you've gotta make your own determination like hospitality. I personally think that's going to come back, but again, remember if the recession comes, that's going to be the first thing to get hit and you, and you got to consider that.
So when you, when you look at some of these asset classes right now, again like hospitality, you gotta ask yourself, Hey, is this a place that I belong in? Do I have the cash position to, to sit it out? If we get a major recession?
Jesse (26m 51s): Yeah. I liked that. I I'm just finishing a rereading a book by Howard marks and I'm basically talking about mastering market cycles and he's got another great book. I think it's the, the one thing or I'll, I'll figure it out
George (27m 6s): To ask you what's the most important thing,
Jesse (27m 8s): The most important thing. That's the one. And I love the, I love his view on risk. Just generally speaking, in terms of the, you know, more outcomes will happen than can happen. And I know that, you know, another quote, he has very kind of very Warren buffet of investment success. Doesn't come from buying good things. It comes from buying things well, and I think it's something in real estate that it's not necessarily the fact that you buy this AAA asset. It's that when in the process that you're buying it at an adequate price, that you're, you're buying it in a place where you feel comfortable, that you can provide the returns either to yourself or your investors, if you have any.
But what I like about his view on risk is this the, you know, there's this just idea that more risk equals more return. And by definition, if, if more risks equal more return than it, then it wouldn't make sense. Like the idea of that, there wouldn't be any risk because you can just, you could say, okay, there's a guaranteed return and average out. Exactly. And, and this idea of quotations expected return. I think we, we forget that key, key word of when we're analyzing things that, you know, might be a value add opportunity.
Yes. Your expected return will be higher based on the higher risk, but it's really one of those things where you need to analyze, I think more granularly. And that's why guys like yourself are great to have on your team because you, the analytical mind is usually the mind you want when you're, when you're analyzing risk.
George (28m 37s): I love it. And here's another buffet ask quotes that volatility and risk are not. So now it's anonymous, right? I mean, a lot of people look at the beta in your portfolio and say, oh yeah, you know, high beta portfolio really risky. But think about it, do the thought experiment. Let's say that you're investing in company a and the stock price declined by half volatility just shot through the roof. But, and this is assuming that the, the selling was over done. Your risk has actually declined. And you know, I think, again, it's, it's, it's hard.
If you want something that's easily testable in academia. Sure. You can look at volatility and things like that. They're very objective. And there's a reason that people do this because it leads to publications. But when you're dealing with investment again, your, your average investor is already probably smarter than the average bear. And then when you look at the ones that are successful, again, these are things that are hard to replicate hard to necessarily pin down an algorithm and think about it. What would buffet, if he could put his thinking into an algorithm and let some academic test it, what he'd do it, of course not.
That would be proprietary, never going to happen.
Jesse (29m 50s): Yeah. And it's funny just on that point, not to, not to completely nerd out here, but it's funny when Howard marks talks about how, you know, economy attritions or financial, you know, the professors that came up with a lot of these equations, the black Shoals model, different different algorithms and equations that they use in the financial markets. That beta was just, the volatility was just the easiest thing to use for their equations, like from, from a mathematical point of view. But Howard marks will say the intuition though, that risk equals volatility should, should kind of strike you as not necessarily perfect.
And I think he, I think the way he flushes that out in the book without having to get so technical, I think the, the lay person, that's why I think so many people find both him and buffet just very easy to, to kind of digest that information.
George (30m 42s): Yeah. I love it. Risk is, comes from not knowing what you're doing. I think that's the best definition, but again, yeah, there's, there's a fair correlation between risk and reward, but yeah. Fair enough to say that it's definitely not quite perfect.
Jesse (30m 60s): So in terms of kind of the way you're looking at the market for opportunities in 20, 22 and beyond what, what are you looking at or what, where are you seeing opportunities? Whether that's from specific verticals in real estate or geographically?
George (31m 19s): Yeah. So geographically, I continue to evolve. I continue to analyze, I really love Neil bow. I point everybody to his real focus course because it's free and it requires literally nothing but free, publicly available data. And if you look at that, you'll see that the, the ideal market moves around the country. Not easy for someone who's not yet to say Neil bow is level two to go around the country and to make good on all those predictions.
So again, I'm going to focus on the Sunbelt, the Southeast, I like this area. It's beautiful. It's great that when I have a business trip, it's someplace, I don't mind going December through March. And I love to continue to look at these growing markets. I do love Orlando. I'm looking a little north to, I'm starting to look more at Gainesville. I would love again, you look at Florida for those that aren't invested in the area in the south, your cap rates are supremely.
Compressed prices are super high. And a lot of people who invest in central Florida will say, yeah, south Florida just doesn't make any sense to me. But now I feel like, you know, I'm looking at central Florida and I'm thinking, does this make sense to me? Do I want to stay in central Florida? Am I going to be looking deals in central Florida in two years? I don't know. Maybe the best thing to do is move a little north and, and see what those cities have to offer. So yeah, definitely moving, but again, as someone a bit newer, I'm not going to go to Idaho.
I don't care what the numbers are. It's not going to be easy for me to make that sort of a jump.
Jesse (33m 0s): Fair enough. And in terms of the outlook from a macro perspective, nobody has a crystal ball, but is there anything that you're kind of just being cautious or, or kind of looking at as we proceed out of, out of what a lot of areas have been in lockdown, how are you, how are you looking at that?
George (33m 20s): Right. So speaking as somebody who makes predictions for a living, I've learned the humility is my greatest assets. And when I try to look and make projections again, everything is conditional. You know, say, you know, if inflation goes through the roof, Hey, real estate will be an extraordinary investment. You know, am, am I prepared for that? Well, when I do my underwriting, we have to consider what happens if we don't get to refinance this.
Because again, Hey, if you get a decent rate, locked in, you definitely want to take some cash out. But what happens if rates go up like crazy? And we did see in the residential market just yesterday. And again, just for those, when, when this may come out, referring to November 10th, we did see quite a big spike. We saw that spike because we have inflation woes, and we have good reason to believe it. We've had two major statistics come out this month.
We had the producer price index come out first and then confirmed by the consumer price index. So we're seeing essentially both the yin and the yang are telling us that inflation is real. I think a lot of us who have a sort of a financial mindset, that's no surprise. But if you've been listening to those pundits, those talking heads, it's been listening to the fed and their projections on what interest at what inflation would be. Maybe you are a little blindsided, but again, we gotta remember a lot of things.
First of all, those inflation statistics are correct. Whatever they tell us inflation is going to be, it's going to be higher. Fed is even targeting higher inflation than they have in the past. And they often overshoots and that's even using their own statistics. But again, you know, if you want to understand how inflation works, what I find most compelling, go to YouTube and check out Ray Dalio, the economic machine, and talk about somebody who has taken their thinking to an algorithm. Ray Dalio has actually done that again.
Totally proprietary. He won't tell you what said it, but an amazing thinker. So take a look at that. And what he'll tell you is that you've got these giant macrocycles, that might be like a hundred years and what we call a cycle, like an economic cycle. Those are micro cycles. They're riding on something larger than our lifetime, hard for us to even contemplate. And so I look at something like inflation, like I lived through the 1970s. Okay. And I'll tell you that when I think about inflation, I think of it. It's something that may be difficult to get started, but when it does, there's really no, there's really no way to stop it.
I mean, yeah, if you remember, Paul Volcker jacking up interest rates and the recession that caused, I mean, literally caused this, this is like, don't try this at home. This, this is serious. And, and we can't do that again. Right? If, if our debt was high in the late seventies, early eighties compared to GDP, I mean, it's just going right through the roof and we are not going to have another poll Volcker to stop at this time. So I don't know what's going to happen next. But again, we have to prepare for inflation.
You, you may not be able to refi out of these things. Cap rates may have to go up because people need a risk premium, right? I mean, when you see those risks, premia get compressed. And if that's a new term, what I'm essentially talking about is, you know, what are you getting out of an investment? Let's say multifamily real estate, compared to the risk-free rate, which is essentially treasuries. If you're not getting anything out of that. And again, these, these risk premium do get compressed usually just before there's a major financial crash.
And the thinking behind that is just that, Hey, it, when people are not demanding a premium, right, then again, we were talking about how risk and reward or return are, are in some way correlated. Yes, largely. But when people start getting greedy, they stopped demanding much of a premium. They're like, yeah, I just want, you know, a little bit more and, and they go for it and then boom, that's when things drop off a cliff. So, so look out for those sorts of things. And, and again, they, they, the risk premium can get compressed, but they can not go down to zero.
So at some point, you're going to have to see that these cap rates are going to go up and you're not going to sell your, your asset for what you thought you would.
Jesse (37m 42s): Yeah, for sure. And I mean, that's part of the reason we're in this way, whether it's, you know, risk, premium, liquidity, premium, whatever you want to call it, like, it's the reason we're in this business. Know if that is, goes to zero, you know, what is the, what is the, what is the enticement to actually move into real estate if you could just buy T-bills. But yeah, I totally agree. I don't think there was another Paul Volcker to break the back of inflation in our current climate. We, we typically ask four questions to every guests at the end of the show, George Bubby, before we do, I'd like you to just talk a little bit about the, the podcast that you have.
You mentioned, it's not just focused specifically on real estate. What do you guys chat about?
George (38m 24s): So I always, I asked this gender questions. I like to ask how people get into it, like what you have that aha moment, what really led you to realize that entrepreneurship is the way to go. I love to hear people and how they talk about their markets. Why did you choose that market? I'm fascinated because people make money in all asset classes, they make it in all markets. And I'm just fascinated to go through another investors, a way of doing things, how they finance their deals. And again, I found some pretty amazing things.
People who are able to finance their deals entirely with debt, it can be done. And I think these people are really brilliant. I'm gonna interview somebody who's doing that himself. You under rots, upcoming episodes. So just fascinated again, by different ways of doing things. I want to get beyond the syndication model. Because again, I think it's wonderful, especially if you are really focused on building wealth, but again, it's not the only way of doing things, but again, really like to focus on what I call chicken soup for the entrepreneurs soul.
Like I like to ask people questions about, you know, what's your advice for a new entrepreneur? What's your advice for your younger self? What inspires you to keep going? A lot of these people that I interview, same as you, I'm sure these are people you don't really need to be working, right? They're doing this because they're creating a legacy for their children or for their communities, or because they just love the rough and tumble of business. Just love making really big deals. And for me, it's all of the above, but regardless I love talking about entrepreneurship.
It's something that really lit my world on fire. And I just want to share that it's not just about investing. It's not just about multifamily. It's about how you, wherever you are in your life, you can get more out of your life by being an investor.
Jesse (40m 10s): I like it. Awesome. We'll in terms of where people can go to reach out or find that podcast, what would, would be the best path?
George (40m 20s): Yeah. So you can, again, just search for us. It's I misspelled a word on purpose. It's a plan word. So it's all about being a founder. So it's like founder with a Y not like an actual metal casting plant. So it makes sure you misspell it in the title. It just look for me online in LinkedIn. That's where you can find me. You'll find everything that I've been doing there as well.
Jesse (40m 44s): Okay. So we've got our final four here. If you're ready, I'll send these questions your way. All right.
George (40m 48s): Hit me. Okay,
Jesse (40m 50s): George, what's something that you know now in your career, whether it's business or real estate that you wish you knew when you first started out.
George (40m 57s): Sure. I'm going to say relationships. I've known relationships have been important throughout my career. And every year I grow older, I grow wiser in terms of making more and better relationships with people. So it's relationships, it's not the numbers. People will bring you the deals. People will bring you the money that you need for the deals. It's all relationships.
Jesse (41m 21s): I like it in terms of mentorship and for people starting out in our industry, what is your view on mentorship and what would you suggest to those individuals?
George (41m 31s): Yeah, so I wouldn't suggest to be cheap about it. If you can get a good mentor, somebody that works for you and looks, there are some great people in the business who may not be great mentors. And there may be some people who may be moderately successful in the business who may be natural teachers. So you want to go and talk to it's just like vetting a sponsor, right? Go talk to some people who have been in their program. Look for some testimonials. I mean, I hope you go beyond the testimonials, talk to people who are in the business and they'll tell you, Hey, you know, this program is good.
Or they might say, Hey, that program, those coaches haven't even closed the deal don't go in there. So again, you want to look around and do some due diligence, just like you would on a property,
Jesse (42m 12s): A book or two that you could recommend to listeners.
George (42m 16s): I have always loved the seven habits of highly effective people by Stephen Covey. I love Dale Carnegie, how to win friends and influence people that I think could be the best business book of all time. It's really a self-help book, but again, he keeps tying it into business. If you are building those relationships, if you are a people person or become a people person, whatever you are good at, you will make tons more money by doing it.
Jesse (42m 46s): All right. Last and final question. First car, make and model.
George (42m 50s): Oh, love it. Thinking way, way back. I want to say that it was a reliance. It was essentially the clone of the K car. It got me around. It was, it was pretty amazing camera. This was my first or second because I did also get a great hand-me-down. I got a, a Ford grand Marquis. So I can't remember which one actually came first, but I lived through both of those automobiles. And you know what, when it's your first car, doesn't matter.
It's just amazing.
Jesse (43m 22s): That is fantastic. I don't think we've ever had somebody say that they've had a reliant on the, on the show, reliant motor company. That's funny. That makes me think of a, in the seventies or eighties where they had checkered cab came out with their own car. That was supposed to be like the, the Volvo, the safety car of a, of the industry. But didn't do very well, but all right, reliant, that's a first for us, George, aside from the podcast. Is there any other place that you'd like to point listeners, if they want to know more about your story or more about what you're doing in real estate?
George (43m 56s): Sure. You can head out to horizon. Multi-family it's a great place to establish a relationship. Reach out to me on LinkedIn. If you are a syndicator, love to have you on my show. Best advice I've gotten last year is don't just have these 30 minute introductions with people. You know, when you get somebody qualified, somebody who's done syndication best way to get to know them better, you know, bring them on your show, go on their show and you really get a double, triple TEDx of what you would get from that half hour.
Jesse (44m 25s): My guest today has been George Roberts, George, thanks for being part of working capital.
George (44m 31s): Thank so much for having me, Jesse.
Speaker 2 (44m 33s): It's been a pleasure.
Jesse (44m 41s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Anson Young is a Real Estate Agent and Investor with Hundreds of Transactions Completed in Each Category of Real Estate. Anson and his team Specialize in Marketing directly to Sellers for Off-market Deals, Using Many of the Methods that can be Found in his Book Finding & Funding Great Deals. When not Working, Anson can be Found Exploring the Wilds of Colorado’s Rocky Mountains with his family, Reading Favourite Books to his Son, and Attending Loud Rock Concerts.
In this episode we talked about:
• Anson’s Bio & Background
• Anson’s First Steps in Real Estate Business
• Becoming a Real Estate Agent
• Anson’s Main Focus in Real Estate
• Raising capital
• Private Landing
• Sourcing Deals
• Building an Off-Market List
• Prospecting and finding Opportunities
• Anson’s Thoughts on Inflation and Interest Rates
• Mentorship, Resources and Lessons Learned
Useful links:
https://www.instagram.com/younganson/?hl=en
https://www.youtube.com/c/ansonyoung
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Right? Ladies and gentlemen, my name's Jessica galleon. You're listening to working capital the real estate podcast. Our special guest today is aunts and young Anson is a real estate agent and investor with hundreds of transactions completed in each category, real estate Anson, and his team specialize in marketing directly to sellers for off-market deals, using many methods that can be found in his book, finding and funding great deals when not working ants and can be found exploring the wilds of Colorado with his family and tending loud rock concerts.
And I can see you got a twig behind you there, and son, how you doing?
Anson (54s): I'm good. I'm good. Thanks for having me, Jesse.
Jesse (56s): Yeah, my pleasure having you on, what do you got there? Is that a base? It's hard to tell because
Anson (1m 1s): That one's a five string bass.
Jesse (1m 4s): I like it. Fantastic, man. Well, thanks for coming on. We were just chatting before the show, like a few of the most recent guests you were speaking at BP con this year, what was, what was your topic?
Anson (1m 17s): So my topic this year was finding the deals in any market and it focused on kind of out of state investing or long distance real estate investing, building a team, you know, how basically how to go ahead and find those deals, whether it's networking or off market. And, and yeah, that's seems to be a hot topic. Everybody's market is too expensive. So they're looking at other markets and I figured I'd hit on that since that's what I'm doing too. So
Jesse (1m 47s): Yeah, absolutely. It's certainly topical right now. It's we kind of joke around about the inverse relationship between, you know, the, the lower interest rates are, the cheaper money is the harder it is to find deals.
Anson (1m 59s): Oh yeah, for
Jesse (1m 60s): Sure. So in terms of a little bit of your background for listeners that aren't familiar with you, maybe you could kind of take us back to how you got into real estate. I know you just mentioned on the outset, you're also an agent. Maybe you could take us back to the beginning of how that journey started.
Anson (2m 17s): Yeah, sure. So back in 2003 or so I was working in it, I got laid off like everybody did, it feels like kind of boat, post.com, bubble burst. And so I was just looking around of what to do next. Do I go back into it? Do I double down in that arena or do I do something else? And at the same time, my wife and I were going to move down to Phoenix from Denver to be closer to family, my brother had just moved there.
They were having their first kid. So I was like, you know what? I don't have a corporate job anymore. I could kind of move wherever I want. And right before I left a friend of mine handed me rich dad, poor dad, which is, I think just the basic origin story of all real estate investors these days. But, but literally read that book on the way down to Arizona and changed my entire mindset about what I could do, what I should do and why going back into a corporate environment, probably wasn't the best idea.
And so landed in Phoenix and decided new city, a new me, and kind of jumped in and tried to learn as much as I could about anything that I could about real estate. And at the same time I was bartending. And so nights were spent working and days were spent trying to figure out real estate. So that's kind of a, that's kind of where I got started.
Jesse (3m 48s): That's great. So in terms of kind of getting into that mindset, I mean, not, not a dissimilar from a lot of people that come on the podcast or just talking in general, rich dad, poor dad just seems to be a cornerstone for a lot of, at least the beginning of real estate education, because I think ultimately the quadrants of that book for, you know, for anybody that hasn't read it, you definitely have to go check that book by Robert Kiyosaki. But I think it is ultimately when you get to that fourth quadrant where it's passive or, you know, quotations passive investments, I think real estate is just, it kind of lends itself to that, to that type of investment or that type of income.
Anson (4m 28s): Yeah, absolutely. And I had no idea that any of that existed, I mean, the guy who gave me the book, Paul, we were, I remember talking in this parking lot late at night and, and, and, and I couldn't even wrap my brain around getting a second mortgage. Like you have one mortgage who's going to give you money for a second house. You know, like that, that's how small my mindset was until that book helped me unlock and unpack what's possible.
So it, there's a reason why it's so such an origin story for many of us is because we weren't really taught that. And, and then this, this book just showed us kind of a different way of how things could work. Yeah,
Jesse (5m 10s): Yeah, yeah, absolutely. And it's, it's funny cause you know, that book, it really, it hits people in totally different, different jobs and different times in their life. And it still seems to be one of the ones that keeps coming up. So you, you read rich dad, poor, poor dad, you're you get laid off from your job where once, once that clicks for you and that light bulb goes off, what was, what was your process after that?
Anson (5m 35s): So I'm like, like many people starting off. I had no clue what I was doing. So I basically attended every single meetup that I could find from kind of Rhea meetups, real estate investment associations, to like cashflow one-on-one games. So, you know, tied in with the, the rich poor dad, it's basically a board game that people get together and play that kind of go through the principles of financial freedom and stuff.
And so anywhere that I could latch on to people who were doing real estate, I was there and I, I kind of made that my full-time job of, of doing that I've formed relationships. And in that I just started doing, trying to provide as much value as possible. So I'd go do all kinds of odds and end tasks for them for a couple of investors and a couple of agents. And in return, you know, all I asked for was just information. Like I would go run contracts, you know, for a long time for an agent.
And then I would ask for, Hey, can you teach me how to value properties on ML MLS? And so trying to provide that value first and then asking for something in return later on. And so I, I ran contracts, I punched signs in yards. I knocked on doors for a foreclosure investor. Feel like I did all these different things to try to learn as much as possible. And about after nine months to a year, one of the agents reciprocated with a deal.
And she was like, Hey, one of my clients has a property that they want to sell. I think that it would be great for you guys kind of sent over the numbers, helped me run through it and ended up to be our first deal. And it was a live in flip that we spent the next year fixing up and, and, you know, figuring out what's next. But we, we sold it after a year and ended up moving back to Denver. And so it was perfect timing because that was right at the end of 2005. And I think the Phoenix market crashed the next week.
So, so we got out just in time, but I learned a lot on that first deal and then went ahead and just appended and moved markets, which felt like starting over that's that's, that's kinda how that deal went. So
Jesse (7m 58s): Kind of started on that deal. Similar to a lot of individuals were, I guess, somewhat of a, you know, some people call it house hacking where you were living in at the time, but also renting out a, would that be fair to say it was kind of that, that type of arrangement for the first one?
Anson (8m 13s): No, we did. We did kind of a, it needed a lot of work. And so we just decided to move in and fix it while we were living there. We were fixing up stuff, you know, as time and money permitted and by the end of it, you know, it was fixed up and ready to go. And actually my agent w I, I had sent her an email, you know, we had gone to Vegas for our anniversary decided right then that we were kind of just done with Phoenix.
I sent her an email saying, Hey, I think we're going to sell. And she's like, I'll buy it. Like my parents will buy this. Like, she had very much faith that the market was going to keep and she was a little bit wrong on that, but that's okay. Yeah. So she gave us a really good price on it. We ended up making, I think $60,000 on it after a year, which isn't too bad and, you know, had some money to go back to Denver and continue the journey
Jesse (9m 11s): Right on. So was the journey continuing on that kind of operational level where it was value add deals or did you, did you pivot?
Anson (9m 22s): I think I, yeah, it was definitely a value add deals. When I got back, I felt like it was starting over because I didn't have a lot of real estate contacts I didn't have, I didn't know the market. And so, no, I kind of just went back to basics. I started working with investors and agents. I actually got hired on to a real estate agent team and was doing broker price opinions for banks. And right then I just, I figured out this whole thing of bank owned foreclosures and that this could be, you know, a really big thing.
And so, so from then on, probably for the next two years, pretty much everything that I bought was a bank owned foreclosure. So they were all distressed value, add properties that, that had almost no emotion into them because the banks don't care if you low ball them, they just care if it meets their kind of pricing matrix. So that was a fun time to be in real estate for sure. But I got my license maybe a year after I moved back and just kind of did both. I was an agent investor just kind of juggling both things.
Hm.
Jesse (10m 29s): So in terms of the kind of becoming an agent, because you get lots of people that are like, should I get my license as an investor, if you're going to make that switch, did you find it was something that was kind of critical or a nice to have type of type of thing where you still had to develop relationships with host of different agents?
Anson (10m 50s): Yeah. I found it to be absolutely critical to all the real estate that I was doing. Just, just from a, you know, obviously if I'm buying Oreos and my entire existence of finding deals is on MLS. I don't want to be one step removed from that process. I want to be, you know, like a direct actor in that process. And so right in front of MLS on a daily basis to try to find, you know, the deals that I'm looking for, rather than relying on an agent to send them to me, or, you know, go around the back door and give me their log-in or something like that, I could shoot off offers immediately, you know, set showings, do the things that I needed to do to go lock up these deals.
And so for me, it was absolutely pivotal
Jesse (11m 41s): In terms of kind of where you've developed your business today. So you kind of, you go through this process, there's the light bulb moment. You, you see that it's, there's proof of concept when you, you know, in one year you make 60 grand catch us up to today. What, where are you focusing? Not on, not just from a, from a geographical standpoint, but even from a type of asset or type of real estate that maybe you focus on or areas that you focus on.
Anson (12m 7s): Yeah. So, you know, it's kind of ebbed and flowed over the years between wholesales fix and flip. What I'm pivoting towards this year is more longterm buy and hold properties, single family, a small multifamily, those kinds of properties. And so that's a little bit different for me. I'm, I'm used to doing this transactional turn and burn, and now I'm trying to slow down and think for the longterm so that I can, you know, actually have something to show for my effort rather than just, you know, larger pay check, so to speak.
And so, so Ben pivoting in that direction as, as a business and Ben geographically in three different markets this year, just testing things out and getting the ball rolling on long-term cashflow. So that's kind of where we're at.
Jesse (13m 3s): So answered for the actual capital raising side of the business for you or where you source capital has that changed over the, the last few years? And if so, how, how has that evolved for, for yourself?
Anson (13m 16s): It hasn't changed too much once I kind of discovered private money lending before the sec kind of changed their rules, we would kind of just cold call for private lenders, developed relationships with them, had a good track record over time. And so after a while, you know, we would get referred to their friends who were looking to, you know, make, you know, a 10 to 14% return on their investment. And, and so, so yeah, so it hasn't changed too much because we're still using short-term even on these long-term projects we're using short-term funds to, to acquire them and then refinance it now to a more portfolio or, or bank loan style financing.
So I guess that side's new, but when we go into purchase, we're still using like our same private money lenders. They know that they're going to hang on for, you know, three to six months until we refinance out, but that's not too different from a flip where we would hold onto it for three to six months and they would get paid out at the end of that. So, so the, you know, the initial buy is the same. It's just that long-term piece of now it's going to convert into something long-term. So can you,
Jesse (14m 34s): You talked to, to that a little bit for listeners, you know, for that type of approach where you are, you know, getting short term finance, when you have a project going on and then stabilizing after that, maybe you could to kind of run through how that works. And, and, you know, on top of that private lending, I think is a bit of a black box for a lot of people. So, you know, maybe, maybe get your thoughts on that as well.
Anson (14m 59s): What do you mean by black box?
Jesse (15m 0s): Well, I, I feel that a lot of people that aren't in our industry, they hear private money and it sounds like they're meeting somebody in an alleyway and they're handing them a bag of cash. So I think, I think from like, I think for a lot of people, they don't realize how many private lenders there are out there, how many more options you have than just walking up to the bank that you've known for years, or are you, you know, you know, the brand,
Anson (15m 25s): Right? Yeah. So in, you know, I wish it was like an alleyway with a sack full of cat. That'd be kind of fun actually. But typically private lending is just lending from an individual rather than a bank. And so a sophisticated, private lender will operate somewhat like a bank where they, you know, they kind of vet deals. They've vet you, they vet the process. Some even want like a loan application and stuff. Others are very much more relational.
I mean, your next private lender could be your rich uncle or something who really believes in you and wants you to succeed. So it kinda runs the gamut from usually it's, you know, older people who are using the retirement funds. Some people who came into some money one way or the other, it seems like two or three of my guys who I lend or who I borrow from. They all sold a business in their sixties and now have kind of more money than they know what to do with, they see a return of 12% PR and that's very exciting to them.
And so they will lend that to the right person. And so it's kind of, I wouldn't call it a beginner strategy at all, because usually you have to have a kind of a track record. You have to have a reputation for what you're doing for somebody who just is sitting on, you know, even if it's a million dollars, you know, that's two projects in Denver. And so they, you know, lending out their entire million dollars. It has to be to the right person, the right projects with the right track record so that they are secure that bill, you know, end up getting that back.
And so it's kind of private lending in a nutshell. And to your other question for kind of stabilizing an asset, typically we're, we're purchasing with private money, which is for us, it's a hundred percent loan and fix. And so we're, we're into the deal with no money and we go ahead and we get the property fixed up rented, and our next lender wants to see it for at least three months.
We're, we're, we're collecting rent. Everything is stable. Everything's looking good before we can transition that into kind of a, it's a refinance into either a portfolio or, or a conventional style loan. I prefer portfolio, cause it seems just a little easier, but then they, they close on it and they'll pay off the private lender. And so now instead of owing, you know, this individual money, now we own, now we owe this credit union or this bank money and, and pay them.
And it's a long-term note, whereas our short-term private money lender is only like a six month note. So now we have a 30 year note and a smaller payment, so we can actually cash flow.
Jesse (18m 29s): Nice. Yeah, yeah. Obviously the goal there, if we switched to sourcing deals, like we talked about at the outset, it's a, it's a challenging thing to do right now. So it was topical, I guess, that that was in new Orleans. That was your kind of discussion topic, maybe as a comparison, if, if there has been things that are different than when you were starting out, how you were sourcing deals, then as opposed to strategies you've, you've learned and are using now, how has that evolved?
And, and you know, what, what approach are you using given the fact that it just seems like there is so little supply out there.
Anson (19m 7s): Yeah. That evolution has been pretty huge. So like I S like I said earlier, starting off, we did a lot of, we just bought bank owned, foreclosures right off of MLS. And we got really good at that to the point where we also sold REO, but we would buy from other REO brokers. And so we kind of knew the inside process of how asset managers think what different banks did, what, when they did their price reductions, you know, could we get in one day before a price reduction and then get under that price reduction and lock up a property before everybody else saw it.
We got pretty good at that kind of stuff. Once the foreclosure crisis started resolving itself, bailouts and everything else, there was just less foreclosures coming. And I saw the writing on the wall when, on the REO sourcing side, it's kind of the, you know, the, the, the source of the river started drying up and we were both benefiting from that source of the river plus way downstream, when we would pick up deals. It's like, oh man, I kind of see the writing writing on the wall here.
We're not going to be able to find as many deals as we used to. And so at the same time, we were also doing some short sales and looking around there was still, you know, a huge, you know, huge chunk of people who were underwater on their mortgages. And so we just aggressively attacked short sales that were listed and short sales that weren't listed. So we were just going straight after foreclosures basically. And so for about a year or two, we did mainly short sales. Was it, we got really good at that as well of going from the wild west or short sales to when it kinda got standardized and institutionalized.
We saw, you know, everything in that whole window. And then, and then the same thing happened where I started seeing that the market was rising, the prices were rising and not everybody would be underwater forever. And so what do I do next? And from there, we went off market. We, we, we did a little bit more MLS deals we would find, but those really just started getting few and far between, and we needed a bigger source of deals we were doing mainly wholesaling right then.
And so the better source of deals was just to go directly to the seller. And so ever since probably 2014, 15 up until now has been all off market direct to seller. I haven't bought an MLS deal probably three or four years. They just, I don't know. It's just not, not scary
Jesse (21m 54s): Now. Yeah,
Anson (21m 56s): Exactly. So all, you know, basically all off market right now, just going directly to those sellers and seeing if we can help them.
Jesse (22m 4s): So on that, on that note, in terms of the approach that you use with, you know, is it the, of, in the vein of direct mailers, are you kind of going to the secretary of state? Are you going through different software? How are you, how are you reaching out to those? Those would be sellers.
Anson (22m 22s): Yeah. So our main, our main way to reach out and touch them is direct mail. We have just this year started adding in, or I shouldn't say just this year, it was probably 2019, just started stacking in more ways to reach sellers, kind of this, the same lists and in different ways. So if they did respond to the direct mail, we also called them. We also text them. We also emailed them if we could, you know, find them on Facebook, knock on their door, whatever it took to really get in front of the right sellers.
You know, there was a time where you can just send out postcards and, you know, get a 2% response rate, just pick from the best ones. But that just started kind of getting less and less as there was more competition. So now we're reaching out in multiple ways, but direct mail is still our number one.
Jesse (23m 16s): Yeah. You know, it, it's interesting because it comes, I guess, depending on who the sellers are. Like, for instance, if you, if you're really reaching out to predominantly mom and pop, or like you said, small, multi, multi Juarez, you know, I found that the responses are usually better. However, if there's that one layer of say a corporate structure, LLC, partnership, whatever that is, do you, is that also part of the pool that you reach out to? And I guess from there, if it is, you probably have to do that one extra step of, you know, who's the principal who's, you know, who's the signing officer.
Anson (23m 49s): Yep. Yeah. So in Colorado, our, our secretary of state is pretty transparent. So we can go on and search LLCs and find out who, you know, who's the owner where their register addresses all that stuff. So our, oh, I wish I had the number of, of LLCs that we've mailed to, but I have given that over to a VA to go ahead and look those up and just make sure that we're hitting the right people and getting in front of them instead of just setting, you know, XYZ LLC, you know, it's like Paul Jones or something.
So,
Jesse (24m 25s): Yeah, yeah. In terms of the, so for those that are just kind of getting into real estate in terms of finding off market deals, they're coming into an environment that, you know, we we've seen prior to supply constraints, a different approach. Whereas now, because there's so few real estate opportunities out there properties, they were coming into a market where they probably have to start with direct, direct to seller or trying to find off market deals. How would you go about telling somebody who's getting into the industry? How does start building that list?
Anson (24m 58s): I mean, even today, it sounds very, very old school, but I think that are driving for dollars lists are still some of our Mo you know, highest producing lists. And if you want to keep the cost down and you have more time than you have money, I would say, drive for dollars and then cold column, just, you know, skip, trace them or look them up on white pages.com. Yup. And then, you know, send out phone calls. You'll probably, you know, get 50 to a hundred driving for dollars leads a day.
And then, you know, cold column the same day or the day after you'll, you'll keep yourself busy for sure. But it, you know, bang for buck time for payoff, it's definitely the best use of your time to try to find deals.
Jesse (25m 48s): Yeah. A hundred percent, all it really takes is, you know, you do it for a week. If you can hit one, then you know, there's your, there's your week's work right there. Exactly.
Anson (25m 57s): And pretty good ROI.
Jesse (25m 59s): Yeah. A hundred percent. And in terms of your stock, you know, your stock mailer, is it typically, like you said, you know, Hey, you know, Hey Doug Smith and then w what's the typical pitch that you, that you guys employ.
Anson (26m 14s): Yeah. So we definitely try to speak, you know, the ethos or the, you know, the, the makeup of our direct mail is, you know, handcrafted and handwritten. So we want to make sure that we're, we're talking to them down at like a normal level of like, Hey, we're here to help. So it's like, you know, using names, using addresses, using, you know, subdivisions, if we really want to like, like, Hey, you know, Hey, Jesse, we're, you know, we're wondering if you wanted to sell 1, 2, 3 main street, if you've ever thought about selling hassle-free please give us a call.
You know, we don't have any commissions or inspections or appraisals, you know, call us for a no obligation fair offer. And that that's enough of the core of the message to get across of like, Hey, we're here to help. You know, sometimes we'll add in that we're local, you know, we're, we're, we're definitely, you know, not an eye buyer or somebody who's a Zillow or something coming in that we're here to work with them and we have, you know, multiple ways to help them.
So,
Jesse (27m 28s): Yeah. Fantastic. At the end of the day, it's really just getting that phone call. You're not expecting it to get the sale, which it's nice, but not expecting to get the sale on the first touchpoint.
Anson (27m 37s): Right. Yeah, exactly. It's definitely a long game of multiple touches and, and yeah. Building on each other. So,
Jesse (27m 47s): So handsome, we're in a crazy time right now, recording this, you know, coming into the end of, of 20, 21. I don't think anybody could have predicted the last year and a half. How has your business, or how do you see your business evolving as a result of kind of the environment that we've been in, if at all, and, and maybe just prospectively, where do you see opportunities, you know, coming in the new year?
Anson (28m 15s): Yeah. So we're going to continue doing what we're doing for this year, which is, you know, more out of state looking at a state for markets that are conducive to cash flow. Short term rental opportunities is, is pretty big focus right now as well. And then locally, we've been partnering more with other investors because we've had a lot of time spent on the other side, kind of looking at a state. And, and so, you know, looking forward to next year, you know, I think the market's going to just be doing more of the same, can't foresee anything crazy that's going to happen.
And so, you know, we're just kind of to focus on long-term projects and, and even if we're wrong, you know, we still have, long-term more passive, passive things going, so
Jesse (29m 12s): Right on. All right. And so we ask a four questions, every guest before we wrap up. So before I get there, I'm just curious, I've been trying to, you know, for the last month or two kind of taking a poll of, of different real estate professionals I talked to, and I'm just curious your thoughts on number one, inflation, and number two interest rates. And, and I'm not expecting you to have a crystal ball, but I just, I find it funny because, you know, you have asked people, you get four opinions on these topics, right?
Anson (29m 46s): Yeah. So inflation's obviously going to be an issue. I think that Brian, who's the economist who spoke at BiggerPockets convention, had a lot of really good things to say. And pretty much everything that I would kind of repeat of, you know, inflation's a problem. It's not going to be a problem today or next year, but in the next, you know, four years or so, it will probably pop and become an issue.
And as far as interest rates, it's like, I think that they just voted that they're not, they're not going to change at all. And so as long as interest rates stay down and buying, and money is easy, it's just gonna turn, turn the market and keep it going. So buyers will keep buying. Investors will keep investing money right now is probably the easiest thing to get, whether it's hard money or otherwise, and so easy money, hard deals.
So it's going to probably just keep fueling that and, and yeah, just, it, it's kinda hard to say, but I think Brian had a really good kind of outlook on it where, you know, 20, 24 or 2026 is kind of when things will start changing and creeping up a little bit on, on interest rates. And I, I don't know enough about it to disagree. So
Jesse (31m 13s): Yeah, we had a, we had Brian on the show, you can check that episode out. I think it was in the sixties, but he was, he was great if especially if you, if you geek out on, on economics, that's definitely the one that listened to. I love it. Okay. Sweet. If you're ready, we'll fire off these final four questions to ya.
Anson (31m 32s): All right. I'm ready. Right on.
Jesse (31m 34s): What's something, you know, now in your career Anson, whether that's in real estate or business that you wish you knew when you started out.
Anson (31m 43s): So I kind of, I definitely always traded just short-term money for, you know, not worrying about long-term things and, you know, it's like, oh, you're in your twenties. You know, you don't really care too much about it, but once you get up into your forties and you're kind of still doing the same thing, it's probably not the best idea. And so I would, I would go back and tell myself for sure, just like, Hey, keep like even a third of the amount of houses that you're doing, and then you won't have to work when you're 40.
So
Jesse (32m 17s): There you go. That's a, that's a good point. Okay. In, in terms of, for that person, that's getting into our industry, what do you tell them in terms of your view on mentorship?
Anson (32m 32s): Yeah, that's a really, really good question. I'm a big fan of mentors, whether it's kind of formal mentors and informal mentors, you know, people who were willing to help you up. And I would say, just find somebody who aligns with your values and then see how you can provide value to them so that they can help you get to where you want to go. And then once you're at a place where, you know, a few years along the line, I think that mentorship works both ways where you should have a hand up and a hand down.
So you're, you know, you'll graduate through mentors that you're working with and every step along the way, you should be helping bring people up as well. And that teaches you a lot of things too, as you're teaching and working through things with other investors as well. So you've kind of learned by teaching and then obviously you learn by learning from somebody who's where you want to be.
Jesse (33m 31s): Yeah. That's great. Great answer as well. Okay. In terms of, let's put a pin in rich dad, poor dad. So put that one aside, but what is a book that you find yourself just recommending over and over again?
Anson (33m 45s): Yeah. So my, that is, it was a book that I also give about the most as well. And it's obstacle is the way by Ryan holiday and it's a book on stoicism and it's, it's really helped me in my personal life and also through business as well. And so it's just an, and an outlook on life and on business and situations that I wasn't exposed to until I kind of started getting into it. And that book definitely hammered it home for me.
So
Jesse (34m 19s): That's cool. I don't think we've ever had that book recommended on the show, but I've, I've definitely had people say it's a, it's a killer book. Yep. Okay. Last question. First car, make and model.
Anson (34m 32s): I had a 1979 tan VW rabbit. That is
Jesse (34m 38s): Unreal.
Anson (34m 39s): Two door.
Jesse (34m 40s): Yeah. That's pretty good, man. Like 79. I just looking at you. I would've, I would've assumed it'd be the eighties or nineties, but that's, that's quite the car.
Anson (34m 50s): That's the same year I was born. It just happened to be, my dad's always worked on VWs my whole life. And so my step-mom drove like a Cabriolet and my dad's had like dozens and dozens of bugs and, and yeah, when it came time to me, for me to start driving, you know, he bought this 79 tan rabbit that he's like, this is yours. If you get your grades up. And it took me a little while, but finally got my grades up enough to, to drive it. So
Jesse (35m 20s): I love how they're bringing back the seventies and eighties, the retro stitching for a, for a lot of their, their new models. So it got kind of that vintage look.
Anson (35m 29s): I'd love to see it. I'd love to see a new rabbit. Yeah.
Jesse (35m 32s): Oh yeah. Bring it back. Awesome. All right. Answered for those of you that want to connect or reach out or have any questions. I know you're doing work with bigger pockets. Maybe you could tell, tell listeners where they can go on the Google machine.
Anson (35m 47s): Yeah. If you go to the Google machine and if you want to connect with me bigger pockets, this is probably the easiest way to do it. It's just, if you just search my name on the site, you'll find my, my, my profile. Think I'm the only answer on the young, on there still. So that's good. Yeah. And then yeah, if you want to find me on Instagram at young Anson, and if you want to find me on YouTube, I do do videos for bigger pockets and starting to do more videos for myself as well. And so you can find me there.
Jesse (36m 16s): My guest today has been aunts and young aunts and thanks for being part of working capital.
Anson (36m 21s): Thanks, Jesse. Thanks so much.
Jesse (36m 31s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Right? Ladies and gentlemen, my name's Jessica galleon. You're listening to working capital the real estate podcast. Our special guest today is aunts and young Anson is a real estate agent and investor with hundreds of transactions completed in each category, real estate Anson, and his team specialize in marketing directly to sellers for off-market deals, using many methods that can be found in his book, finding and funding great deals when not working ants and can be found exploring the wilds of Colorado with his family and tending loud rock concerts.
And I can see you got a twig behind you there, and son, how you doing?
Anson (54s): I'm good. I'm good. Thanks for having me, Jesse.
Jesse (56s): Yeah, my pleasure having you on, what do you got there? Is that a base? It's hard to tell because
Anson (1m 1s): That one's a five string bass.
Jesse (1m 4s): I like it. Fantastic, man. Well, thanks for coming on. We were just chatting before the show, like a few of the most recent guests you were speaking at BP con this year, what was, what was your topic?
Anson (1m 17s): So my topic this year was finding the deals in any market and it focused on kind of out of state investing or long distance real estate investing, building a team, you know, how basically how to go ahead and find those deals, whether it's networking or off market. And, and yeah, that's seems to be a hot topic. Everybody's market is too expensive. So they're looking at other markets and I figured I'd hit on that since that's what I'm doing too. So
Jesse (1m 47s): Yeah, absolutely. It's certainly topical right now. It's we kind of joke around about the inverse relationship between, you know, the, the lower interest rates are, the cheaper money is the harder it is to find deals.
Anson (1m 59s): Oh yeah, for
Jesse (1m 60s): Sure. So in terms of a little bit of your background for listeners that aren't familiar with you, maybe you could kind of take us back to how you got into real estate. I know you just mentioned on the outset, you're also an agent. Maybe you could take us back to the beginning of how that journey started.
Anson (2m 17s): Yeah, sure. So back in 2003 or so I was working in it, I got laid off like everybody did, it feels like kind of boat, post.com, bubble burst. And so I was just looking around of what to do next. Do I go back into it? Do I double down in that arena or do I do something else? And at the same time, my wife and I were going to move down to Phoenix from Denver to be closer to family, my brother had just moved there.
They were having their first kid. So I was like, you know what? I don't have a corporate job anymore. I could kind of move wherever I want. And right before I left a friend of mine handed me rich dad, poor dad, which is, I think just the basic origin story of all real estate investors these days. But, but literally read that book on the way down to Arizona and changed my entire mindset about what I could do, what I should do and why going back into a corporate environment, probably wasn't the best idea.
And so landed in Phoenix and decided new city, a new me, and kind of jumped in and tried to learn as much as I could about anything that I could about real estate. And at the same time I was bartending. And so nights were spent working and days were spent trying to figure out real estate. So that's kind of a, that's kind of where I got started.
Jesse (3m 48s): That's great. So in terms of kind of getting into that mindset, I mean, not, not a dissimilar from a lot of people that come on the podcast or just talking in general, rich dad, poor dad just seems to be a cornerstone for a lot of, at least the beginning of real estate education, because I think ultimately the quadrants of that book for, you know, for anybody that hasn't read it, you definitely have to go check that book by Robert Kiyosaki. But I think it is ultimately when you get to that fourth quadrant where it's passive or, you know, quotations passive investments, I think real estate is just, it kind of lends itself to that, to that type of investment or that type of income.
Anson (4m 28s): Yeah, absolutely. And I had no idea that any of that existed, I mean, the guy who gave me the book, Paul, we were, I remember talking in this parking lot late at night and, and, and, and I couldn't even wrap my brain around getting a second mortgage. Like you have one mortgage who's going to give you money for a second house. You know, like that, that's how small my mindset was until that book helped me unlock and unpack what's possible.
So it, there's a reason why it's so such an origin story for many of us is because we weren't really taught that. And, and then this, this book just showed us kind of a different way of how things could work. Yeah,
Jesse (5m 10s): Yeah, yeah, absolutely. And it's, it's funny cause you know, that book, it really, it hits people in totally different, different jobs and different times in their life. And it still seems to be one of the ones that keeps coming up. So you, you read rich dad, poor, poor dad, you're you get laid off from your job where once, once that clicks for you and that light bulb goes off, what was, what was your process after that?
Anson (5m 35s): So I'm like, like many people starting off. I had no clue what I was doing. So I basically attended every single meetup that I could find from kind of Rhea meetups, real estate investment associations, to like cashflow one-on-one games. So, you know, tied in with the, the rich poor dad, it's basically a board game that people get together and play that kind of go through the principles of financial freedom and stuff.
And so anywhere that I could latch on to people who were doing real estate, I was there and I, I kind of made that my full-time job of, of doing that I've formed relationships. And in that I just started doing, trying to provide as much value as possible. So I'd go do all kinds of odds and end tasks for them for a couple of investors and a couple of agents. And in return, you know, all I asked for was just information. Like I would go run contracts, you know, for a long time for an agent.
And then I would ask for, Hey, can you teach me how to value properties on ML MLS? And so trying to provide that value first and then asking for something in return later on. And so I, I ran contracts, I punched signs in yards. I knocked on doors for a foreclosure investor. Feel like I did all these different things to try to learn as much as possible. And about after nine months to a year, one of the agents reciprocated with a deal.
And she was like, Hey, one of my clients has a property that they want to sell. I think that it would be great for you guys kind of sent over the numbers, helped me run through it and ended up to be our first deal. And it was a live in flip that we spent the next year fixing up and, and, you know, figuring out what's next. But we, we sold it after a year and ended up moving back to Denver. And so it was perfect timing because that was right at the end of 2005. And I think the Phoenix market crashed the next week.
So, so we got out just in time, but I learned a lot on that first deal and then went ahead and just appended and moved markets, which felt like starting over that's that's, that's kinda how that deal went. So
Jesse (7m 58s): Kind of started on that deal. Similar to a lot of individuals were, I guess, somewhat of a, you know, some people call it house hacking where you were living in at the time, but also renting out a, would that be fair to say it was kind of that, that type of arrangement for the first one?
Anson (8m 13s): No, we did. We did kind of a, it needed a lot of work. And so we just decided to move in and fix it while we were living there. We were fixing up stuff, you know, as time and money permitted and by the end of it, you know, it was fixed up and ready to go. And actually my agent w I, I had sent her an email, you know, we had gone to Vegas for our anniversary decided right then that we were kind of just done with Phoenix.
I sent her an email saying, Hey, I think we're going to sell. And she's like, I'll buy it. Like my parents will buy this. Like, she had very much faith that the market was going to keep and she was a little bit wrong on that, but that's okay. Yeah. So she gave us a really good price on it. We ended up making, I think $60,000 on it after a year, which isn't too bad and, you know, had some money to go back to Denver and continue the journey
Jesse (9m 11s): Right on. So was the journey continuing on that kind of operational level where it was value add deals or did you, did you pivot?
Anson (9m 22s): I think I, yeah, it was definitely a value add deals. When I got back, I felt like it was starting over because I didn't have a lot of real estate contacts I didn't have, I didn't know the market. And so, no, I kind of just went back to basics. I started working with investors and agents. I actually got hired on to a real estate agent team and was doing broker price opinions for banks. And right then I just, I figured out this whole thing of bank owned foreclosures and that this could be, you know, a really big thing.
And so, so from then on, probably for the next two years, pretty much everything that I bought was a bank owned foreclosure. So they were all distressed value, add properties that, that had almost no emotion into them because the banks don't care if you low ball them, they just care if it meets their kind of pricing matrix. So that was a fun time to be in real estate for sure. But I got my license maybe a year after I moved back and just kind of did both. I was an agent investor just kind of juggling both things.
Hm.
Jesse (10m 29s): So in terms of the kind of becoming an agent, because you get lots of people that are like, should I get my license as an investor, if you're going to make that switch, did you find it was something that was kind of critical or a nice to have type of type of thing where you still had to develop relationships with host of different agents?
Anson (10m 50s): Yeah. I found it to be absolutely critical to all the real estate that I was doing. Just, just from a, you know, obviously if I'm buying Oreos and my entire existence of finding deals is on MLS. I don't want to be one step removed from that process. I want to be, you know, like a direct actor in that process. And so right in front of MLS on a daily basis to try to find, you know, the deals that I'm looking for, rather than relying on an agent to send them to me, or, you know, go around the back door and give me their log-in or something like that, I could shoot off offers immediately, you know, set showings, do the things that I needed to do to go lock up these deals.
And so for me, it was absolutely pivotal
Jesse (11m 41s): In terms of kind of where you've developed your business today. So you kind of, you go through this process, there's the light bulb moment. You, you see that it's, there's proof of concept when you, you know, in one year you make 60 grand catch us up to today. What, where are you focusing? Not on, not just from a, from a geographical standpoint, but even from a type of asset or type of real estate that maybe you focus on or areas that you focus on.
Anson (12m 7s): Yeah. So, you know, it's kind of ebbed and flowed over the years between wholesales fix and flip. What I'm pivoting towards this year is more longterm buy and hold properties, single family, a small multifamily, those kinds of properties. And so that's a little bit different for me. I'm, I'm used to doing this transactional turn and burn, and now I'm trying to slow down and think for the longterm so that I can, you know, actually have something to show for my effort rather than just, you know, larger pay check, so to speak.
And so, so Ben pivoting in that direction as, as a business and Ben geographically in three different markets this year, just testing things out and getting the ball rolling on long-term cashflow. So that's kind of where we're at.
Jesse (13m 3s): So answered for the actual capital raising side of the business for you or where you source capital has that changed over the, the last few years? And if so, how, how has that evolved for, for yourself?
Anson (13m 16s): It hasn't changed too much once I kind of discovered private money lending before the sec kind of changed their rules, we would kind of just cold call for private lenders, developed relationships with them, had a good track record over time. And so after a while, you know, we would get referred to their friends who were looking to, you know, make, you know, a 10 to 14% return on their investment. And, and so, so yeah, so it hasn't changed too much because we're still using short-term even on these long-term projects we're using short-term funds to, to acquire them and then refinance it now to a more portfolio or, or bank loan style financing.
So I guess that side's new, but when we go into purchase, we're still using like our same private money lenders. They know that they're going to hang on for, you know, three to six months until we refinance out, but that's not too different from a flip where we would hold onto it for three to six months and they would get paid out at the end of that. So, so the, you know, the initial buy is the same. It's just that long-term piece of now it's going to convert into something long-term. So can you,
Jesse (14m 34s): You talked to, to that a little bit for listeners, you know, for that type of approach where you are, you know, getting short term finance, when you have a project going on and then stabilizing after that, maybe you could to kind of run through how that works. And, and, you know, on top of that private lending, I think is a bit of a black box for a lot of people. So, you know, maybe, maybe get your thoughts on that as well.
Anson (14m 59s): What do you mean by black box?
Jesse (15m 0s): Well, I, I feel that a lot of people that aren't in our industry, they hear private money and it sounds like they're meeting somebody in an alleyway and they're handing them a bag of cash. So I think, I think from like, I think for a lot of people, they don't realize how many private lenders there are out there, how many more options you have than just walking up to the bank that you've known for years, or are you, you know, you know, the brand,
Anson (15m 25s): Right? Yeah. So in, you know, I wish it was like an alleyway with a sack full of cat. That'd be kind of fun actually. But typically private lending is just lending from an individual rather than a bank. And so a sophisticated, private lender will operate somewhat like a bank where they, you know, they kind of vet deals. They've vet you, they vet the process. Some even want like a loan application and stuff. Others are very much more relational.
I mean, your next private lender could be your rich uncle or something who really believes in you and wants you to succeed. So it kinda runs the gamut from usually it's, you know, older people who are using the retirement funds. Some people who came into some money one way or the other, it seems like two or three of my guys who I lend or who I borrow from. They all sold a business in their sixties and now have kind of more money than they know what to do with, they see a return of 12% PR and that's very exciting to them.
And so they will lend that to the right person. And so it's kind of, I wouldn't call it a beginner strategy at all, because usually you have to have a kind of a track record. You have to have a reputation for what you're doing for somebody who just is sitting on, you know, even if it's a million dollars, you know, that's two projects in Denver. And so they, you know, lending out their entire million dollars. It has to be to the right person, the right projects with the right track record so that they are secure that bill, you know, end up getting that back.
And so it's kind of private lending in a nutshell. And to your other question for kind of stabilizing an asset, typically we're, we're purchasing with private money, which is for us, it's a hundred percent loan and fix. And so we're, we're into the deal with no money and we go ahead and we get the property fixed up rented, and our next lender wants to see it for at least three months.
We're, we're, we're collecting rent. Everything is stable. Everything's looking good before we can transition that into kind of a, it's a refinance into either a portfolio or, or a conventional style loan. I prefer portfolio, cause it seems just a little easier, but then they, they close on it and they'll pay off the private lender. And so now instead of owing, you know, this individual money, now we own, now we owe this credit union or this bank money and, and pay them.
And it's a long-term note, whereas our short-term private money lender is only like a six month note. So now we have a 30 year note and a smaller payment, so we can actually cash flow.
Jesse (18m 29s): Nice. Yeah, yeah. Obviously the goal there, if we switched to sourcing deals, like we talked about at the outset, it's a, it's a challenging thing to do right now. So it was topical, I guess, that that was in new Orleans. That was your kind of discussion topic, maybe as a comparison, if, if there has been things that are different than when you were starting out, how you were sourcing deals, then as opposed to strategies you've, you've learned and are using now, how has that evolved?
And, and you know, what, what approach are you using given the fact that it just seems like there is so little supply out there.
Anson (19m 7s): Yeah. That evolution has been pretty huge. So like I S like I said earlier, starting off, we did a lot of, we just bought bank owned, foreclosures right off of MLS. And we got really good at that to the point where we also sold REO, but we would buy from other REO brokers. And so we kind of knew the inside process of how asset managers think what different banks did, what, when they did their price reductions, you know, could we get in one day before a price reduction and then get under that price reduction and lock up a property before everybody else saw it.
We got pretty good at that kind of stuff. Once the foreclosure crisis started resolving itself, bailouts and everything else, there was just less foreclosures coming. And I saw the writing on the wall when, on the REO sourcing side, it's kind of the, you know, the, the, the source of the river started drying up and we were both benefiting from that source of the river plus way downstream, when we would pick up deals. It's like, oh man, I kind of see the writing writing on the wall here.
We're not going to be able to find as many deals as we used to. And so at the same time, we were also doing some short sales and looking around there was still, you know, a huge, you know, huge chunk of people who were underwater on their mortgages. And so we just aggressively attacked short sales that were listed and short sales that weren't listed. So we were just going straight after foreclosures basically. And so for about a year or two, we did mainly short sales. Was it, we got really good at that as well of going from the wild west or short sales to when it kinda got standardized and institutionalized.
We saw, you know, everything in that whole window. And then, and then the same thing happened where I started seeing that the market was rising, the prices were rising and not everybody would be underwater forever. And so what do I do next? And from there, we went off market. We, we, we did a little bit more MLS deals we would find, but those really just started getting few and far between, and we needed a bigger source of deals we were doing mainly wholesaling right then.
And so the better source of deals was just to go directly to the seller. And so ever since probably 2014, 15 up until now has been all off market direct to seller. I haven't bought an MLS deal probably three or four years. They just, I don't know. It's just not, not scary
Jesse (21m 54s): Now. Yeah,
Anson (21m 56s): Exactly. So all, you know, basically all off market right now, just going directly to those sellers and seeing if we can help them.
Jesse (22m 4s): So on that, on that note, in terms of the approach that you use with, you know, is it the, of, in the vein of direct mailers, are you kind of going to the secretary of state? Are you going through different software? How are you, how are you reaching out to those? Those would be sellers.
Anson (22m 22s): Yeah. So our main, our main way to reach out and touch them is direct mail. We have just this year started adding in, or I shouldn't say just this year, it was probably 2019, just started stacking in more ways to reach sellers, kind of this, the same lists and in different ways. So if they did respond to the direct mail, we also called them. We also text them. We also emailed them if we could, you know, find them on Facebook, knock on their door, whatever it took to really get in front of the right sellers.
You know, there was a time where you can just send out postcards and, you know, get a 2% response rate, just pick from the best ones. But that just started kind of getting less and less as there was more competition. So now we're reaching out in multiple ways, but direct mail is still our number one.
Jesse (23m 16s): Yeah. You know, it, it's interesting because it comes, I guess, depending on who the sellers are. Like, for instance, if you, if you're really reaching out to predominantly mom and pop, or like you said, small, multi, multi Juarez, you know, I found that the responses are usually better. However, if there's that one layer of say a corporate structure, LLC, partnership, whatever that is, do you, is that also part of the pool that you reach out to? And I guess from there, if it is, you probably have to do that one extra step of, you know, who's the principal who's, you know, who's the signing officer.
Anson (23m 49s): Yep. Yeah. So in Colorado, our, our secretary of state is pretty transparent. So we can go on and search LLCs and find out who, you know, who's the owner where their register addresses all that stuff. So our, oh, I wish I had the number of, of LLCs that we've mailed to, but I have given that over to a VA to go ahead and look those up and just make sure that we're hitting the right people and getting in front of them instead of just setting, you know, XYZ LLC, you know, it's like Paul Jones or something.
So,
Jesse (24m 25s): Yeah, yeah. In terms of the, so for those that are just kind of getting into real estate in terms of finding off market deals, they're coming into an environment that, you know, we we've seen prior to supply constraints, a different approach. Whereas now, because there's so few real estate opportunities out there properties, they were coming into a market where they probably have to start with direct, direct to seller or trying to find off market deals. How would you go about telling somebody who's getting into the industry? How does start building that list?
Anson (24m 58s): I mean, even today, it sounds very, very old school, but I think that are driving for dollars lists are still some of our Mo you know, highest producing lists. And if you want to keep the cost down and you have more time than you have money, I would say, drive for dollars and then cold column, just, you know, skip, trace them or look them up on white pages.com. Yup. And then, you know, send out phone calls. You'll probably, you know, get 50 to a hundred driving for dollars leads a day.
And then, you know, cold column the same day or the day after you'll, you'll keep yourself busy for sure. But it, you know, bang for buck time for payoff, it's definitely the best use of your time to try to find deals.
Jesse (25m 48s): Yeah. A hundred percent, all it really takes is, you know, you do it for a week. If you can hit one, then you know, there's your, there's your week's work right there. Exactly.
Anson (25m 57s): And pretty good ROI.
Jesse (25m 59s): Yeah. A hundred percent. And in terms of your stock, you know, your stock mailer, is it typically, like you said, you know, Hey, you know, Hey Doug Smith and then w what's the typical pitch that you, that you guys employ.
Anson (26m 14s): Yeah. So we definitely try to speak, you know, the ethos or the, you know, the, the makeup of our direct mail is, you know, handcrafted and handwritten. So we want to make sure that we're, we're talking to them down at like a normal level of like, Hey, we're here to help. So it's like, you know, using names, using addresses, using, you know, subdivisions, if we really want to like, like, Hey, you know, Hey, Jesse, we're, you know, we're wondering if you wanted to sell 1, 2, 3 main street, if you've ever thought about selling hassle-free please give us a call.
You know, we don't have any commissions or inspections or appraisals, you know, call us for a no obligation fair offer. And that that's enough of the core of the message to get across of like, Hey, we're here to help. You know, sometimes we'll add in that we're local, you know, we're, we're, we're definitely, you know, not an eye buyer or somebody who's a Zillow or something coming in that we're here to work with them and we have, you know, multiple ways to help them.
So,
Jesse (27m 28s): Yeah. Fantastic. At the end of the day, it's really just getting that phone call. You're not expecting it to get the sale, which it's nice, but not expecting to get the sale on the first touchpoint.
Anson (27m 37s): Right. Yeah, exactly. It's definitely a long game of multiple touches and, and yeah. Building on each other. So,
Jesse (27m 47s): So handsome, we're in a crazy time right now, recording this, you know, coming into the end of, of 20, 21. I don't think anybody could have predicted the last year and a half. How has your business, or how do you see your business evolving as a result of kind of the environment that we've been in, if at all, and, and maybe just prospectively, where do you see opportunities, you know, coming in the new year?
Anson (28m 15s): Yeah. So we're going to continue doing what we're doing for this year, which is, you know, more out of state looking at a state for markets that are conducive to cash flow. Short term rental opportunities is, is pretty big focus right now as well. And then locally, we've been partnering more with other investors because we've had a lot of time spent on the other side, kind of looking at a state. And, and so, you know, looking forward to next year, you know, I think the market's going to just be doing more of the same, can't foresee anything crazy that's going to happen.
And so, you know, we're just kind of to focus on long-term projects and, and even if we're wrong, you know, we still have, long-term more passive, passive things going, so
Jesse (29m 12s): Right on. All right. And so we ask a four questions, every guest before we wrap up. So before I get there, I'm just curious, I've been trying to, you know, for the last month or two kind of taking a poll of, of different real estate professionals I talked to, and I'm just curious your thoughts on number one, inflation, and number two interest rates. And, and I'm not expecting you to have a crystal ball, but I just, I find it funny because, you know, you have asked people, you get four opinions on these topics, right?
Anson (29m 46s): Yeah. So inflation's obviously going to be an issue. I think that Brian, who's the economist who spoke at BiggerPockets convention, had a lot of really good things to say. And pretty much everything that I would kind of repeat of, you know, inflation's a problem. It's not going to be a problem today or next year, but in the next, you know, four years or so, it will probably pop and become an issue.
And as far as interest rates, it's like, I think that they just voted that they're not, they're not going to change at all. And so as long as interest rates stay down and buying, and money is easy, it's just gonna turn, turn the market and keep it going. So buyers will keep buying. Investors will keep investing money right now is probably the easiest thing to get, whether it's hard money or otherwise, and so easy money, hard deals.
So it's going to probably just keep fueling that and, and yeah, just, it, it's kinda hard to say, but I think Brian had a really good kind of outlook on it where, you know, 20, 24 or 2026 is kind of when things will start changing and creeping up a little bit on, on interest rates. And I, I don't know enough about it to disagree. So
Jesse (31m 13s): Yeah, we had a, we had Brian on the show, you can check that episode out. I think it was in the sixties, but he was, he was great if especially if you, if you geek out on, on economics, that's definitely the one that listened to. I love it. Okay. Sweet. If you're ready, we'll fire off these final four questions to ya.
Anson (31m 32s): All right. I'm ready. Right on.
Jesse (31m 34s): What's something, you know, now in your career Anson, whether that's in real estate or business that you wish you knew when you started out.
Anson (31m 43s): So I kind of, I definitely always traded just short-term money for, you know, not worrying about long-term things and, you know, it's like, oh, you're in your twenties. You know, you don't really care too much about it, but once you get up into your forties and you're kind of still doing the same thing, it's probably not the best idea. And so I would, I would go back and tell myself for sure, just like, Hey, keep like even a third of the amount of houses that you're doing, and then you won't have to work when you're 40.
So
Jesse (32m 17s): There you go. That's a, that's a good point. Okay. In, in terms of, for that person, that's getting into our industry, what do you tell them in terms of your view on mentorship?
Anson (32m 32s): Yeah, that's a really, really good question. I'm a big fan of mentors, whether it's kind of formal mentors and informal mentors, you know, people who were willing to help you up. And I would say, just find somebody who aligns with your values and then see how you can provide value to them so that they can help you get to where you want to go. And then once you're at a place where, you know, a few years along the line, I think that mentorship works both ways where you should have a hand up and a hand down.
So you're, you know, you'll graduate through mentors that you're working with and every step along the way, you should be helping bring people up as well. And that teaches you a lot of things too, as you're teaching and working through things with other investors as well. So you've kind of learned by teaching and then obviously you learn by learning from somebody who's where you want to be.
Jesse (33m 31s): Yeah. That's great. Great answer as well. Okay. In terms of, let's put a pin in rich dad, poor dad. So put that one aside, but what is a book that you find yourself just recommending over and over again?
Anson (33m 45s): Yeah. So my, that is, it was a book that I also give about the most as well. And it's obstacle is the way by Ryan holiday and it's a book on stoicism and it's, it's really helped me in my personal life and also through business as well. And so it's just an, and an outlook on life and on business and situations that I wasn't exposed to until I kind of started getting into it. And that book definitely hammered it home for me.
So
Jesse (34m 19s): That's cool. I don't think we've ever had that book recommended on the show, but I've, I've definitely had people say it's a, it's a killer book. Yep. Okay. Last question. First car, make and model.
Anson (34m 32s): I had a 1979 tan VW rabbit. That is
Jesse (34m 38s): Unreal.
Anson (34m 39s): Two door.
Jesse (34m 40s): Yeah. That's pretty good, man. Like 79. I just looking at you. I would've, I would've assumed it'd be the eighties or nineties, but that's, that's quite the car.
Anson (34m 50s): That's the same year I was born. It just happened to be, my dad's always worked on VWs my whole life. And so my step-mom drove like a Cabriolet and my dad's had like dozens and dozens of bugs and, and yeah, when it came time to me, for me to start driving, you know, he bought this 79 tan rabbit that he's like, this is yours. If you get your grades up. And it took me a little while, but finally got my grades up enough to, to drive it. So
Jesse (35m 20s): I love how they're bringing back the seventies and eighties, the retro stitching for a, for a lot of their, their new models. So it got kind of that vintage look.
Anson (35m 29s): I'd love to see it. I'd love to see a new rabbit. Yeah.
Jesse (35m 32s): Oh yeah. Bring it back. Awesome. All right. Answered for those of you that want to connect or reach out or have any questions. I know you're doing work with bigger pockets. Maybe you could tell, tell listeners where they can go on the Google machine.
Anson (35m 47s): Yeah. If you go to the Google machine and if you want to connect with me bigger pockets, this is probably the easiest way to do it. It's just, if you just search my name on the site, you'll find my, my, my profile. Think I'm the only answer on the young, on there still. So that's good. Yeah. And then yeah, if you want to find me on Instagram at young Anson, and if you want to find me on YouTube, I do do videos for bigger pockets and starting to do more videos for myself as well. And so you can find me there.
Jesse (36m 16s): My guest today has been aunts and young aunts and thanks for being part of working capital.
Anson (36m 21s): Thanks, Jesse. Thanks so much.
Jesse (36m 31s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Craig Curelop is a Real Estate Agent and Investor. He is an Author of The House Hacking Strategy: How to Use Your Home to Achieve Financial Independence and Co-host of FI Team podcast.
In this episode we talked about:
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Craig’s Bio & Background
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House Hacking Strategy
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Expansion of Craig’s Real Estate Portfolio since 2017
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Working at BiggerPockets
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Real Estate Investing Strategies
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Writing a Real estate Book
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Sourcing Deals
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View On Current Market Environment
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Short Term Rental Market Outlook
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Financing Deals
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The Advice to People who Consider Making a Career in Real Estate
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Building a Team
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Mentorship, Resources and Lessons learned
Useful links:
https://thefiteam.podbean.com
https://www.instagram.com/thefiguy/?hl=en
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name is Jesper galley and you're listening to working capital the real estate podcast. Our special guest today is Craig . Craig is a real estate agent and investor. He is author of the host hacking strategy and co-host of FII team podcast, Craig, how's it going,
Craig (37s): Jesse? So good to be here today. I'm doing great. How
Jesse (40s): Are you? I'm doing awesome, man. I can't complain we're on the tail tail end or just, just pass Halloween. So I, for those that can't see us right now, we've got a couple of mustache here, but I feel like yours is for a Movember
Craig (53s): Mine's is just for life and his life. The lady, the lady loves the mustache, so we
Jesse (58s): Keep it. That's amazing. So it's just a lifestyle choice.
Craig (1m 1s): It's a lifestyle choice. Yeah, man. It's been like a year. I think it's, I'm almost, I'm approaching my one year mustache anniversary, so I love it. There should be a, there should be a celebration for that.
Jesse (1m 10s): Oh, I said we were just chatting. I have mine on, I meant to shave it off. I was afraid of mercury for Halloween and now I, and now we're in November, so I don't know what to do, dude. You
Craig (1m 18s): Look good. You should keep it.
Jesse (1m 21s): I appreciate it, man. Are you joining us today from, from Denver?
Craig (1m 25s): Yeah, I am here in Denver. Yeah. Been here four and a half years.
Jesse (1m 30s): Sweet. Well, thanks. Thanks so much for coming on the show. Really appreciate it. I think we'll have a great episode here. Talk a little bit about your background in real estate and love to get into house hacking and the book. But before we do, maybe what we could do is talk a little bit about how you got into real estate and bring us up to speed of what you're doing these days.
Craig (1m 52s): Yeah. So I got into real estate because a lot of people like a lot of people, I hated my job. And so I was actually working like a venture capital type role in Silicon valley, which sounds super sexy and super cool. And I was hanging out with mark, like I was hanging out with mark Zuckerberg and Elon Musk and all that, but that wasn't, that's not really the case. Right. I'm actually just like buried in spreadsheets, working hundreds of hours a week is what it felt like. And really just getting paid like an abysmal amount on an hourly rate. And I just kinda came to this conclusion that there's no way I wanted to do this for the rest of my life and what, like, what's the way to out.
What's an early way to retire. How do I achieve financial independence? And that's what kind of real estate came to mind through a lot of iterations I went through, I tried to do start my own startups, which was just horrible, horrible stuff. And then I was like, I don't need to be mark Zuckerberg or Steve jobs or anything like that. Right. I can just be a real estate investor. And so I found bigger pockets pretty quickly after this deciding I wanted to get into real estate just was absorbing absorb, absorb information for about six months. And then I was like, okay, I got to get out of Silicon valley. Cause I just can't afford anything here.
It doesn't seem like this whole house hacking thing really works in Silicon valley. So I actually moved to Denver, got a job at bigger pockets, which was like a dream come true. Started surrounding myself with real estate investors and people that were doing things that I wanted to do. And, you know, got my first property in that was April, 2017 or actually started June, 2017. I got my first property
Jesse (3m 21s): Right on. And that first property was that a, was that a house hacking proper property. And, and I guess before you answer that, maybe for listeners just to update people that don't know how sacking would, is it?
Craig (3m 33s): Yeah. So how's hacking is the idea that you buy a one to four unit property with a low percent down, typically three to 5% down. You have to live in it for a year. So if it's a single family house, you're living in a room, if it's a two to four unit, you're living in a unit and you rent out the parts that you're not living in, so that the rent covers your mortgage and you're able to live for free or at least drastically reduce your housing expense. And because your housing expenses probably your largest expense, you're actually able to save a lot more money. So you can go ahead and buy the next investment.
And so that's what I did on that first property. I purchased a duplex. This was before anybody really knew about the rent by the room strategies before that was popular. So the only way to house at this time in my head was to buy a duplex live in one side, rent out the other. So it was an uptown duplex. I lived in the bottom, rented out the top and I wasn't quite covered my mortgage. And I was like determined to cover my mortgage. It would have been a great house either way, but I was determined to cover my mortgage. So I Airbnb it out my bedroom and put up this like cardboard box room divider thing, slept on a futon and made that where I slept for one year.
And that was my 24 year old hustle self.
Jesse (4m 47s): So that, that is a pure house hack right there. So in terms of the, the uptown, was it already, was it already converted to the ability to have a walkout? What did that?
Craig (4m 58s): Yeah, it was totally turnkey. And so with house hacking, I firmly believe, and I stand by this. I was like this to the grave. Is that a turnkey property? That in by Turkey, I just mean the rehab is totally completed for you is much better than doing a rehab when you're doing the house. Heck because with house hacking, right, the, the magic is buying one every single year on the year and your year does not start until you close on that first property. And so let's say you close today's November 1st, let's say close today, November 1st.
I can't buy another one until November 1st of next year, but if I'm doing a rehab, that means I am spending more money. I am not getting money from my tenants. And that may push me back if I have to save another 20 or 30 grand to get the house hack on November 1st. So who cares if I have an extra 30,000 of equity in my house, which I can't use, I need 30,000 in my pocket, which I can go buy the next house for.
Jesse (5m 52s): And the one year is that, is that a financing thing? Is that just a strategic thing?
Craig (5m 57s): Yeah, that's a financing thing. So in order to get those low down payment loans, the three to 5%
Jesse (6m 1s): Down the bank says, you need to live there for at least one year. So yeah. Yeah. I find, I find too, there's a, depending on kind of the weather American Canadian, depending on which state you're in, I know that the ability to move in or displace a tenant oftentimes has a one-year horizon on it that they want you living there for one year. But to your point, yeah. In terms of finance, I think most areas you're going to get that lower financing. When you can say that you're personally moving into the, to the property in terms of the, so, so you start with, you start with that property, how, and that was a 2017, you
Craig (6m 37s): Said 2017.
Jesse (6m 38s): So from 2017 to where we're at right now, a couple of things have changed in the market. You know, some minor things in terms of how you kind of grew the portfolio. If you have from then to now, what does that look like?
Craig (6m 52s): Yeah. So the growth at first, it's really slow because you just don't have a lot of money, right? Like, you know, I remember on that first one, I pretty much depleted almost my entire savings and maybe had like 10 grand left and I needed to save up another 20 or so grand and get the next house hack. And you know, at that time I was maybe saving $2,000 a month. So it was like gonna take me probably a whole year to save up for the next house. Heck. So what I was doing, you know, I call it the lull period in between house hacks where there's really not much you can do. I mean, if you want to be a real estate hustler and start wholesaling and flipping, you could get into that, but I wasn't really interested in those things.
So I just doubled down at my work. I was working at BiggerPockets at the time, doubled down on my work there. I actually asked Scott who Scott trench to see yogurt buckets, basically, how can I make more money here? And I was able to, he actually gave me an opportunity and we created a pathway together to where I could make more money at my, at my W2 job. I was doing Airbnb arbitrage. I was throwing out my car. I was basically just figuring out any possible way that I can make some more money because I want to hit financial independence as early as possible, like so badly because I hated that feeling of being stuck.
Jesse (8m 4s): Yeah. Yeah. It's great. It's looking for different or different streams of income. And for those that don't know, like Turo Turo is great. It's a, it's basically an Airbnb for your card and I'm pretty sure they're in every major market, but so it sounds like, it sounds like for you, it wasn't so much the flipping and the fact that you're going to run a business, you wanted more so passive income and, and longer term, longer term growth.
Craig (8m 25s): That's right. Yeah. I was, I mean, maybe I was scared honestly. Like I didn't want to handle hard money. I was in Denver. Right. So buying a house for 400 grand hard money on that, it's going to be like 50 grand. And I was like only about 20 grand. Right. And then you still got to put 20% down. So it became such a high effort thing that like, I wouldn't be able to do that and have my W2 job. And I really loved my W2 job at the time. Like I was hanging out at BiggerPockets, we were talking real estate network was growing. I had a lot of opportunity at BiggerPockets.
So I was like, just, that is my number one focus. So
Jesse (8m 59s): At the time, what were you doing at BiggerPockets?
Craig (9m 2s): So I was their finance guy. So I say the finance guy, because I was the only person on the finance team at the time. And so basically like doing all their books, running the numbers, making reports for management and stuff to look at. So I, at one point I knew pretty much every number that BiggerPockets had, but unfortunately I don't have that anymore. So my numbers are probably three years expired.
Jesse (9m 26s): Okay. Fair enough. And you've moved at sounds like you've moved from BiggerPockets to another W2 job or are you investing full time?
Craig (9m 35s): No, so yeah, I knew that BiggerPockets is going to be my last w two jobs. And so my, yeah, so I figured pockets. I basically had done three house hacks. So over the course of about three years, I did three house hacks and I felt like I was financially independent, but I wasn't sure. And so the way I test it was I took a zero paycheck and maxed out my 401k. So like my entire paycheck for three months was going to my 401k and I figured, Hey, if at the end of three months, my checking account is higher. I'm financially free.
And if not, well, then I'm pretty darn close. And I just, I just maxed out my 401k. And so lo and behold, it was a lot bigger and I was like, I can, I think I can make it on my own. And so pretty much a month after that, at the end of January of 2020, I quit BiggerPockets and went full-time as a real estate agent, helping people, coach guide and mentor people, helping coach guide and mentor those who want to house hack.
Jesse (10m 32s): Fair enough. So in terms of the, the host hacking itself, so you, you move on to that anniversary, you move in purchasing another property. How sack of that property, what are you doing with the former property in terms of whether you're selling refinancing? What does that look like?
Craig (10m 46s): I don't do anything. I just move out and I put someone else in my place. So just rent it out. I did refinance my first two properties because interest rates were so low this past year in 2021. And so it made a lot of sense. I think I reduced my monthly payment by like, like a total of a thousand dollars over the course of two properties. So easy way to boost your cashflow. And so, so yeah,
Jesse (11m 9s): Yeah, absolutely. Absolutely. But in terms of the, cause the Denver market, it's not the cheapest market in the world. So in terms of you were still able to cashflow, even when you're, you're moving out of these properties with, with the down payment as low as it was.
Craig (11m 24s): Oh yeah. So on that first property, my, my mortgage payment before I refinanced was 22, 2300, I was getting 1650 for the upstairs and 1300 for the downstairs. So my rent was 29 50 and my mortgage payment was about 2300. So six 50 over the mortgage, of course there's reserves and all that kind of stuff, but it was a newer property. So there wasn't a whole lot of maintenance and stuff. It wasn't a great location, so not a whole lot of vacancy. And you know, maybe you put reserves for two or $300 a month and it's still cashflows $300.
And it's in a great area. It's appreciated like probably 200 over 200 grand now in just a few years. So like great property now, since I've refinanced it and rents have gone up this year in 2021, you know, it's, I think I'm making a little over $3,000 on the rent and my mortgage payment is only like 1700 or maybe 1800. And so, you know, now it's closer to a thousand dollars of cashflow on the property and then yeah, same, same thing, same thing as it goes like each one, probably each property that I have in Denver cashflows about a thousand dollars a month.
Jesse (12m 33s): That's great. So being the numbers guy, when you look at these properties specifically on the host hacking side of things, is there an approach that you take that might differ from, from other investors or other investments?
Craig (12m 46s): Yeah. So when you're house hacking, you want to fit, you want to have multiple strategies that you can do, or at least I like having multiple strategies. And what I mean by that is, you know, if you've got a duplex, can you rent it out? Each unit like traditionally and still cashflow, it may not be your best cashflow, but can you still do it? Can you Airbnb it? Can you rent it by the room? How does the layout work? Can you, you know, in a single family house, can you split the upstairs and the downstairs or, you know, the left side from the right side and make two different units out of it. And so properties like that are the ones that we really like.
I pretty much in Denver now, I pretty much only buy single family houses that we could easily convert it to duplexes just based on the layout. And that way, you know, you're getting the house at a single family price in a single family type neighborhood. He renting it out as two separate units that are actually would get you higher rent than you would have to duplex because it's in a nicer area, it's a nicer house. And so the numbers work really well in places like,
Jesse (13m 41s): Yeah, no, that makes sense. And you kind of moved into, I guess, writing with the house hacking strategy. How did that come about? What was that process like?
Craig (13m 52s): Yeah. So writing has, you know, the miracle morning. I do. Yeah. Great. But yeah. Great. So amazing. Both of you haven't read that book. You need to read it a life-changing book, but ever since I started doing that, I started to write every morning and I think he had Ellen Rogers who wrote the book meant means like journaling, but I just enjoy actually just like writing content in the morning. And so basically I write every morning and I was writing blog after blog, after blog for bigger pockets. I think I have probably close to 60 blog posts on bigger pockets. And so they asked me, Hey, do you want to write this book on how second you can?
I was like, hell yeah, I do. And so I, you know, basically instead of writing the blog post every morning, I would just take a stab and write a piece of the book every morning. And after about a hundred days, I had a first draft of a book. And then, you know, for a few months later after the edits and stuff like that, it got published. And that was definitely a, an inflection point in my life.
Jesse (14m 43s): Yeah. I'm always fascinated as listeners probably know of the, the process, the, the, the writing process. We had Chad Carson, coach Carson on the show, by the time you're listening to this, that episode probably has aired. He was talking about the same thing. It was basically from blog to multiple blogs to book. It seems like a strategy that a lot of writers, especially in our space use, as well as, you know, on the other side of, for the individuals that maybe writing isn't isn't their passion, or it's just something that's that doesn't come easily easily to them.
I found that some, some people put content out audio and then basically transcript the audio and then kind of edit from there. But yeah, it's, it sounds like you were the former on that.
Craig (15m 24s): Yeah, no, I, I genuinely like to like touch the keyboard, which is weird, I guess, but like, I like to like make that thing go and yeah, it doesn't take long, you know, if you can just sit yourself, I mean, there's a word counter right on the bottom left, like a Microsoft word document. So I would just be like, I'm not, I'm not leaving this computer until a thousand words richer or whatever you want to call it.
Jesse (15m 43s): And for those that are interested, we'll put a link up for where you can reach out and where you can get the book. But in terms of the, the framework of the book, did you, I mean, obviously you, you wrote through blogs, but in terms of the framework itself, did that change from when you initially wrote it and you know, how did you approach that?
Craig (16m 1s): Yeah. So when you're running a book, it's all about the outline. Like you should spend half the time of half the total time writing the book on the outline, because that is the most important part. If you got the outline, good, the book will just write itself. Right. And so it's almost like almost, you just keep expanding, expanding its spending on the outline until it becomes the book and then you have to go back and, and make it flow. And so really it was just a mixture of yeah. Having a solid outline. Also, I took a lot of my blog posts and just kind of repurposed them a little bit for the book because I mean, a lot of my information is out in the world somewhere.
That's the great thing about a book, because you can even sit into one little thing. And so, and so, yeah, I mean, that was pretty much the process, you know, outline, outline, outline. And then after I had a thorough outline and I went over it with bigger pockets, I just, just started writing a thousand words a day. Every day. You had a, before you had a book.
Jesse (16m 55s): No, that makes sense. So in terms of the, you know, one of the biggest things right now that we're seeing in our market is it continues to be a lot of capital chasing fewer and fewer deals. And it just seems that deals are harder and harder to find where, you know, it's usually one or the other. And in times where there's a lot of deals out there, it's usually financing is harder to find. So in this environment, for those, whether they're looking for longer term properties or looking specifically to do house hacking, what's your approach for sourcing deals and you know, what do you tell clients and investors that you coach?
Craig (17m 28s): And so we get almost all of our deals on MLS and how second is kind of a different beast, right? And the reason for that is you don't need to get a property, super undervalued, add value to it and refinance it, right? The magic is just like slowly collecting rental properties with a low percent down. So you can buy a $600,000 property here in Denver and you're putting 5% down. That's 30 grand, right? And so you've gotten this, you have this property for 30 grand. You have to make the deal work by creatively trying to figure out ways, right? So we've got a lot of people that like to Airbnb, a lot of people that do rent by the room, we've we teach people how to do these split things that, that I like to do.
And those almost always cashflow, right? It may not be a thousand dollars a month at first, but over time, rents are going to increase. You're going to be paying more of your mortgage payment down. Maybe you can refinance to a lower rate. You can take off your PMI and you figure out ways to increase your cashflow over the course of five, seven years. And you know, that that's, the play is the long-term buy and hold. So that's why the MLS works is because again, we don't, we're not trying to like add a whole bunch of value and refinance it, deployed money back out. We're just okay with letting the $30,000 in and keeping it in there.
Jesse (18m 38s): Yeah. And it kind of sounds similar to what we do on the commercial real estate side. We always find that the owner occupier is the one that can pay the highest price for the, for the property because of the, the economies that they have, or the fact that because they're operating out of there. So I guess in a similar way, the person that is house hacking, maybe, you know, not that you're going to pay more than you should, but you probably can be more competitive than somebody that's purely going in there to rent it out.
Craig (19m 2s): Yep, exactly. Right. You can, you can. Yeah, exactly. You can pay more because again, like you're going to be thinking about your competition because the, the, the market's competitive. Right. And if your competition is a lot of it is like home buyers, it's probably more so than house hackers. And so as a house hacker, you can pay more because you're already offsetting your mortgage payment with rents. And so sure, like, what's the difference of like a $50,000 difference is like $250 on your mortgage. Right. It's significant, but it shouldn't be life-changing.
And that $250, you're going to make that back in a month with appreciation. Right. So like, it doesn't even like the price almost doesn't even matter, but make sure you run the numbers and it makes sense, but like with how exactly, I've just never heard anybody lose. Like, and I know a lot of house hackers.
Jesse (19m 50s): Yeah. No, it makes sense. I mean, especially that you're in the property, are there properties that you basically try to avoid or properties that, you know, comparing two properties, say one, like you said, that needs, needs renovations or needs capital improvements. Do you try to avoid those? And, and also just kind of on the same, on the same wavelength when it comes to properties that, you know, you can put a walkout in that doesn't currently have one that would be perfect and create a house hacking property. Is that something you also would look at when you're, when you're looking at properties?
Craig (20m 23s): Yeah. So we like to look at, so creating a walkout can be very hard if the house, like, you know, if the basement isn't already at like our level. So we try to find a house where the stairs to go, like stairs to go from the main level to downstairs is right by maybe a back door or garage door. So you can just kind of wall off where, you know, the backdoor meets the upstairs. And then the, so then just, so when you walk in the back door, it's just, you go down the steps.
And so that those lamps are the ones that we really like, and there's a ton of them in Denver. So that's what tends to really work. I think you had another question, but I forgot what you asked
Jesse (21m 4s): In terms of the, just other capital improvements. Are there, are there certain properties that you, you try to avoid when it comes to, you know, when it comes to spending a certain amount of money to get it to where you need it to be? Okay.
Craig (21m 16s): Yeah. So again, I like the layout to be, like I said, right where the, the less amount of work I have to do the better. So if I have to like dig a separate entrance, like that's a lot of work, expensive egress windows can be very expensive and they've gone up in price in my market when I was putting them in like a couple of years ago, it was 3,500. Now it's close to $5,000 for a regressed window. And so if, if egos windows are already in there, that is really helpful. If there's some sort of plumbing fucked up to the downstairs, we can hook up a kitchen fairly easily.
That's really nice. And so, yeah, those are all the things that I kind of look for. There's nothing that I, I like nothing in particular that I wouldn't do, but if it's like, not even like it, but I wouldn't like force a house to make it a house hack. If the layout doesn't work and all that, like, there's, there's plenty of houses where the way it does work.
Jesse (22m 5s): Yeah. Fair enough. So just shifting gears in terms of where we're at in the market right now, I know that, you know, as you mentioned, you, you write a bunch of blogs. I've seen different posts that you've had. I'm curious to get your thoughts on the current market environment that we're in. Obviously, you know, there's been lockdowns for a few years, almost two years now, if not, yeah. Over we're coming into it right now to two years in terms of how that's affected, if it has at all, the way that you're viewing the real estate market. And is it informing decisions that you're making today?
Craig (22m 37s): Yeah, that's a good question. So, so COVID was probably the best thing that ever happened to me from a, it from a financial standpoint, which maybe I'm, I think I'm one of the few, because when everything's shut down in April and may of 2020 is right. When I basically started my real estate agent business and no one was doing showings. Right. And it was super competitive before that, but no one was doing showings and Denver never really shut it down. Like they never made it. So you couldn't schedule it. Like there were some markets where you couldn't schedule it Denver, you can still schedule it.
And I was talking to like my buyers and I was like, well, no one else is looking right now showing percentages, showing times like showing rate is down 88%. So I swear we're probably the only ones even looking and the seller wants to sell and you want to buy, so if you're cool with it, like I'm cool with it. Let's just go and it will be, you know, six feet apart wear the mask, whatever, like, you know, and, and so we did that and we were for like a few months there, every offer that we were putting out there was getting accepted and it was at asking price. And it was like, it was even below asking price, which was like beautiful for them, for the buyers.
Obviously that was only a short window. And then as things started to heat up again towards the end of last summer, and then all through winter 20, 20, 20, 21, and throughout 2021, things got started really heating up and getting really, really competitive. And that's where house hacking comes into play. Right. Because it's like, Hey, not only were the price is going up, but rents were also going up as well. But we were saying like, okay, let's just analyze the deal, right? Like it's listed for 500,000, can you pay five 50 for it? Like, this is what your mortgage payment would be.
This is what you'll get in rent. You're still going to be making over a thousand dollars a month, like who cares what the listing price is and how much over we have to go. Then the only downside was the appraisal gap coverage, right. Where, you know, for the listeners that may not know is if the appraisal is, comes in lower than the purchase price, someone's got to make up that difference in cash buyer or seller or combination of the two. We kind of had a, a way around that as well. And so should I get into that or please do so, so one thing that we did a lot of was we would set the inspection.
So we would set the inspection for maybe seven to 10 days out. So let's say, you know, you're under contract on November. First inspection would be November 10th. We would then immediately call the lender and get a rush appraisal to be done like that same, the same week. So we're reporting this on a Monday, the appraisal would be backed by Friday before the inspection deadline. If the appraisal comes back super low, we can still back out because of the inspection. So we were able to fully waive the appraisal while still having to be able to back out on the inspection. And that was a strategy that I think a lot of, well, maybe we were the only ones to do it, but I'm sure we're not the only ones to do that strategy, but that worked really well for us in terms of getting deals in our contracts, getting deals done and making sure both parties were very happy.
Jesse (25m 33s): No, fair enough. And in terms of the short-term rental space. So I think you've, you've written blogs on this in terms of that area of the business, you know, how has, how do you see that market given everything that's transpired over the past year and a half, two years? And do you think, do you think it's a S it's a space that is going to be coming back? If it has an already
Craig (25m 55s): It's already come back and it's tough. It's like, it's doubled since, but it was, so I had a whole bunch of short term rentals. I was one of the scared ones that shut, shut everything down and turn into long-term rentals during COVID. And I think a lot of people did that. So the supply and demand just wasn't there. So then as more and more Airbnbs came on and we started air, like our clients started being, they were just crushing. It they're like, dude, I like you told me I was going to make like 3000 a month. I'm making 5,000 a month, like, like the are conservative numbers. Like they were blowing our numbers out of the water, which was great.
Like, I would much rather have people be happier in that regard. But, you know, as, as, as, as far as where it's going to go, like, I don't have a crystal ball. I don't know. That's why I always say like, Airbnb can be your plan a right. And that could be the way you make your most money, but like, make sure you have a plan B that also cashflows, even if it's only a hundred bucks over the mortgage, just so you can hold it, hold it through this recession or whatever, because, you know, when, when, whenever this recession hits that we're going to have at some point, right? Like the first thing that's going to go is recreational travel business travel is probably going to be a lot less, especially with zoom and all of these things that have come to fruition through COVID and there's going to be a lot less reasons for people to travel and want to travel.
And so if the Airbnb, I mean, at the end of the day, Airbnb hasn't even gone. Hasn't even made it through a recession yet the company Airbnb. Right. So we don't even know how they would handle it. So just to have that, have that like backup plan, I think it's super important.
Jesse (27m 24s): Yeah. In terms of the actual financing of deals, obviously you're doing a particular strategy and niche when it comes to the house hacking, but generally speaking, do you have a, a certain methodology or philosophy about how you handle the debt side of your business?
Craig (27m 41s): So I, I personally am trying to get as many, as many Fannie Freddie loans as I possibly can, because we all know that's the cheapest and that's the best kind of debt you can have. I think you're allowed to have up to 10 Fannie Freddie type loans. Once you've maxed out at your 10, you know, then you have to start thinking about other creative ways. And so right now, I think I'm at like seven or eight, I'm going to probably be at 10 by early next year, but I'm fine with that.
Like, I kind of just want to exhaust my 10 because now I'm going into like more commercial real estate investing, triple net, lease side stuff and all that. And that's where I see the future of my real estate investing going. But yeah,
Jesse (28m 24s): No, that makes sense. I want to kind of shift a little bit to something we talked about at the beginning. So your W2 job, or, you know, your, your normal kind of day to day job. You're not dissimilar to a lot of people that we have on the show that make the jump into full-time investment for people that are looking to get into real estate or people that are into real estate. And they're coming up to what, you know, you had an inflection point, you know, what do you, what, what would you say to those individuals in terms of actually kind of leaving the, the day job and you know, what seems like a pretty, and it is a scary, scary move, you know, what, what are your thoughts on that?
Craig (28m 59s): I mean, it's uncomfortable doing so, right. But think about it this way is that your worst case scenario is the scenario you're in right now, right? Your worst case scenario is as you quit, you maybe lose $5,000 on an experiment of trying to, you know, do something for yourself. And then you have to go back and get another job. Right? Like that that's really a hardest. And so if you can kind of just like, look at it as an experiment and look at it, like nothing is permanent, just because you say you quit, it doesn't mean you have to quit forever.
Right. And also, I like the idea that, yeah, you've got enough rental property, passive income to support at least your basic living expenses so that you have enough runway. So that it's, it's not, you know, it's not an issue, you know? Yeah. So
Jesse (29m 44s): For you, it wasn't, it wasn't like a burn, the boats thing where you just absolutely, you know, drop it and say, I'm going to start buying real estate. It was buy real estate, figure out what that number is to make it, make it at least somewhat more comfortable to make, to do that transition. Do I have that right?
Craig (29m 59s): Yeah. Yep. Is that right? Right. I mean, I think for me, I had like $3,000 of passive income and I was like, I'm a single dude. Like I can live off of that as long as I say frugal. And then once you become your entrepreneurial self, you can make a million times more than you ever could have W2. And that will just funnel you're, you know, getting more financially independent or, you know, more fat financially independent, or however you want to call it.
Jesse (30m 22s): No. Fair enough. So in terms of the, you know, you mentioned you, you did get licensed, so as a licensed realtor, you kind of moved into that space, the fit team. Is that, is that on the investing side or is that the, is that on the broker agenda things?
Craig (30m 36s): Yeah, so I ended up being like so busy last year that I either had to quit or start a team. So we started a team. We, we got a team about 1520 agents now that are all house hackers, all investors, at least on the investment side. And so we help coach guide, mentor people through that process of house hacking. We've got pretty much everything you need in terms of, you know, relationships with vendors, leases, calculators, like we'll walk you through the entire process if you need us to just because that process is so scary to like the first person putting their, like 30 of the $40,000, they've saved up for their whole life into one house.
It makes you feel better when you've got a whole team of people with, you know, hundreds of deals under their belt, kind of guiding you through that.
Jesse (31m 23s): Yeah, for sure. And I mean, in terms of the team itself, the, the team that you built out and the coaching that you have, was that something that happened, it seems like you, you had the demand. So you built out the team for those that are building their own team w with real estate, whether it's sourcing real estate, trying to get property managers, what are your recommendations? Kind of some of the stuff that you've found that were helpful to you when you were starting out and you're buying these first few properties,
Craig (31m 52s): I I'd say like, just document your systems as best as you can. Loom is something that I use a lot. So I'm sure people know about it by now, it's a screen recording thing. It's a plug-in on Chrome and anything you do that is repetitive, you should be looming it. Right. And you save it somewhere so that someone else can do it. Right. So, so these days I'm doing very few. I really don't do any showings. I really don't do any contract writing. I've got the team that does that and they can ramp up so easily without asking me hardly any questions, because I literally have videos and videos and templates and samples of all of that.
Right. So we can onboard a new agent pretty quickly and they're up and running very quickly. And the questions they asked me are like high level questions that they should be asking me. And so I can stay kind of in my 20%, which is know content creation coming on, podcasts like this, right. Doing stuff like that to just to just grow the, grow the brand.
Jesse (32m 46s): Yeah. That's great. I love the loom. And it's funny now, like two years or a year and a half after everything, that's, that's really been going on in the world. It's nice that we have zoom, loom, Skype, where you can actually, you know, when you're hiring something, somebody just the other day, my partner and I were like, okay, we can give instructions to this person. Or we could just record the call, the onboarding call. And then, you know, they, he, or she has a reference.
Craig (33m 7s): Yeah. It's, it's so amazing. Like, and I think it's way easier. Like the old fashioned, like paper trail documents, like your type every step-by-step. We have a little bit of that, but the loons are just so much easier and so much better too. Like it's a picture is worth a thousand words. Right. So video's worth like a million.
Jesse (33m 24s): Yeah, no, a hundred percent. A 100%. And then you ha it's, it's more dynamic, right? Yeah. You can have somebody in real time asking you questions and then solve it, solve it right there. Awesome. Well, we have, we've got four questions that we ask every guest that comes on the show and want to be mindful of the time here. But before we get to that, in terms of the coaching that you have for people to reach out we're where can they find find you? And, you know, what's the best route for them to, to take on.
Craig (33m 51s): Yeah. So, you know, we've got our podcast, the fight team podcast is actually being rebranded here shortly. So we're going to come up with a new name, so be on the lookout for that. And then, you know, if you're, if you're in the Denver area or you need a real estate investor from the real estate, Adrian, the fight team.com is where you can find us. And I'm also on Instagram. If you want to just kind of check out my stuff at the fire guy.
Jesse (34m 12s): Absolutely. We'll put a link to everything in the show notes, but yeah, let's go to the final four here. If you're, if you're ready to go, I'll send them your way. Let's do it. Okay. What's something, you know, now in your career, it can be real estate or business that you wish you knew when you first started out.
Craig (34m 30s): I wish I knew the who, not how concept have you heard of, you know, that mother basically. Yeah. That whole thing of why stay in, what do you do best in stay in your zone of what you do best at anything. You don't do good. Hire someone to do it for you. Cause they're not only going to do it better, quicker and probably cheaper, but it's going to also grow your business much faster and you're going to be happier.
Jesse (34m 56s): Yeah. I can't, I can't recommend that book enough when we were at the BP con BiggerPockets conference in new Orleans, I was think Dan Sullivan is the author awesome book. It's it really is. It really changes the way you look at things because for so long, we're taught, you know, if you, if you get somebody to collaborate with you, if you give somebody a task that you're, you know, you're cheating in school. Right. But really the idea of find, find out who's the best person to do that. And it should be, should it be taking up your bandwidth or not? Yep. Love that.
Awesome. All right. Number two here. What is a, a book that you seem to constantly be recommending and we'll put the who not, how on put that aside for a second or podcast that you, that you keep recommending?
Craig (35m 40s): I guess the miracle morning doesn't count either. Cause he already mentioned that one, definitely the miracle morning and who knows how or applied my tattoo a podcast, obviously there's a bigger pockets podcast. That one is kind of a no brainer. Can I just depends on where you are in your journey. But I think like for, for fundamental business books, miracle morning changed my life. Who knows how it changed my life. And also the E-Myth is, is really, really good if you're thinking about growing a business and long people wanting to step away someday.
Jesse (36m 9s): That's great. We'll put links up to those as well. In terms of people that are getting into the industry, people that are, whether it's through brokerage or looking from the investor's lens, what would you tell them in today's market? And just generally your thoughts on mentorship?
Craig (36m 27s): My thoughts. So, so in terms of the market today, I think like you have to just like keep buying no matter what the market's doing, because timing the market is like been known to be fail failure right now, known to fail. So just dollar cost, average it by one a year with the course of 10 years and you'll buy it the highest you'll buy it. The lowest in terms of mentorship and stuff. I think you really, I hate that term mentor. I hate when someone asks me to be their mentor, I kinda just wanna be your friend, right? Like I'll be friends with almost anybody, as long as you're, we've got the same values, the same morals, and we're kind of on the same page.
So just like go to meetups and just start talking to people, right. And then follow up with them and grab a coffee with them and grab dinner with them and go on a hike with them. And before you know it you're, you've got a friend and maybe they're more experienced than you. Then they become your mentor. Right. They're going to naturally just give you advice. They're going to want to help you. And so that's like my favorite way to mentorship is just becoming friends with people that are both above you. So you can be the mentee and below you. So you can be the mentor.
Jesse (37m 25s): That makes sense. All right. The last one, Craig, first car make and model.
Craig (37m 30s): Oh man. He tried to get to my bank accounts. It's a 2002 Dodge. Intrepid was my first car
Jesse (37m 38s): Right on. And I said, that's not the one you put on Turo.
Craig (37m 41s): No, no. The one I put on Turo was a Toyota Prius, which got smashed up. But yeah, that's a fun, fun story. Maybe we'll dive into it real quick. I think I lost you on the yeah.
Jesse (37m 57s): Okay. Yeah, no, you can get into it. Cause I know you put a, you put a blog out as well about, about just different income streams I think. And Turo was a Toro was definitely one of them I believe.
Craig (38m 8s): Yeah. So yeah, back in the day, Touro was a street, was an income stream that I had to kind of while I was at bigger pockets and I could fight to work. And so basically I, I was proud of myself. I read, never split the difference by Chris Boston negotiating book. And I was able to negotiate the price of that car from 12,500 down to 10,000. So I bought the car for 10,000. I Ubered it for awhile. I toll road for awhile. The car probably made me about $10,000 over the course of two years. And then someone crashed on Turo. The Touro com whatever the company has, some insurance policy where they actually paid me out like 11,500 for it.
I ended up like getting more than I ever paid for it initially after, you know, however many miles later. And then I bought a crappy car for like 50, for like five grand and kept the six grand and invested in real estate. So
Jesse (38m 57s): There you go. Always, always on the move. Awesome. All right. Well, we'll put links up to, to everything that we talked about here. And just for those that, you know, I know you have a presence on Instagram as well. Could you just let us know the handle for that as well?
Craig (39m 11s): Yup. It's a, the fire guy. So like the financial independence guy.
Jesse (39m 17s): Awesome. My guest today has been Craig Kurloff Craig. Thanks for being part of working capital.
Craig (39m 21s): Thanks for having me on Jesse. Appreciate you.
Jesse (39m 31s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Chad Carson is an Entrepreneur, Writer, and Teacher, who Co Owns over 100 Units of Rental Property and Private Lending In and Around the College Town of Clemson, South Carolina. He wrote an Amazon Bestselling book “Retire Early With Real Estate”, and his story has been featured on Forbes, Yahoo Finance and more. Chad, His Wife, and Two Kids Recently Returned from 17 months Living Abroad in Cuenca, Ecuador. Each Week Chad Shares Tips, Strategies and Stories on His Popular Blog Podcast on Youtube Chanel CoachCarson.com
In this episode we talked about:
• Chad’s Bio & Background
• Flipping Houses
• Ups and Downs of Students Rental Space
• De-Risking Real Estate Deals
• Valuation Metrics of Single-Family Rentals VS Student Rentals
• Raising Capital in College Towns
• Chad’s Plan for Tomorrow
• House Hacking
• The process of Writing the“Retire Early With Real Estate” Book
• Chad’s Thoughts and Views on Interest Rates and Inflation
• Unlevered Yield
• Coaching and Blogging on Youtube Channel
• Mentorship, Resources and Lessons Learned
Useful links:
https://www.coachcarson.com
https://www.instagram.com/coachcarson1/
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, my name is Jesper gala and you're listening to working capital the real estate podcast. My guest today is Chad Carson, AKA coach Carson.
Chad Carson is the author of the bigger pockets book retire early with real estate. And he is an entrepreneur writer and teach and teacher who cones over a hundred units of rental property in Clemson, South Carolina, Chad used real estate investing to reach financial independence before the age of 37. When he, his wife and two kids decided to spend 17 months living in Ecuador in south America each week. Chad shares tips, strategies and stories on his popular blog podcast and YouTube channel coach Carson, coach Carson. How's it going?
It's great,
Chad (1m 2s): Jesse. Good to see you. Good to see you again. And we were on a panel not too long ago, so nice to connect.
Jesse (1m 7s): Yeah, absolutely. Yes. We were in new Orleans on the a at BP con, which was a lot of fun. I've talked about it on the show. It was nice to get out there since the last one in Nashville, which I guess was two years before that. Right?
Chad (1m 20s): Exactly. Yeah. It's like the rockstars of real estate. You get to hang out with people and talk about the market. Talk about all deal making. It's a lot of fun.
Jesse (1m 30s): Yeah, absolutely. And you know what I did forget to mention you are also a, a alumni of Clemson football. So go tigers.
Chad (1m 38s): Yeah, exactly. We're not doing so hot this year, but for the, any of the college football fans, Clemson's usually up there, but this year we're a little, a little soft.
Jesse (1m 46s): And if I remember correctly, you're you played linebacker back in the day there
Chad (1m 50s): I did. Yeah, that was my that's how I paid for my school. So luckily I didn't have it as far as I know, no permanent damage, you know, concussions, things like that, but yeah, it was middle linebacker. I was about 40 pounds bigger and had a, had a lot of fun doing that at the, at that time
Jesse (2m 5s): Weight loss period that that happens after the, the college football day.
Chad (2m 9s): It either it either goes one or two directions. I lost, I lost my four day in that like all the little small guys now on the team are like enormous. So they found all the weight that I lost.
Jesse (2m 18s): Sorry, the secondary maybe gained some weight and then you get the lineman that, that cut it
Chad (2m 23s): Down. Yeah, exactly. Right
Jesse (2m 25s): On. Well, thanks again for coming on. I thought it would be great to have you on the show since that panel, that we were on a lot of the questions that we got seem to be still topical today, before we kind of dive into, you know, what's currently going on with real estate and what you're doing for listeners, maybe you can give a little bit of a background about how you got into real estate and what you've been up to since, since that's first started.
Chad (2m 49s): Sure. Yeah. So when I graduated from college, so at Clemson university, I thought I was going to go to play football and NFL, and that was a dream that quickly got shattered. And then I also was a biology major college. So I was considering going into medical school, kind of that direction. Also had some job offers in the financial world, you know, working like on wall street, that kind of thing. But I was really always really interested in the lifestyle of a real estate entrepreneur and particularly a small real estate entrepreneur who sort of controls your own destiny and works out of the house and keeps overhead small.
And so a business partner and I started flipping houses pretty soon after I graduated from college and we scraped by and figured out ways to come up with capital to buy primarily single family houses, fix them up, flip them. And then over time that worked out pretty well and we were able to make a living. And we, I think that was 2003 when we started by 2006 and seven, we also started buying some rental properties as well. And in particular, we got into the niche of college student rental properties eventually in Clemson, South Carolina.
So we're in a college town. So that just seemed to be the best fit for finding a good balance of cashflow and growth and good longterm stability and wealth building was with those kind of small multiunit properties, duplexes, fourplexes with a 12 Plex. We have some kind of aggregated land that we have with multiple apartment units on it as well. But that's where we are now. Today is a, we have 110 units. Most of those I'd say 60% are those college student rentals, but also have a mix of single family houses, mobile homes, things like that.
Jesse (4m 23s): Yeah, that makes sense. And in terms of the, the first ones that you got into, not, I guess dissimilar from a lot of people that get into our, our space coming at the kind of value add flipping, was that something that at that time you thought might be the direction that you'd go to, to do flipping or, or was it, you know, it's a little too hands-on and maybe passive or somewhat passive is the better, better.
Chad (4m 46s): Yeah, I mean, I looked at it as is, it's a great way to add value and that, particularly for me, I didn't have any capital upfront. So I just, I don't know where I heard it, but I just learned that if you can find a good deal and in any market, then the capital is out there. There's there's and I think that's more true today than, than ever that we are flooded with capital. I mean, there's people who are looking for deals, there's money, that's looking for deals, but if you're that small entrepreneur or big entrepreneur who can go out and find a lot of real opportunities that have either equity that you can add value to today, or you can find good longterm cashflow in long and growing, growing markets or markets are good opportunities.
I just found that skillset that I learned early on was so valuable for all sorts of things and it put food on the table to start off. But over time I found that acquiring equity that I could work one time, do all the work upfront and then have that paid dividends for a really long time. That was just very enticing to have that because it fit into the lifestyle goals that I had, not just, I love working, I love projects, but real estate to me, the power of it is how it starts in the beginning as a startup. You had put a lot of work in, but it becomes a relatively passive investment that gives you a lot of lifestyle freedom and the end.
Jesse (6m 0s): And at that time, I mean, getting into student rentals, was that the approach initially, or was it just that that's where you were finding
Chad (6m 8s): It was not my approach originally. It was mainly to single family houses and typical suburban kind of subdivisions is where we found a lot of our early deals. And I still like those single family house deals for what they are as well. But I actually did a house hack where I lived in one unit and rented out the other, my first introduction to college student rentals. And it was just where I wanted to live. It was near the college town. It was near just the place I wanted to be. And I found that I just, I think I started from that getting to know the, the tenants themselves.
So I live next door to a wonderful Chinese couple who are getting their PhD in some kind of health, health initiative, or I'm sorry, healthcare or biotech, I think it was. And then another, you know, had like an international flavor, had China and the other guy and his wife from South Africa and another one from another, you know, another country. And I just thought it really interesting, the people I was meeting and I thought they were really good tenants. And so it just that sort of just landing into my lap, having to find somewhere to live in a house act is a great way to pay for your living expenses.
But after that, I said, there's gotta be more opportunities to buy more properties like this. And so we started picking up after you every year from there.
Jesse (7m 21s): And in terms of the, the student rental angle, like I think we, we chatted a little bit in new Orleans that, that very similar, how I got started in real estate was, was in the student rental space. And, you know, you hear everything when you're investing in student rentals from, you know, it's, it's a complete nightmare. You're dealing with tenants, but maybe you can talk to listeners a bit about how that's a, it's pretty misleading. And, and if anything, it's, it's really, from a risk standpoint, I look at it at completely the other way around what most people will tell you.
Chad (7m 50s): Yeah. It's like real estate in general. Some people run away from it because they heard that there's going to be tenants and toilets and people having leaks. And that's going to be such a big deal. Well, the same with student rentals, they hear that people have, you know, big parties and through kegs through windows, which I'm sure happens somewhere. Right. And in fact, I've probably been at some of those parties when I was in college, but, but it's not, it's not the, the, you know, it doesn't have to be that way. So a lot of there are a lot of good students, students who are renting their place and to take responsibility and you also have the, the parents are often helping pay, pay their way.
That's just the reality of it. And so if you do that, you can, I, I have very little credit risk with my student rentals. We have almost always had payments on time. I can think of two situations. And now 18 years of investing a little bit less than that with student rentals, where I've had a credit issue on a student rental and the rest of the time, the rent's paid things. Thanks for taking care of. They have a security deposit. There are some damage issues here and there just like you would with any tenant. But I saw, I think the positive of student rentals as they be find the right university, the right town, the right place with the right dynamics, you're going to consistently get your rent.
That's great. And the negative, I would say the drawback of it is it's a more higher high turnover type business. So you do have that maintenance, you know, maintenance turnover, and your, I found my maintenance cost to be higher than maybe some people would anticipate early on just because you're having to paint. You're having to clean up. You're having to do these things pretty often. And, but the flip side of that again, is that we are leasing period starts for student rentals. And now December before they, before August of the next year.
Yeah. So here we are, actually, we're our property manager just talked to another day. They're starting right now, here we are beginning of November. So it gets earlier and earlier where know, at least in our market, students are trying to lock down their rentals pretty early. And so that's what we found is we can, pre-lease all of our, our rentals, very rarely do we have something that's vacant. Hmm. Okay. So we do have a vacancy period about 10 to 14 days when we're fixing up the property and doing the turnover. But that's like, there is no sitting there for, for one or two months waiting on finding a tenant there's pre-leasing, you know, turnover period.
And then it's leased for 12 months. Yeah.
Jesse (10m 8s): And I find in most markets, I'm not sure if, if for yourself, is that nine times out of 10, the occupancy is really only three quarters of the year. Some of them do, at least my experience has been, some of them do stay in the summer, but we typically see 12 month, 12 month leases paying rent for 12 months, but really occupancy either.
Chad (10m 27s): That's exactly right. Yeah. And it's a pretty strong landlord market for us in our markets, even, you know, so we've been able to always negotiate that we don't do nine months leases or have to do subleases, but they, most of the people are gone or the summer, or maybe come for a few weekends here and there, but that's, that's the case for us as well. I'm curious,
Jesse (10m 45s): Do you, de-risk further with having the least document several or in other words, if one person doesn't pay rent that the others have to come up with that rent, is that how you structure your,
Chad (10m 58s): We do structure ours that way. Yeah. There's, there's other big operations in town who have like least by the bedroom type arrangements. We've always chosen not to do that. And we had explained that early on with a couple of students who, Hey, my roommate is not paying the rent. That's not my deal. I said, well, actually it is your deal. That's your, you look at, look at this like a partnership, you know, this is a marriage without the, all the good stuff. Right. You know, you're, you're married to your, to your, your partners here. And so they would all have to pay the rent and figure it out among themselves.
And, and so, yes, it was very rarely happened, but that has been, that's come up. And so we, we do have that discussion with the lease with our private property managers to have that discussion. Now let them know that.
Jesse (11m 38s): Yeah. And it's great because you have a kind of a, I mean, you have a private, private solution or private market solution, but you also have kind of social norms that factor into that too, where, you know, one person, when they have four other friends living in a place where, you know, parents have the lease and somebody is not paying, you know, the pressure to make sure that you, you know, you're on time and you do things properly. It's probably like,
Chad (12m 1s): Yeah, they work it out. Yeah. There's the, yeah. You don't want to let down your roommates let down other people, so, or, or the handle it privately behind the scenes, you know, they, they work it out. Yeah.
Jesse (12m 10s): And on the other side of the other flip side of the fact that there's more turnover, I know in markets that have more rent control or more, more regulatory red tape, they actually liked those landlords. Like the fact that there's more turnover, because then you can actually reset rents without issue.
Chad (12m 29s): Yeah. That's been a big deal for the last six, seven years for it because the rents have gone up consistently every single year. And so rather than having to face that, how do I raise my rent on a good tenant kind of conversation, which is always tricky, right? You can now push it to market rent every single time. And the other benefit of that big lead time on your leasing period is that you can test out new rent levels without a whole lot of risk. And so if we push it too far and we can't find anybody, like we're getting zero leads at this new rent level, we can pull it back and say, okay, we're a little too aggressive here.
Let's pull it back to this. And I've always found with leasing, I don't do the leasing anymore, but I've, I've done tons of leasing over in the past. And it's a really good skill to have because you can see that you can see the sensitivity to price, to the marketing you're doing to whatever. And if you get the right price, market match, I mean, it's like a faucet. Like you turn on the faucet on the water and the leads start coming through. I've always found. And so I think it's good to have done that myself because when I'm having conversations with my people who are doing our leasing, I don't have a lot of excuses.
I might look, you know, it's either the property is not ready. It's either you're not promoting it well. Or the price is not right. It's one of those three, which one is it? And let's look, let's look at the metrics. Let's look at the numbers. How many leads are you getting? How many showings have you had? How many applications have you had? How many people are not renting is one of those, like we're having a problem. And one of those levels there
Jesse (13m 52s): And how has the last a year or two Chad, how has that impacted number one, your business, or, and as well, your, your outlook on, on the space that you're in and potentially maybe where, where you'd want to be?
Chad (14m 5s): Well, I mean, us personally, I was a little, I was scared during COVID, I'll be, I'll be, be honest about that. And the story, the story for me was where we, we are a big fish and a kind of a small pond or in a small town with a big university. We have a lot of our holdings in one place. And so as, as we've matured with our portfolio, looking to have some geographic diversification was always on our radar. And we've kind of been doing that both with, within real estate and also into equities and other things too. But it hit home with COVID because a lot of the COVID regulations, nobody really knew what was going to happen in March of 2020.
And when the university where we are at Clemson university decided to go all virtual. My first thought my concern was, well, why would anybody come back to school? Like if they're going to be, you know, going virtual, they can do that from their home, wherever they live. And so I'm, I'm thinking, okay, you know, how much cash I need to save? In case we have 12 months of like 30% occupancy or 50% occupancy, I'm started thinking about worst case scenarios. And we start figuring out how much is that going to cost us to do that and how much we have to lower our rents. So that, that didn't pan out.
It turns out most people came back and wanted to have their lease their, their, their apartments. Anyway, even though they were virtual, but it did imprint upon me, the fact that we have some vulnerability that we need just as a personal wealth building strategy, that diversification is really important. And that's, so this, this last year and a half or two COVID has been, that's been the message for us of de-risking our geographic exposure, but also just de-risking period. Like if we do have a situation like that, even if we're not geographically diversified, we we've made it to the place where we have enough, we have enough income, we have enough properties.
So de-leveraging paying off debt, doing some things that are not real sexy or not real recommended for people who are always growing, but actually doing the boring, paying off your debt. You know what happens if you have a great depression or your rents go down, I can deal with that. If you, even, if you had, if you had no debt and you read sweat crater by 50%, that would be painful. You'd have to tighten your belt, but you wouldn't lose your properties because you couldn't pay your debt. It would be a totally different situation.
Jesse (16m 13s): Yeah. And that's another thing we talked about on the panel. It's this idea, where's that balance of, of you don't want your, you know, to a certain extent, you don't want to have no debt because then, you know, your return on equity is not pretty, but at the same time, you don't want your loan to value or, or your debt to be so large that maybe you're cash flowing. But like you said, do you have a correction of 10% of the market, 15, 20, whatever it is. And then all of a sudden you are in negative territory.
Chad (16m 38s): Yeah. And I, I just, I look at people that are a lot smarter than me only look at Warren buffet and people who, who build their business to be resilient. He he's an insurance business. He has to be reinsurers all the big insurers out there. And so he has to be cognizant that he can't predict everything and I've got to save a lot of cash. There is some leverage in his portfolio, you know, he has float and I'm sure it's some kind of long-term debt, some of his holdings. But if you look at the total debt that a company like Berkshire, Hathaway, Hathaway, or other mature companies have, once they've achieved that maturity, they're not aggressively trying to like spring every single bit of return out of their portfolio.
They're more about not losing money, like not, not having habit. They want to survive for the next, for the long run. And I think there's a, there's some wisdom in that. I think we, we real estate investing is so debt heavy that we just assume that that's always the way things are done. And the people I know is just me personally, on the small level, who've really done well over the long run and who personally have a lot of peace of mind. And they're just not really worried about the ups and downs of the market are often the people with the most cash in the bank and the least debt. And so, I don't know, that's my, that's my personal correlation that I see out there.
Yeah.
Jesse (17m 47s): Yeah. I couldn't agree more with that. It just gives you, it gives you that little bit of buffer in terms of, of risk in general. Now, when it comes to, when it comes to student rental properties specifically, we've heard my partners and I actually more demand in the last little while I've had schools in our area, reach out to me and, you know, asking, are your listings still available because we don't, we just don't have the supply or is your market similar? Is, are you seeing that there's a bit of a supply challenge for student rentals?
It's,
Chad (18m 19s): It's been yes. For the most part has been that same scenario. We've, we've had some ups and downs because we're, we're in a pretty small market. So we have 24,000 students who go to Clemson university. There are 17,000 residents or the population of the city of Clumpson. So the university, and then the city, the city of 17,000. And then we have a couple little small towns, somebody we're very, it's a unique situation. We're very, we don't have a lot of other renters other than our students and our faculty. So when every time there's, there's been some supply excesses, when you have 2000 new units come out online at one, one year luxury student apartments.
So sometimes your upper end, your upper rent type stuff, we have a few, you know, more closer to campus, higher rent stuff. Those get affected big time. Whenever the new stuff comes on on the market, it's like throwing a big rock in a pond, you know, and we're in a small pond as everything gets kind of shaken up. So we had some vacancy issues for on a couple of properties, but for the most part that kind of stabilizes and the, the D the overall driver of that is the student population has been increasing at the university consistently, probably two or 3% per year. And the supply doesn't always keep up with that perfectly.
You know, sometimes it goes above it. Sometimes it goes below it, but in general, I think if you're in a college town, that's the, that's the metric you need to pay attention to is student population, and then whatever other population of faculty and those kinds of things go with that. And then if you're in a larger college town than we are, which I think is healthier, actually, if you're in like a a hundred thousand person college town, or a bigger city, you also have other industries that are related to the university high-tech industries, things like that. And I think that's an interesting mix because then you can cater to the two different segments of the market.
Not only be, you know, renting to students, you can kind of have some cross, cross marketing to different populations out there.
Jesse (20m 5s): Yeah. We've seen that in, in most of the areas that we had seen residents, it's been more so like 170,000, 200,000 population wise, and then, you know, 30, 40,000 on the student side. So yeah, it's funny that they, you know, in Clemson, it's pretty much a, you know, you double the double, the population there when school's in exactly, in terms of the way you value on that student, on the student rental front, do you typically do what we do and that it's not a per door metric, it's usually a per bed metric.
And how do you look at valuation when it's, you know, single family versus student Rez?
Chad (20m 42s): Yeah. We look at it per bedroom as well. And there's a little bit of a, you know, kind of a gray area when you get into some of the lower price rentals where, you know, there there's some, a few that we rent to student grad students, or maybe also some regular local, just kind of people who just need a rental, but when you're in the pure student rental, yeah. We look at it, whether it's, you know, it's a four bedroom apartment that that's, you know, that's pretty clear, or sometimes we have two bedrooms and one, we, we, the two bedroom apartment, we're always looking at it like on the per bedroom basis. And we also value it that way.
So we, you know, we'll, we'll work it backwards to try to get almost always to some kind of rental yield number, you know, a cap rate rental yield, or trying to understand what if we paid, no, we had no debt on this property. You know, what is the yield on the, on that? And that's, that's the first level of valuation that we'll do. And I I've always liked it speaking back of debt. Again, you know, you have a cost of capital, you have a cost of debt, both either your debt costs or an equity cost, if you're splitting the deal with other people. But to me, the main metric that you have is that, that rental yield like an unleveraged rental yield, because that's what you're using to distribute to the debt and to your partners and everybody else.
And so I just, I've always kind of used that as my, my true north. Not because that's the only way we're going to make money, but because that's what gets me through the ups and downs, that's what got us through 2000 7, 8, 9, because we were able to pay our bills and have some, have some cushion there. And so that's, we start with that. And that, that metric has not been as attractive the last couple of years, as it was earlier, you know, as interest rates have gone down rental yield, unleveraged, rental yields have gone down as well as the prices have gone up. So people are just willing to buy properties with lower rental yields, but that's also made it more important to find deals, to have more kind of hidden value add or hidden upsides.
So I found that really knowing my market street by street, knowing what the things that are most important to my students are, for example, being close to public transportation, being on the bus line, also walkability. And bikeability, I think that's, that's my biggest personal metric. Like when I live somewhere, I want to be close to bike trails and walking, and, and I, I feel like that is a generational thing where people go to college towns, they often have a walkability and bikeability, that's pretty good. Clemson's not so good. I've been trying to work on that on the side, trying to get that better, but I think they go there and then they go to other towns and like, Hey, I remember my college experience was so walkable and bikeable, they want to go find places as, as once they find their first apartments and houses that also have that.
And so I think that's a really important trend, you know, nationally with, with different, different markets that we're in. But I think that from a college town standpoint, if you can find the numbers are important and leveraged yield, but we're also trying to, if we're going to buy and hold for a long period of time, I want to find the places that are better than others in town, whether that's distance the campus along a bus line, along a bike lane, some kind of, you know, just a character in the market, big trees, nice, nice sidewalks, things like that that are harder to replicate when people build new construction.
But if you can buy that from an existing property that gives, that gives you some extra value.
Jesse (23m 48s): Yeah. I like the, the unleveraged yield approach, but, you know, it's kind of, here's, here's a net yield for a property and, and kind of getting, you know, taking out the debt first as an analysis, it makes a lot of sense in terms of the, the walkability I find interesting too is cause when you go to certain college towns, to your point of knowing the specific market is that some college towns, you know, their tolerance for, you know, a hundred more yards or 200 yards, it might be lower or higher than other universities. I know in our area, some universities, if it's, if it's a five minute more walk, all of a sudden, you know, that they rule that out or a specific property, they're like, no, we're not, we're not going on that side of the street.
Chad (24m 27s): All right. Yeah. You gotta, you gotta go block by block. Right. I mean, you just got to know that's where local market knowledge is so critical. Yeah,
Jesse (24m 33s): Absolutely. So in terms of, as you, as you kind of continued to, to get, you know, get more properties, you're now over a hundred units in terms of where you want to be next, when it comes to whether it's apartment building, student residence, what does that look like for you, Chad?
Chad (24m 50s): Yeah, we're sort of thinking of, you know, I'm not saying contrary contrarian, but my lifestyle has sort of dictated the way I'm going to build my business. And I have a healthy respect for like bigger businesses and people who build big, you know, big syndications, but that's, that's been like the opposite of what my business partner and I are trying to do. We sort of hit a level where we said, here's the fork in the road for us. We're either going to continue growing. And by other units, we could replicate what we've done here and doing it another college town or another city, and raise a lot of capital and do that. Or we could just say, all right, this is, this is as big as we want to get our business.
And we actually frame it as like a small and mighty business, like this, keep this thing deliberately small so that we can then have space to do other things. And for me, other things are teaching other people how to do it. And I have a podcast as well, traveling with my family, doing, you know, consulting here and there for other people doing a YouTube channel. So it's just, it's more of a personal choice. This isn't as much. So the personal choice has dictated that our real estate investing business is not going to get any bigger. And so going back to the de-risking conversation, that's another reason that we, we look at, you know, I looked at the cashflow, our business produces from the gross revenue.
And then after deducting all of our expenses, capital expense reserves, all of that. Here's how much income we needed. Here's how much we have and we're in. We're pretty good there. So the next step for us is do, is let's, let's make sure this foundation, this castle, that we've, we've built, can't be taken down and there's no guarantees in life, but some of the ways that could happen would be debt that's that's the main way I've seen people mess up their real estate careers in the past. So either stabilizing the debt, getting longer term debt, low interest rates, making sure that stabilize and making sure we have enough cash reserves.
And in some cases just paying the debt off, even with, even if that doesn't make sense from a growth standpoint, that's more of the ambition we're having of the next few years, what we might sell a property there that is not an ideal property. And in the past we would do a 10 31 exchange or something into another property. Some cases we're just paying the tax and paying, paying another set of debt off on that property. So that's, that's kind of where we are. That's our ambition. And then also just trying to help other people do the same thing on a kind of that small and mighty scale.
Jesse (27m 4s): I like that small mighty, but I mean, it makes sense too. It's, you know, when you're talking about it might not be as an attractive return, you know, if you're not doing a syndication or you don't have investors, it really is not as big of a deal. You're not, you don't have a fiduciary obligation to them. It sounds like up to now, you've, you've worked with partners or bootstrapped the, the financing side of it is that, is that pretty much how you've done it to date?
Chad (27m 27s): Yeah, we primarily have done private capital, but just very simple private capital. Like we had a, an professor of mine at Clemson when I first met him, one of our first deals, he would loan us the money. And I, he actually didn't realize that at the time I learned that you could do a self-directed retirement account where you, instead of just investing in stocks and bonds and things like that, there's these kind of boutique custodians who allow you to make loans to other people against real estate or buy a limited shares and syndications, for example. And so I showed him that he could do that and he was like, oh, that's interesting.
Well, what do you want me to do with it? And I said, well, how about you loan me money for this flip that I'm doing and I'll pay you 10% interest. And he said, that sounds good. Okay. And he said, you're going to do all the work. I said, yes, I'll do all the work is so it started off that way. And then we sort of branched out and eventually said, well, we don't want to flip it anymore. We just want to hold these properties. And so we can't pay 10% interest and make that work. So we started just paying 6% interest for most of our deals. And then we would extend the terms out, you know, instead of doing, you know, a one-year term, let's do a 15 year term and have it, have it go longer.
So that that's been a large majority of what we've done is private capital. Often through self-directed retirement accounts, we've done a lot of seller financing where a seller, instead of them selling their property and paying taxes on it, we'll offer to buy their property. And it's often landlords who are just trying to get out of the business and then we can get really attractive, low interest rates with them. And so it's been a mixture of that kind of capital with a little bit of commercial debt as well. And then, so, so when we, when it comes time to pay stuff off though, it's, it's just the person who has a bond, a debt, you know, instead of it, these are me and my business partner are the only equity partners.
We don't have any other, other people who are working with us on that side.
Jesse (29m 8s): No, that's great. You've, you've kind of found a, an in between, right. Between the larger syndication or asset specific capital raising and, and just doing it all on your own in terms of the, so the structure that you have now, you've, you've purchased these properties over the years, and you're now doing coaching and teaching. When it comes to retire early with real estate, the book that you worked with with bigger pockets, how did that come about? And in terms of, you know, putting that out there and, and how long ago was that, that, that the book came out?
Chad (29m 39s): Yeah, it coincided with my family. I were in Ecuador. You mentioned that at the very beginning, we decided to take this sabbatical trip and it was sort of just, it was representative for us that, all right, we're, we're, we've hit a plateau, we've got enough income coming in. There's still work to be done, but we're ethic, we're at a good place. And so we traveled and then our daughters were three and five years old and my wife teaches Spanish. I like, we like foreign languages. So they learned Spanish and enrolled in schools locally. And we just enjoyed living. There, just went to Cuenca Ecuador at the same time though, you know, always thinking of what's next. And I had been writing a blog for bigger pockets or writing on their blog and had my own blog going on.
And, and just, I think I was talking to Brandon Turner. It was some conference and he said, oh, you got to write a book, Chad, just pitch this pitch, the book idea at a bigger pockets. And so that was, you know, a year or two before we went on that sabbatical. But I, I decided to write the book while we were at Ecuador so that everybody else would go to bed, you know, eight, eight or nine o'clock. They put the kids to bed and then I'd write for like an hour or two. And for me, it was just, it was putting into a framework what we had done in our business. So from, I used the metaphor saying, you start at the bottom of a mountain, you're looking up at the top of the mountain.
The top of the mountain is this idea of financial independence. When you have enough wealth to pay all of your personal expenses, whether that's rental income in our case, or if you own stocks or something else. And so I tried to give people several different routes up that mountain, that how do you do that? How do you do your first deal and get that first capital when you don't have a lot of capital or have a lot of knowledge often through house hacking often through, you know, maybe move into a house and then, you know, move out of the house and keep it as a rental or, you know, doing some burrow strategy type deals when you don't have a lot of capital.
And then, but then, you know, moving up the mountain, some of the conversations we've had here, like how do you get to a place where you feel more confident that you can actually live off of your income and actually have a, have time, have free time to do things. So I talked about some of those strategies and having backup plans to your backup plans, you don't have side hustles and things that would make them make you some extra revenue. So it was sort of a, it was a blueprint type book, but then it was also, I interviewed, I think it was 700. I did a survey of 700 people who were aspiring for financial independence or had already achieved it.
And then I profiled 25 of them who are at different levels of their real estate journey. And just talk to ask practical questions, like how many properties do you have? How much income do you need to retire? And so it's all these kinds of financial independence, retirement oriented questions. And I told their stories kind of in between the chapters of the blueprint that I've put together in the book.
Jesse (32m 6s): And how long ago was that, that that book
Chad (32m 8s): Came out 2018 was when it was published.
Jesse (32m 10s): So definitely, definitely still topical in terms of the, the process. I'm always curious, you said your you're writing it when you were away. I imagine it was a lot of work. How was the tactical process of writing the book?
Chad (32m 25s): Yeah, I started with a big outline and, you know, as, as a blogger and you're a podcaster, I think we have content that we put out there where, where idea, we're always putting ideas together. So I had a lot of ideas in mind, but it's a pretty grueling in terms of yeah, just researching and get it. You know, I wrote probably 120,000 words for a book that ended up being 65,000 words, you know? So you cut like half of it out and had friends read it and say, yeah, that sucks. You don't want to do that. You know? And it says the brutal process is not, I mean, writing on a computer is one thing, but just the, the reflective process of putting your ideas out into the world and having them, you know, critiqued, thirdly, stomped on and beat up.
You know, I think my linebacker training was probably the best training I could have had for that, just because I had football coaches who would just scream at you and yell at you. And, and so the end, the end result though, you hope is, you know, it could always be better, but that the end result of that is very satisfying when you get it out there. And the good thing about publishing with bigger pockets, who I know you're you're involved with as well, is that they have a platform. They have people who are interested in the book. So the marketing, the marketing side of things is not my strength. And so I like the writing. I like the teaching. I like sharing, but marketing yourself and putting yourself out there as a whole nother strategy than writing the book.
And that was fortunate that that BiggerPockets could help me on that side.
Jesse (33m 49s): I'm always curious when we have individuals that have written books and what their style was, was it actually pen to paper every day? Was it, you know, modifying transcripts of, like you said, content that they already have, and, you know, I guess everybody's a little different in terms of what their strengths are.
Chad (34m 5s): Yeah. I was just, you know, I had the outline, I had, I had content out there, but it was just every day. I think I read this from Stephen King or somebody like that. I just said, you just got to make a goal, even if it's, even if it's not good that day, just like write 700 words or a thousand words or whatever it is, and just get it out on the, on the computer. And I did type it up. I think I used the Google doc and just had that going for a long time. Now I am pen to paper type person too. Like I love doing my mapping and I'll, if I have ideas for the chapter, I'll sorta mind map that out and draw it out, you know, on a, on a non-digital non-connected type a world.
Cause I had to think clearer, they're usually in the morning or late at night, but that's where the best thinking goes on. But then when you, you gotta just had that, that deep work time of, you know, two to three hours at a time of just knock it out, type something, get it on the paper and this chick away at it, you know, a little bit by little bit by little bit.
Jesse (34m 58s): Yeah, absolutely. Well, I thought we changed gears a little here in terms of where we're at in the market right now. We talked again about this when we were on our panel, you have a particularly particular view of, of where you think the market is right now when it comes to very topical inflation and interest rates. I know, you know, nobody's got a crystal ball here, but how are you preparing for the next year or two for the short term, you know, aside from what you've said about de-risking, but your thoughts on that and, and I guess generally your view on where interest rates are at and where you feel inflation may or may not be.
Chad (35m 33s): Yeah. I mean, if I had to vote or bet on something, which I'm not a great bet betting person, but I would, I would bet inflation's going to be continue to be more of the topic for awhile and at least for a couple of years. So I'm, you know, I, there's not a lot of preparation for me on that side of things, because a lot of our portfolio already, we have some debt still. We have assets that we feel are in really good locations that have long-term potential. So I just, I, I feel like we're in an, all of you who are listening to this, if you're one of the reasons you should be investing in real estate, is it, this is one of the best assets for an inflationary period.
And the other message that I think is so important, but if you're in, if you're in the growth phase for what, wherever you are, whether you're just early in your career as an individual investor, or if you're in the syndication world, the best formula I've ever heard of an investing for inflation is that you buy these assets that go up in value over time because they're good, well located. And you buy a property that has an unleveraged deal of let's say six or 7%. And then you borrow money at 3%. And your cost of capital is three. If you have a margin of three to 4% between what you can produce an income and what it costs you to borrow money, and then that property's going to get better and better over time.
I think that is such an incredible basic formula to build wealth because you are lucky, especially if you can lock that interest rate in for a long period of time. Now that you're, it's only getting better over time. And that's, I kind of keep that in mind in terms of just, it's almost like football, you know, this has simple, simple plays that work well on any market. And that's a simple play borrow for a lower cost than what your property produces by in a good location that has some dynamics of supply demand that are in your favor over the long run, and then just be a buy and hold investor and wait, just be patient you don't, if you get the more you can be flexible on when you exit, then you can be more optimal about, you know, knowing that it's going to happen at some point, but we don't know if it's gonna be three years or five years or 20 years, but we're going to be, be patient enough to get there
Jesse (37m 28s): In terms of unleveraged year, a yield. Just, just so listeners are clear when you talk about unleveraged yield, we're talking about the cap rate for the property, or are you factoring in debt with that yield? Yes,
Chad (37m 39s): But like a cap rate. And I guess I use leverage yield instead of cap rate, because I used to always use cap rate online on my YouTube videos and a couple of like nitpicky people are pointing out that well, that's not exactly what a cap rate is. You know, use a cap rate to value a property or what I'm S what I'm saying is, is an internal metric. This is just, let's just look at this and leverage yield. Let's take all of our expenses, our operating expenses, management, maintenance taxes, insurance, let's take capital expense reserves, whatever we need to make sure we've covered all of our outflows of cash what's leftover when that's all said and done, except for excluding your mortgage payment.
That's, that's what I'm saying. I actually like
Jesse (38m 14s): That term better unleveraged yield or operating yields, because it kind of gets away from this. What I've heard the term. I can't remember who's who coined it, but a suitcase words and cap rate is definitely a suitcase word. It means a million different things to different people. If you're the investor, the broker, the buyer, the seller, you know, and you just hit it right there, even with cap reserves, right? How do we, how do we factor those in some people do it differently? So that makes sense. I mean, you're looking at, from an interest rate perspective, from a risk standpoint, if we could do fix, we do fix, if we can make sure that that yield is higher than the interest rate, it's not rocket science.
You know, the question is finding those properties. Yeah.
Chad (38m 54s): Yeah. And that's, that's the, that's a whole nother thing, but it's, it's we started talking about the market, like, how does the market effect that this is a competitive market? So finding those deals is certainly challenging, but I know when I first started investing in 2004, three and four, we're just not that long ago. Right. It was the interest rates were higher, even then I thought interest rates were low, but you knew there were five or 6%. Now they're three or 3%. I mean, that's, that's incredible. So yes, it is more competitive. Yes. The yields have gone down, but with the right properties and the right markets, that's where we, as operators can really set ourselves apart.
We can find those value, add opportunities. We can find those little pockets of opportunity within our market, in my market. For example, Clemson is my, my main little town, but I think some of the better opportunities, and these are these little small towns, right next, next to the Clemson central and Pendleton and Seneca. Nobody's gonna know what those mean if they're not in my market, but if you're, I think that's my challenge to everybody is try to find ways in this market to do the opposite or go the different direction from what other people are doing. How does it, when the competition's digs, how can you zag?
How can you do something different? And that often is with locations, which is finding those little pocket locations. Sometimes it's with different asset classes. Like I do residential multiunit, but you know, maybe mobile homes are the thing in my area, or maybe there's a self storage, or, I mean, I'm not saying that you should just jumped ship on your, your strategy, but being open to different competitive advantages, I think is what we're all having to do right now.
Jesse (40m 24s): Yeah, for sure. Well, we have final four questions that we ask everybody that comes on the show, but before we, before we get there, I'd love to chat a little bit about what you do on the YouTube channel and how you kinda got into that side of, of really just coaching and, you know, hence coach Carson. But yeah. How did that come about?
Chad (40m 45s): Well, it started as a, as a written thing. So I was a blogger and I actually, well before, even before that, I did coaching locally. So I actually don't do a lot of coaching. Now. It's more like coaching through the YouTube videos, through podcasts, through, through a course online course that I teach, but it would really wish it's starting one-on-one with people locally in my market. And they're saying, Hey, how do I find a deal chat? How do I analyze a deal? And so I would just do it, you know, at a local real estate meetup and show them on the back of a napkin or a back of an envelope. Here's how you do it. Here's what I'm doing. And it was just that, that love of teaching, I guess, that kind of made it so that I was like, I just want to share this more publicly.
And I met the bigger packets guys, Josh and Brandon started writing for them, start writing my own blog. And I wrote so many articles that nobody looked at it. It was just like, I'm really glad they did because they were not that good at the time. But I think whether you're YouTube or podcasts blogger, you just got to love the process of teaching and sharing and ideas in general. And so for me, it grew from that to a blog, which was great. I could write it on my own, turned into a book, the podcast game, just because the people who happen to be reading my blog all were asking me, Hey, I like listening to podcasts and I'd rather do that than read it all the time.
So I started doing that and then YouTube has been spend kind of a recent passion. I've had a YouTube channel for awhile, but I think it's a more challenging medium in some respects, because you have the video, you've got the, you have people's attention. Span is a lot shorter on YouTube. Unfortunately with the podcasts, you know, people are washing dishes or exercising or something. So you have their attention a little bit longer YouTube, but man, if you, if you're not doing something good, they're out, you know, there's skipping, let's get outta here. So I'm still a rookie in this respect. But a lot of my style there is kind of a tutorial driven.
I'm trying to use a little whiteboard and show, you know, they look over my shoulder. Here's how I would run the numbers. Here's an, here's what an unleveraged yield needs. Here's how you calculate cashflow or here's a story about a deal I did. This is my first rental property. And here were the numbers in the beginning. Here's how it changed over time. Here's my spreadsheet I use. So it gives me the ability, like a podcast is a good conversation media, but a YouTube is more of an instructional tutorial based. And I've really enjoyed that, that aspect of it as well.
Jesse (42m 53s): Yeah. And I find the thing with YouTube as well. It's the more challenging thing, at least for me, it's the consistency of putting episodes out. Like when you're you got a podcast, you know, you have a, you have a call with somebody today. You got to be there that other person's going to be there when it comes to YouTube to kind of self-start cause you can outsource a lot of things. It's very difficult to outsource your face in front of a camera.
Chad (43m 13s): Yeah. We haven't figured that one out yet, but that's also what makes it special. Like I think YouTube is so cool and that it's basically taking down the big media networks. Like it's, it, it is more popular. There's more views. And who are the people who are creating? Yes, there's some big names out there, but it's just like the Chad Carson who's check cars. They want to know what it is he have to do with anything. Nobody gave him permission to give content. And the only reason, the reason that we are doing that out there is that people are voting with their views. And that, that is, that's a cool concept. That to me is like, it's the, it's the epitome of the internet, but it's also on a large scale with YouTube that people are choosing to sit down in front of their TV or the computer or their phone and watch these no name creators who are producing good content and then they vote for it.
And then YouTube has an algorithm that shares that with other people because people are voting with their, with their watch time. And that's, that's pretty, that's pretty amazing.
Jesse (44m 4s): Yeah, absolutely. No, for sure. It's a, it's definitely a great medium, especially for on the instruction front. All right, Chad, we got four questions. We ask everybody that comes on the show. So if you're ready for those, I'll, I'll send them your way. All right. Let's do it. All right. What's something that, you know, now in your career could be business real estate that you wish you knew when you first started out.
Chad (44m 25s): Yeah. The numbers are not everything. When you analyze a rental property or any kind of property, I was so enamored with the numbers early on and you know, I'm a spreadsheet nerd. I'm sure a lot of real estate investors are that I would just get enamored with. Oh, look at this cap rate, look at this internal rate of return. Look at this cashflow potential. And I ignored the other half of that coin, which is the kind of qualitative metrics of that property of location, of desirability, of long-term potential, you know, opportunity to add value to the property.
And so I, I missed, I missed on some opportunities, but I also put too much weight into some properties that had, they were they had a good cashflow for a reason. They were in a bad location and the next door neighbor was dealing drugs. You know? So it's like, I, I learned the hard way early in my career about that, but I said, there's a more balanced approach now to saying, yes, I got to have metrics that make sense, but I also need to have those metrics are driven by real world human beings who choose to live in a place for a certain reason, let's start with a human being. And then let's just use the metrics that sort of control my emotional irrational impulses.
That's the, the, the, the metrics are just to kind of keep me in check.
Jesse (45m 35s): Yeah. That's a great answer. Couldn't agree more with that. All right. In terms of somebody that's getting into our industry, what would, what advice would you give them and just generally your view on, on mentorship.
Chad (45m 46s): I think you need to love the process. And I don't mean like, you know, this is real estate investing has been your passion for all your life, but I do mean that if, if you, if you're doing it, just because it seems lucrative or seems like it's a place to make a lot of money, like that's fine. Like making money is great. We all should make money, but you gotta have something that really draws you to this business. And for me, it was like running the numbers. It's really interesting to me that I sort of tapped into something that was, that I just enjoy doing. I enjoy the communication and the human side of things.
The negotiations are really fun for me. I almost feel like it's a puzzle piece that you get to put together. So, you know, I, I, I had a, I almost have a bad habit of just doing deals because I just loved the, the deal, you know, let's put the deal together, you know? And so that's, I think going back to a new person, who's getting into the business, find a piece of the business that you love, whether that's the remodeling side of things, the am analysis side of things, the negotiation side, or multiple, and to stick with that, like get really good at that. Find that kind of intersection of what you're passionate about, what you're good at and what a need in the marketplace is.
And if you just stick with that, it's focused on that. The rest I think will take care of itself. That's great.
Jesse (46m 56s): All right. Number three, aside from your book retire early with real estate, or what book recommendations are you constantly giving out again and again that you could share with listeners?
Chad (47m 7s): Yeah. This is a oldie classic book, seven habits of highly effective people. I just, I was fortunate enough to read that right after I was getting out of college. And it's one of those books that, you know, the first three habits are just personal habits, like being proactive, putting first things first, you're just learned about personal effectiveness and planning. The second three habits are all about interpersonal communications. So how to, you know, think win-win make sure that the person's winning and you're winning listen first, don't seek always like, get your first word in.
So there's just some core, like really good principles that I I've re-read that book like 10 times every time I reread it, I'm getting other little kind of layered benefits from it. So highly recommend that one.
Jesse (47m 49s): Yeah. I guess every time there's, there's more nuance that you get out of that book. All right. Last question. My softball first car make and model
Chad (47m 58s): First car make a bottle. This is a Toyota Camry, 1995 model cloth Gracie. And, you know, drove that to high school, drove that to college. It was actually, this is a funny story. When I started my real estate, this is, I still had that car and I put, I was trying to find deals and I put these noxious vinyl signs all over the side of my car saying like we buy houses and here's my phone number. And it was sort of a, it's sort of a turning point for me. I was embarrassed. I was like, God, this is horrible.
I've putting these all in my car, drove away one girlfriend who was like, ah, you're not, I really don't want to be around being around you. But then I was a kind of a filter for my next girlfriend who became my wife because she's like, oh, whatever, that's fine with me. But the cool thing about that for me, that that car was, I owned it free and clear. And then I put a sign on top of it that I made cost me 300 bucks to put the signs on there. And I ended up buying a property every year for like five years that made me, you know, minimum five, 10 grand per property off of this marketing that it, so this car was like a money machine did really well.
Jesse (49m 4s): I think that's the best answer to that question that we've had on the show. That's, that's pretty good. Awesome. In terms of where people can reach out to you aside from a quick Google search, where can they go, Chad?
Chad (49m 16s): Yeah, my, my home base online coach carson.com. That's where you can find my podcast. Although you can search for my podcast on any of the podcast players out there, apple, Spotify, those as well. And then of course on YouTube, if you search for me on YouTube, we'd love to hear from you. Please leave me a comment on YouTube or somewhere. Always like to hear your story and, and respond to that. And what would enjoy connecting it with you somewhere online?
Jesse (49m 38s): My guest today has been Chad coach Carson. Chad, thanks for being part of working capital.
Chad (49m 42s): Yeah. Thanks for having me, Jesse. This has been a lot of fun.
Jesse (49m 52s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Ashley Kehr Holds Degrees in Financing and Public Accounting and is a License Insurance Agent. She Purchased Her First Rental Property in 2014 and since then has Grown her Buy and Hold Portfolio Consisting of Residential Property, Commercial Property and Mobile Home Parks. Ashley is also the co-host of the BiggerPockets Real Estate Rookie Podcast with a Goal to help Newbies figure out the Actionable Steps Necessary to get their first deal. Currently, Ashley lives near Buffalo, NY on a Dairy Farm with her husband and three boys. She Spends most of her time Educating New Investors, Analyzing deals, Seeking the Next Adventure, and living a spontaneous life.
In this episode we talked about:
- Ashley’s Bio & Background
- Property Management
- The First Duplex Deal
- Investing in Mobile Home Parks
- A Pivot to Camp Grounds
- The Underwriting for Camp Grounds
- Regulatory Environment
- The Philosophy of the Trade-off between Potential Income and Value
- Real Estate Risks and Opportunities in the Next 2 years
- Mentorship, Resources and Lessons Learned
Useful links:
https://www.instagram.com/wealthfromrentals/?hl=en
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name is Jesper gala and you're listening to working capital the real estate podcast. My special guest today is Ashley Kerr. Ashley holds degrees in finance and public accounting and is a licensed insurance agent.
She purchased her first rental property in 2014 and has since grown her buy and hold portfolio consisting of residential property, commercial property and mobile home parks. Ashley is also the cohort cohost of the bigger pockets, real estate rookie podcast with a goal to help newbies in real estate, figure out the actual steps necessary to get their first deal. Currently. Ashley, we just talked about this. You live near Buffalo, New York on a dairy farm of all things with your husband and three boys. How are you doing
Ashley (1m 2s): Good. Thank you so much for having
Jesse (1m 3s): Me right on. So I guess just on that, on that point, you are in Buffalo, so we're probably just a two hour drive away from each other. The dairy farm is that that's a family run thing or?
Ashley (1m 15s): Yeah, so my husband's family, he's third generation. And basically when I moved out of my parents' house, I moved to here and lived down the pharmacist.
Jesse (1m 25s): I love it. We were just chatting before the show. I'm kind of on the heels of, of BP con in new Orleans. Ashley was, you were speaking on a panel, you mentioned before. It was a panel of, I guess, women in real estate. Is that correct?
Ashley (1m 40s): It was all about women that have succeeded in real estate and their advice to inspire other women to get started.
Jesse (1m 49s): Awesome. Great. Well, like they can attest to the fact that we had a great time out there. Didn't cross paths at this time, but maybe next year at next BB con.
Ashley (2m 0s): Yeah, definitely. I there's so many people there so many awesome people to me, it's hard to even get from point a to B because you just run into people. Maybe you met online or people you wanted to meet or just, you know, somebody that comes up to you that heard your story. Yeah.
Jesse (2m 15s): I couldn't agree more Ashley for our listeners that don't know you have a really great presence online, Instagram kind of showcases some of the stuff you're doing, but for those that don't don't know your background, could you give us a little bit of a background of, you know, how you started out, how you got into this world of real estate that we, that we all love?
Ashley (2m 36s): Yeah, of course I, so when I graduated college, I got married and I started working at a CPA firm and I was going to get licensed as a CPA and just work as an accountant. Well, I lasted about six months and I really hated it. So I ended up quitting my job and I was just going to be a stay at home mom. I was going to get pregnant, have babies and live on the farm. Well, about two weeks into my unemployment, my friend's dad approached me and he had a 40 unit apartment complex that he wanted me to run for him.
And so I agreed I could do it from home. It would be part-time. And basically from there, I grew a property management company for himself, for him and all of his properties. It ended up being about 80 residential and about 20 commercial properties that I was managing for him. So to start my first deal, I actually approached his son and said, look what your dad is doing. We should do this. And we bought our first duplex in 2014. And that was how I got started.
Just kind of watching somebody else learning from him and working for him. I gained a lot of experience and knowledge.
Jesse (3m 49s): That's incredible. And that was only, I mean, 2014, right? Not too long ago. Yeah. So in terms of basically saying here's a 40 unit apartment, what were the details, was that, was that something local that you could do or was it, you know, it wasn't across state lines.
Ashley (4m 6s): Yeah, it was right in the town, you know, 10 minutes from my house as in the town that I had gone to high school. And so I knew the town very well. It was very convenient to get to. And I started off with a small little office there that I could go to if need be. And actually just my first day was the first of the month. It was April 1st, 2013. And so all the rent checks are coming in and I was like so nervous that I wasn't going to track them properly. That all 40 checks that came in, I actually photocopied all of them before I actually deposited them.
And I spent pretty much, it took me, I think like full two full years to actually build out my systems and processes for property management. But it was definitely a learning experience. I ripped my hair out a lot. I cried and life is much better now not doing property management. I ended up outsourcing property management to a third party in February, 2020. So I gave up the property management on my properties and also with the same investor. So now I just do asset management for both of us.
Jesse (5m 11s): Was there a reason that a, that person had had come to you for managing that, that 40 unit? Or was it just happenstance?
Ashley (5m 21s): I actually grew up next door to him, his daughter and I were best friends growing up. And I actually went on vacation with their family when I had just quit my job just because I had nothing else to do. And I that's where they were talking about who needs help. And I think there was kind of this mindset. They had that because I was an accountant. I was capable of managing and running a building, which really wasn't true. I could do the bookkeeping for it. But as far as I had to spend a lot of time learning the rules, the regulations and stuff like that and how to make it actually run efficiently.
So, but that was really just it. The, it was more his wife and his kids like pushing him. You need somebody to help you. And so I ended up doing a lot of admin stuff for him too in personal assistant stuff. And then he brought me in an all these projects. I helped him build a 40,000 square foot dealership. I helped him purchase a dealership. I helped him start an insurance agency. So I'm so grateful for him, for him because he brought me in on so many opportunities that a lot of people don't have that I guess, advantage.
Jesse (6m 32s): Yeah, for sure. It's like the school of hard knocks for a few real estate. So property management is, is one of those professions where it's, it's a lot of hard work. It's a lot it's can be a very stressful job. And usually when you're doing a great job of it, nobody calls you and says, Hey, you're doing a great job. So usually you get the call when there's an issue. How did you, well, I guess first, when did you realize that that was something maybe you didn't want to do at least you personally doing for, for long-term and, and w was there a light bulb moment that, you know, you came across that you, you thought, Hey, let's, let's go buy real estate.
Like you're talking about.
Ashley (7m 8s): Yeah, actually the light bulb moment was when I helped him purchase the dealership. So I saw how he was purchasing a business and what he was doing was taking his properties that he owned and refinancing them, pulling the equity out. And he was able to make a cash offer on this business and purchase it. And I still remember sitting in the attorney's office at the closing table and he had had me set up the LLC. He had had me set up the bank account and I was the one signing that huge check that was given at the closing table.
And just the fact that he put that pen in my hand and had me write that check. I had never even seen a check that big of a month before I think really had an impact on me. And I saw like the power of the real estate that he had and how he used the equity to further advance his investments. So that was the biggest aha moment for me.
Jesse (8m 4s): Yeah. And you kind of got the, I mean, learning by osmosis by you actually doing it, but it's kind of like, I, at least I see it as there's that psychological barrier for a lot of people, as you know, with, with our industry, but you basically being the proxy, they're signing the check for him that I've, I probably broke down some psychological barriers about who can or can't buy real estate at that scale.
Ashley (8m 26s): Yeah, definitely. And even he had me do all of his financing. So anytime he went and got loans, I was in charge of that. I did all that. I worked with banks and that also helped me build a network of loan officers too, because I was super diligent about being timely in responding to loan officers, getting them what they wanted and working with them. And they liked that working relationship. And so when I started investing myself, I had a lot of loan officers that were very eager to work with me because they knew that I would provide to them what they needed to make the loan work.
Jesse (9m 2s): Yeah. Attention to detail and, and staying on top of them that didn't know traits that would explain or describe a CPA there. Yeah. So in terms of you, you pivoting to, or moving on to saying here's an opportunity that you think that you and this investor that you worked with that would purchase it, how did that property come along? What was that deal like?
Ashley (9m 24s): So I started talking to my, the investor son, just putting a little bug in his ear. Like, I think we should do this. And actually the first property that I found, I sent it to him. I said, I think this is the one we should buy. And we went and looked at it and we put an offer. It was accepted. And so he brought the money, he had savings that was going to be the cash offer on the property and how we structured. It was, we became 50 50. So I would do the property management, manage the remodel and do all the leasing.
And then he was the money guy. But also what we did was to make it less risky for him. He also received a monthly principal and interest payment every month. So he was making five and a half percent on his money. It was amortized over 15 years. And then he was getting 50% of the equity in the property and 50% of the cashflow and the property too. So it was a very, I guess, a good offer for him because it was less risky because he was tied into it so much in getting all this benefit from it.
And for me, it was just a way for me to get started, look like right now, I would never do that deal with anyone, but looking back like that got me started. And I I'm super grateful
Jesse (10m 43s): For that. And was that a, was that a local deal?
Ashley (10m 47s): Yeah, so it was in the same town where I was managing the, the apartment complexes and we stuck in that town for, I think our first three deals. And then for our fourth one, we ended up venturing into the city more and then starting to spread out.
Jesse (11m 2s): So in terms of you, you started in this, this duplex, you said for this first deal, and now, you know, just kind of touching on that. That's not a deal you would do now, but how has that growth to the second deal? Was it, was it zero to one or was it one to 10? Like how did, what was the type of deal that you did after that? Duplex,
Ashley (11m 21s): After the duplex was another duplex and it was actually on the same street, just a couple houses down and it went up for sale and my partner ended up putting a line of credit on his house and that's how we, we use that money to purchase the second one. And then we ended up doing a portfolio loan, putting a mortgage on both of them pulling the cash out of them. And that's how we purchased our third home right around the corner too. So we bought three just within a couple blocks of each other.
Jesse (11m 49s): Very cool. So in terms of over the, I guess now, well it's seven years, a little bit, almost eight over that process. You've, you've obviously ventured out to other areas in commercial real estate. Well, what was that process like? It was, there was this, it sounds like at the beginning, at least it was a gradual thing, but was there another, whether you call it a hot moment or was there a big leap in saying, okay, I'm going to, I'm going to try my hand at this, you know, this asset class or moving out into larger deals.
Ashley (12m 18s): Yeah. At first I was very focused on duplexes, small multifamily. The largest I bought in the beginning was a six unit. And then the smallest was a duplex. And I, I was really focused on that and I really became very confident and comfortable purchasing in my market on those properties. So a lot of people ask if I still consider myself a rookie, if I'm purchasing a small multifamily my market. No, I don't. I think I'm very experienced in that. Any other kind of investing? Yes, definitely in that.
So I, I stuck with that and then I ended up just having this opportunity to buy this mixed use commercial building and the investor that I worked for. He owned a liquor store and I saw the power of his liquor store and just the uniqueness of it. And it could be a cash cow and just kind of diversify your portfolio. And so I ended up buying my first commercial building, where I put the, the liquor store in that building. And that was my first kind of different strategy than I went after since then.
So that building finished in 2020, we opened up the liquor store in November, 2020, since then I have been like all over the place, especially hosting a podcast is so bad for my shiny object syndrome because I hear all these things that are like, I just want to do that. They're like sounds awesome. All these different things. So I spent a lot of time going after self storage, mobile home parks and campgrounds. And I recently went to four conferences back to back and I finally have realized that I'm going to focus on campgrounds.
I do have a mobile home park under contract, which I'm going to continue with that. It's a sweet deal. I did have a self storage under contract, but it fell through because the seller wouldn't do a phase two environmental study. Yeah. So the phase one recommended it and the owner said no. So I falling out of contract on that one. And then I'm working on getting a campground under contract now. But I think my big aha moment as to why I was focusing on campgrounds is I had a couple of people talk to me during the conference and really like point out to me what I'm struggling with.
And point out facts, such as look at all the successful investors I'm friends with. He said, look at your network. Are all of them going after like three big asset classes right now? And the answer was no, they're all focused on one. Maybe they started out focused on something like I started out focused multifamily, but then now I'm pivoting. I have that down. I have that strategy, you know, set it's running smoothly and now I can pivot on onto something else, but you don't see these experienced successful investors going after three or four large strategies at once and seeing what will work.
And then the second aha moment for me was I was telling somebody about this campground that I was offering on. And he was like, that's, that's it. And I was like, what are you talking about? I know I want to offer. And he's like, no, that's what you're excited about. He was like, you just spewed off so many different random facts and stats and all this stuff. When you've talked about self storage, your mobile home park, it's just like, oh yeah, I got a mobile home park under contract. Like you don't have that excitement. So that was a big aha moment for me too, was that I'm actually excited about investing in campus.
Jesse (15m 39s): So leading up to campgrounds, which I want to talk about because we, we don't, I don't think we've ever really gone into detail at all on the show, in terms of that process, that takes you from the first few investments to where you're doing these, you know, more commercial side of the business deals. How, how did that develop from the team point of view in terms of networking with other people or having other people influence the decisions you made for those future properties?
Ashley (16m 6s): Yeah. So up until this mobile home park that I have on our contract, I had never paid more than $152,000 on a property. And that was my sixth unit. Everything else had been below that. So my mobile home park is $750,000. That is a huge like jump for me. And that was like a huge mindset shift for me to get over that hurdle because I'd never even spent close to that amount of money or looked for that amount of money.
I've always done well with creative financing and finding money, but to find that much money was like, like nerve wracking. But I spent the last year and probably if you would have talked to me two months ago, I wouldn't even have realized this yet, but I spent the last year doing so much networking. There's a group of people. It next month will be our sixth time meeting up for various events or different things. And I think just talking with them, seeing what they're doing has really kind of helped me eliminate a lot of my limited mindset and knowing that I can achieve these things, I am capable of doing this.
And if I work hard enough, I'm going to find a way I'm not going to give up. And so that definitely helped just seeing what these other people are doing. I even had a James Dainer and he's an investor from Seattle and he runs a very successful company. He endangered, he actually let me come and job shadow him for three days. And I just got to like, see the inner workings of his mind. I got to sit in in all his meetings and that was so awesome. And it's such a cool opportunity. So if anyone is trying to, like, you feel stuck, reach out to people in your network and just go and watch what they're doing and see it.
And it's, it's definitely motivating. I get so pumped up after I surround myself with other investors.
Jesse (17m 59s): Yeah, for sure. And I mean it to the conferences or, you know, speaking with other like-minded individuals, even at, at BB con when we were in new Orleans, it is I think a relative thing where people, I hope that when listeners hear, you know, $20 million, $40 million deal it's, there is that aspect of like, it is relative. There was a, there was a point where, you know, somebody jumping from a million to $5 million or 100,000 to 500,000 or less is, you know, for that person, it's five times what they've done before 10 times, what they've done before.
But I feel like once you do that enough times, you get that aspect of, oh, wait a minute. It really is that the concepts are the same. The deals are bigger, right?
Ashley (18m 40s): 'cause, you're getting like the same ratio of compare, like your, your rental income to the purchase price. Like if that ratio is still the same, who cares if it's a hundred thousand dollars property or, you know, a $1 million property, I guess. Yeah.
Jesse (18m 55s): I find the way I conceptualize the moving from, you know, your first property or second property, not really, I guess more so when you move from certain size of properties, to me, there's a category of one you can continue to bootstrap and then another, you have to raise external capital. Right. And, and what that inflection point is, is going to be different on the individual, right. You know, if you're one or two individuals, there's a certain level where you cannot afford to purchase that property, unless you create a structure where you're raising capital.
And I'm curious for yourself that 700,000, you mentioned creative financing. Did you underwrite it from a pure debt point of view and put in your own capital, or was that something where you had to create a vehicle where you were raising capital?
Ashley (19m 41s): So I spent all my money on real estate. So I have no money. I actually did two offers to the seller. I did one where I'd go and just get a commercial loan to purchase the property. And then I did one at seller financing and I did the seller financing at his asking price. And I said, you know, I'm willing to negotiate on terms. And he told me, I knew $2,500 a month. So I took, and I amortized the loan over 25 years at three and a half percent.
And that came out to $2,500 a month. And so I got a nice interest rate, a long-term loan, and then he needed, he's actually, he lives on the property. So he's actually moving off the property and he's building a house. So he needed some money for that to build the house. So I am putting some money down on the property, but I actually sold a property. And that's, what's going to fund that down payment.
Jesse (20m 41s): There you go. So that's creative. It's funny, you mentioned that one deal that didn't go through because you had the phase two environmental where, you know, there are all these strategies that you can use where we have a property right now that we have contamination on it. And it's really a matter of, of remediation. And part of their creative strategy, most likely will be a purchaser that comes along where we have to do, you know, a short seller financing or VTB on it to get it, you know, get the environmental assessment. But again, like, it's really just a matter of thinking outside of the box. And I'm sure you, as an accountant, you're like, okay, 2,500, we'll figure out what numbers those need to be to make that payment happen.
Ashley (21m 17s): Yeah. As soon as he said that, I got like excited inside and I was like my smile and be like, okay, well, how about if we did it this?
Jesse (21m 27s): So if we were to pivot to the campgrounds, this is something that, I mean, I don't know a lot about, I know we had Brandon on talking more about, you know, mobile, mobile home parks seem to continue to be the trend. Obviously multifamily is on fire, but yeah, for, for a complete newbie campgrounds, how did you come across them? And, and why do you get so excited when you, when you, when you're talking about?
Ashley (21m 54s): So I actually came across this campground that was close to me for sale. It was actually on LoopNet. And I found that the day was listen, I got to be the first person to go and see it. And the older gentleman that owned it, he took me through the whole property, along with my broker. And just like, I could see so much value add and all these different revenue streams just popping out at me. And so that's what really got my interest. And like, my family had cam when we were younger, my parents still have an RV.
We have like family land that we turned into, like a private campground, I guess. But so I have some experience in that and I love the outdoors and camping, all these different things, but just walking through that property and seeing the potential, like just even Wade whacking, the property was going to add so much value. The basketball net had like rocks or something, like holding it down and I wasn't even faced the right way. And just like all these things just super easy improvements could increase the value of it.
The second thing that really enticed me about that property was that there, I think there was 164 sites and about 120 of those were seasonal. So people came in in the spring and this was in Buffalo. So campgrounds are closed in the winter, but they came in, in the spring, left their camper there, they paid a seasonal rate. And then they came and picked up in the fall. And that really limits the daily check-in checkout, which I kind of liked that model a lot more because I'd like to stay away from as much operation as possible. So I offered on that property.
Hannah was like my biggest offer after it was 1.4 million and they were asking 1.5 and they had me go through, I was getting bank financing on that. And they had me go through a bunch of hurdles, like sending them so much stock to make sure I was really a qualified buyer. And then they ended up getting an offer from a capital group out of Los Angeles that beat me out. They did offer 1.5 million and they ended up getting it, but it made like the Buffalo news and stuff that this campground was, they stopped taking stop doing showings because there was two competitive offers from a capital group in Los Angeles and local investor, which is me, but that was like, so he got the bug there.
And then I realized like after I lost that on it, like, wow, I was actually, I really enjoyed that. So I started looking a little bit more and reading about different revenue streams. I got a couple of people on the podcast, the real estate Wiki podcast too, who are investing in campgrounds and one that wanted to start investing, but had done a ton of research, had them on the podcast so I can learn some more. And so then from there I found another one and I'm currently trying to get one under contract now.
And I just did a, an episode on the bigger pockets, real estate podcast with David Green. And I mentioned on there that I'm looking for campgrounds and that was released yesterday and already today. I have so many people sending me deals. So anybody else
Jesse (25m 4s): I'm sure. Yeah. It's a, it's a great, you know, selfish or symbiotic. I don't know you want to call it, but where we can, we can have people, we can have guests on we're. I mean, the value, hopefully we're giving is we're, we're getting it in return from having the guest on. And obviously listeners just hearing a boat, like I would never have thought a campgrounds. Now I'm going to look into what's the, what's the Canadian market, like in campgrounds. Just curious. I'm curious though, from the, from the perspective of you come across this, this, this camp brown, you start seeing all the different revenue, potential revenue, streams, the underwriting for a campground obviously, or maybe not obviously, but from my perception, it seems like you're buying a bit more of an operational business.
It's not as much pure real estate, but when you're underwriting it, are you looking at it as a, you know, as somewhat similar to a cap rate, like you're looking at the yields annually, are you looking at which companies that you would need to employ to, to manage the thing? W what did that look like for you being, especially being an accountant where it seems like those types of things would be at the top of the list for you?
Ashley (26m 11s): Yeah. So actually what I did at first was I AIG Osborn had, he has an available a self storage deal analysis calculator. I actually took that. And I use that for that first property that I put an offer in. And I tailored that to like, okay, so he has, you know, the size of the storage units. How many of those units do they have? And then what's the, you know, the monthly rate for that. And I just like, changed it. Okay. There is, you know, 50 full RV hookup sites.
There's maybe 50 with only electric or something. And I just tailored it to kind of fit a campground. So I've been actually working on that because there is not really a template or a calculator to analyze a campground because they're so different. Each one is so unique with what they have to offer and what are those different revenue streams. That's also what entices me, because there's so much different ways you can generate revenue off of a campground.
So for the deal analysis, it's really been, so I'm only offering on my second one, I've analyzed maybe four or five in total now. And I just, I have to completely almost redo the spreadsheet every single time, because they're going to have different expenses. They're going to have a different income streams. So I really just start by making a list of what I think the revenue is. It can generate. And then I'm pulling comps. I'm looking at websites of other RV parks in the area.
And I'm like, okay, what is their daily rate? What's their seasonal rate. A lot of times it even says what they charge for different things. So like one campground had a zip line and ATVs or whatever, and you'd pay like $25 for a day pass, use the activities. Okay, well, I could do that online, and this is what I could charge. So pulling comps on the campgrounds, because that's going to be your competition. People are going to look at what's around, especially the seasonal, because seasonal campers usually don't live that far from where they're parking their camper, usually within an hour, because they're going there on weekends, you know, the days off or even just for a night sometimes, and then commuting bathroom work, blackout work.
The one that I had offered on first at the Mo the owner said, the majority of people there lived within 30 minutes of where they were keeping their campsite. So if they're looking in that area, that's definitely going to be, your competition is looking right there and see what amenities they have, and then kind of figure out the price. It's almost like a, how an appraiser does an appraisal, those do the bedroom, count the bathrooms and then compares them and like, okay, this is the average, this is what I can put that value to that property.
Jesse (29m 4s): It's almost like how many things can we unitize and figure out what those, what those costs are or income is in terms of the, as a complete outsider in this, in this sector. Is there a case for campgrounds? Like, are there situations where the campground you can purchase the business itself, but not the real estate? Or are those always kind of co-mingled
Ashley (29m 28s): No, you definitely can where you do like a land contract, but that would be something that I'm not interested in at all. I like the idea of owning the property. And I joked when I went this recent one I'm offering, I joke that in 10 years, I'm going to pay it off. I'm going to kick everybody out and I'm just going to build my dream house live there.
Jesse (29m 50s): So actually we were on one of the panels that we had in, at the conference we were talking about, well, it was, it was a question for a couple of us on the panel and it was talking about the regulatory environment. And I thought, it'd be interesting to ask you because New York state, I think is probably of all the states, it's probably has a little bit more of regulatory kind of work to get through from a landlord tenant perspective. How, how have you looked at real estate or how has that impacted how you look at real estate, especially in your, in your state?
Ashley (30m 23s): Yeah, so it's definitely not a landlord friendly state, New York by all means. So everything really changed for the worse in June of 2019. And even now just with COVID the, the regulations they put on, on evictions and everything like that has been awful to deal with and what tenants can get away with. And it definitely has deterred me from wanting to keep building a portfolio here. I think that I do have a nice sized portfolio.
And if I, which I do think I will continue doing a bunch of burgers is I'll, I'll go out of state and kind of diversify in different markets. Maybe do a couple here a year still, just because it's so easy for me. Cause I know the market and I know the properties and I get a lot of deals sent to me. But yeah, we, we were lucky. We didn't have too many people that didn't pay during COVID, but there's one person that hasn't paid since COVID and we can't evict them.
We can't do anything. So I was very thankful that I gave up property management before COVID hit, because I wouldn't be bald ripping my hair out even more. So that was nice. But yeah, I, I think that if you are investing on state, don't come to me here.
Jesse (31m 46s): Yeah. Yeah. I think there's a, there's definitely a different, I mean, we're, we're very, I think our whole country safer for Alberta is, is a challenging regulatory environment. I think rent stabilization and rent control. We had a professor actually from New York city from NYU that was talking about the history of rent control and rent stabilization in New York state and then across the country. But I think for us, I'm not sure if it's the same for you, but basically we have a certain amount that we can raise every year. And they're really the only time you can raise above that is when a new tenant comes in.
I'm not sure if it's the same kind of,
Ashley (32m 20s): Yeah, we don't have that like outside of Buffalo, cause that's more like New York city, but for us, the biggest thing is like in June when all of the, the laws kind of changed and they just changed so drastically. So it used to be a three-day notice before you could file a petition for eviction, but then it changed to a 10 day notice and then it just like made the whole eviction process a lot longer, the different rules and regulations they put in and just a lot easier for tenants to get away without paying rent just a lot more loopholes and things like that.
Jesse (32m 56s): Yeah, absolutely. I think one very like a stark difference between let's just use Buffalo, for example, compared to say our market in Toronto or I mean you could go LA you could go, Boston, Buffalo has been a very, I think yields centric type of market where you, the cap rates that you can achieve around your area, probably a lot higher than the cap rates we can achieve in our area. But I think that has been at the expense of potential equity growth. So how do you look at, at that when you are doing your underwriting and just generally your philosophy of, of that trade-off between, you know, potential income as opposed to value?
Ashley (33m 36s): Yeah, so like one thing is the 50% rule in the 1% rule. So the 1% rule says that the per your, the rent that you're charging each month is 1% of the purchase price. I can hit that all day long. What I can't hit is the 50% rule where 50% of your expenses are 50% of the monthly income because the property taxes are so high too. So that's like a, not even the, the laws at all, just property taxes are so high here too. So that's been kind of another reason for me to want to go out of state for my rental portfolio, because if I buy this $20,000 property, I can pay that off very quickly or just pay for that in cash.
But I'm still paying those properties taxes every single year. And those, I just sold a property that the property, it was 20,000. I had bought it for and the property taxes were about three grand a year on it. And, but I could go upstate and I could pay maybe, you know, 50, 60,000 for that same house, but only pay a thousand dollars in property taxes. And once that property is paid off, it's only a thousand that I'm paying every year instead of 3000. So that I would say is even more of a factor to me than the, the landlord tenant laws, even.
Jesse (34m 54s): Yeah. It's funny that we would be the inverse of that. The 1% is almost impossible if not impossible, but the 50%, which is, you know, for listers, like you have a, your, whatever your expense ratio is, that's really, really what it is, you know, as a percentage. So us, I think 30 to 40% is pretty, pretty normal. It, unless it's brand new and then you can get a little bit lower, but yeah, I didn't, you know, and I didn't even think of that from a property tax perspective. That's really, I always, I, when you mentioned that, I thought it would have just been just expenses in general, not necessarily property tax.
Ashley (35m 26s): Yeah. It's, it's definitely the property tax, but we actually in Erie county, which is the county that's in Buffalo and, or surrounds it, they actually have an Excel sheet that they, every year that they just put on the county website that tells you each town and what the tax rate is for those towns. And then it compares it for you. It says, okay, if you buy a hundred thousand dollar house, this is what your taxes would be on that property. And you can go through and see, and it shows, breaks it down from like town and county.
And then if there's a village to village tax and then school tax. So what you can do is you can go through there and say, okay, these are the desirable school districts. Well, what towns border that, where you're paying that low town and county tax, but you're getting into that school district because of that little bit of overlapping. So if you guys, and anybody wants to go and look search your county, I'm sure they probably do this too. If your county does and look at that and you can see what towns have the lowest tax rate tax rates.
So the last house that I, I just did a flip and that house had super, super low property taxes. It was in a small little town and the reason it had low property taxes was because there was like a garbage dump in the area landfill. And they pay the majority of the property taxes. Well, this property was like right on the edge of the border where you're not getting any smell from the landfill. And so it was kind of like an opportunity because you get that, you know, I, that property, I also purchased for 20,000, but instead of 3000 and proper Texas, it was only $850 a year in property taxes.
Just show the difference. Yeah.
Jesse (37m 12s): Yeah. I think that's, I mean, it's pretty amazing. Like you can have properties within, you know, 45 minutes an hour from each other and just have such a drastic price difference when it comes to property tax Ashley, in terms of the way that you're looking at the market right now, and fingers crossed, hopefully we're coming out of this thing, you know, in, in the right direction, when it comes to the lockdowns and restrictions, what is, where do you see opportunities over the next few years? You know, what's, what's kind of got your interest aside, you know, aside from, from the, what we've discussed here, but what are you excited about?
Ashley (37m 47s): Well, I guess, you know, I'm trying to stay away from that shiny object centers. Talking about teenagers is bad for me, but I think there'll be a opportunity for businesses. So going after businesses that maybe are sick of the COVID regulations, or maybe they did fall behind and during COVID and they just haven't been able to catch up. So I think there'll be opportunity there. So some of the businesses I'd be interested in are not really going to be ones that were impacted by COVID, but were actually empowered by COVID.
So they actually did better. So that would be like liquor stores, which I got one of those. And unfortunately we didn't get our like liquor license until basically the shutdown was kind of over, but looking at the kind of businesses that can survive COVID I think really piques my interest that if there was another shutdown or something like that happening again, that these businesses were thriving and they still do successful anyways, even when there isn't a shutdown.
So that was like a liquor store was a big one for me. And then I also like the idea of a laundry mat or a carwash, just the, the, the ease of the cash cow from those. And then I do have some experience managing a laundromat for that, that other owner. So yeah, those are any other business opportunities
Jesse (39m 18s): Working with that. Gentlemen is the gift that keeps on giving we've. We've looked at laundromats as well. It's just one of those compelling things that even without buying the real estate there, there still is a compelling case. If you can obviously do both. That's great. But I like your point in terms of businesses that have been resilient. I mean, we've seen in our own market, you know, whether it's technology, medical, technology companies, ghost kitchens, just companies that you didn't, you couldn't foresee how much, how explosive their growth would be prior to the pandemic, obviously for, you know, nobody has a crystal ball, but that that's, we do see those companies, a big driver of, of real estate at least locally here.
And I'm sure it's, it's the case where you are.
Ashley (39m 60s): Yeah. And even with auto dealerships. So I've been in because of the same investor I've been in the auto dealership industry and they are making more money now because of the shortage of cars. So every car that they're selling, it's getting selled at invoice or above because there's no cars available because all the chips and all the parts are stuck on a ship waiting to come into the us. But they they've said that they sold they're making as much as they did, but they're selling half of what they sold before.
COVID. So they're doing less work, making the same amount of money. So it's been almost beneficial to them to, I mean, there's definitely was some hardships, especially during the shutdown and things like that, but there's the PPP programs that I think helped a lot of, of businesses. So it's very interesting to see what businesses actually have benefited from COVID and have done better.
Jesse (40m 57s): Yeah. I couldn't agree more. Well, actually, I want to be respectful of your time here. There's four questions that we ask every guest that comes on the show. So before we kind of get on how people can reach out to you, if you're game for those all, I'll start them off. What's something that, you know, now it could be in your real estate or career in general that you wish you knew when you were starting out.
Ashley (41m 19s): So, one thing that I did not know was that you could go and get a loan for an investment property. I thought you had to make a cash, but you had to buy it in cash because that's how that other investor had purchased all of his properties. So I wish that I would have known that there was other options to me then just taking on a partner and I could have explored that. And not that I, you know, made a bad decision or anything like that, but I wish I wouldn't have had that limited mindset of that. You could only buy a property in cash, and I didn't even realize creative financing and all the different ways to purchase property until I actually found bigger pockets in 2017.
So that was three years later. And then I tripled my portfolio in a year and a half after just digging into the forums and learning all these different ways, you know, seller financing and private money, all these different things.
Jesse (42m 13s): Yeah. Just, just all the different resources. The next question is, you know what, since you were on a panel for women in real estate, maybe we'll, I'll kind of tweak the question a little bit. Typically we'll ask, you know, your view, what would you give as a recommendation to younger people coming into our industry, your view on mentorship, but why don't we say from a, especially from a female point of view, younger women coming into our industry, you know, what would be your advice to them? And, and just generally, and mentorship,
Ashley (42m 41s): I think that there are some women out there who think that they are at a disadvantage being a woman in real estate, because there's so many men doing it. Don't look at it like that. It is an opportunity and it is an advantage. You are going to stand out because you are a woman. If you go and look at a property with a broker, do you think he's going to remember the 20 other men that have looked at it and know he's going to remember that one woman that came, that you know, is investing in properties.
I think there's a lot of doubts and that, you know, you're going to get scammed by contractors because you're a woman, you know, don't know what you're doing. And that's also an advantage. You know, if a contractor is going to try and scam you, because you're a woman who's going to do it right off the bat. So if he's talking down to you or things like that, then you know, not to hire him or if it's a guy and the contractor is like, okay, he probably knows what he's doing. I'm going to scan them at them or something.
But I, I think use it to your advantage. And it's an opportunity. And if you feel like, because you are a woman that you are not being taken seriously, then you're talking to the wrong people. You're talking to the wrong person because I have more friends in real estate that are men than women and not a single one of them has ever talked down to me or made me feel like I don't belong. That it's a boys club at all. If anything, I feel like I've been more welcomed because I am a woman.
There's a million other men doing what I'm doing, but there's not as many women. So it's given me an opportunity, a like up and I think take advantage of that
Jesse (44m 25s): Great advice. Okay. Is there a resource, a podcast or book that you'd like, let listeners know about that you're listening to reading
Ashley (44m 36s): The real estate rookie puck.
Jesse (44m 41s): Yeah. As well.
Ashley (44m 44s): Yeah. If there is actually a book that I love and I think that anybody who's in business or the real estate or any other business should read this because no matter what, you're going to be dealing with people, and it's a hug your haters by Jay Baer. And it's a customer service based book. And basically it talks about like, if you received negative feedback or criticism, how to deal with that, and also how to kill people with kindness. So if you are a wholesaler and you're getting, you know, sellers that are, you know, or you know, how to work with them.
And so I, it's a, it's a great read. I, it's probably the, one of the, probably the only book that I've scribbled in that much before and like taken notes and highlighted things. And so
Jesse (45m 32s): That's great that I think that's the first on the show. I've never heard of it. We'll put a link up to that as well. Awesome. All right. My favorite question, first car, make and model.
Ashley (45m 42s): It was a green Bonneville. I don't even want the makeup upon GMC or Chevy or something, but That's basically about think of a vote.
Jesse (45m 57s): Yeah, just, just in a, in a what's it called in Buffalo with a PO thing. It's Pontiac. Pontiac Bonneville. Yeah. Awesome. Awesome. Well, Ashley, for, for people that like to kind of find out what you're doing online, like I said, you have great, great presence on, on Instagram and other platforms were where's the best bless area for people to reach out.
Ashley (46m 19s): It will be on Instagram app wealth from rentals. And then we also have a real estate rookie, a YouTube channel, and then a real estate rookie, a Facebook page. You guys just searched those.
Jesse (46m 32s): My guest today has been Ashley Kurt, Ashley, thank you for being part of working capital.
Ashley (46m 36s): Thank you so much for having me.
Jesse (46m 45s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Andrew Drexler has been a Part of the First National Financial Commercial Team for over 15 years, and has Originated more than $4 billion in Commercial Financing. In 2020 alone, his team funded over $1 billion in Commercial Mortgages, of which $822 million represented transactions in Ontario and $236 million Represented Transactions in Quebec
In this episode we talked about:
- Andrew’s Bio & Background
- The Real Estate Market Liquidity
- Debt Markets and Financing of Projects
- The Retail Real Estate Outlook
- Remote VS Onsite Work
- Real Estate Risks and Opportunities
- Underwriting Apartment Buildings
- Condo Development
- The Student Rental Market
- Canadian and US Real Estate
- Mentorship, Resources and Lessons Learned
Useful links:
https://www.linkedin.com/in/andrewdrexler/?originalSubdomain=ca
https://www.firstnational.ca/contact-us
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time, or at least an in gentlemen, my name Jessica galley, and you're listening to working capital the real estate podcast. Our special guest today is Andrew Drexler. Andrew has been part of the first national financial commercial team for over 20 years.
Now, for those of you that don't know first national is one of Canada's largest non-bank mortgage lenders offering both commercial mortgages and resident residential mortgage solutions. And correct me if I'm wrong, Andrew, I believe you said that we're over 10 billion in, in mortgage originations.
Andrew (50s): It's going to be pretty close to 10 billion for this year. Yes, we're on the commercial side. It's going to be a very exciting year.
Jesse (56s): Well, first of all, thank you so much for coming on. It's it's great that you're being generous with your time. How you doing today?
Andrew (1m 2s): My pleasure. Good. Thank you. It's a beautiful fall day in Toronto right now. I love fall. It's my favorite season. So it's a beautiful day
Jesse (1m 9s): Transience of that fall season. We get it for such a small amount of time. That makes it so good. Well, it is a, it is false. Yeah, no, absolutely. I appreciate that. It is fall. It's a leaves home opener today. So at least versus Canadians for the hockey fans out there. What we do with, with guests that we have on first and foremost, Andrews, we like listeners to get a little bit of a background into, you know, how you got into the, the real estate space, maybe a little bit of, of your background and how you ended up where you are today.
Andrew (1m 44s): Sure. So, you know, I first got introduced to real estate actually, when I came as a 14 year old immigrant to Canada for Romania, with my family. And it was the first time it occurred to me that you have to pay rent to live somewhere. And I thought that was quite interesting. So I guess I went to school at the university of Toronto and upon graduating, I was very fortunate to meet more the co-founder of first national and, you know, he's a legendary figure in our industry.
He's been a great mentor for me now for 20 years. And so early on in my career Morty and I were looking after one of our largest clients from Israel who came into Canada and bought a lot of real estate in a very short period of time. And so early on, I was exposed to all the different asset classes and because they were short-staffed here, we did a lot for them, not just the financing, but a lot of the acquisition work and due diligence work, you know, and that gave me a really good understanding of both the equity and the debt side. So it's been, it's been a really amazing ride really for the last 20 years, we've worked on some really exciting deals, mixed use deals, construction loans, and pretty much every asset class.
So it's been, it's been quite an interesting last 20 years. We've seen a lot for sure. And you know, I'm excited about where the Canadian industry is. I mean, there, we see a lot of changes, but we also have some challenges going forward. So I think overall though, the industry, the Canadian real estate industry is in a pretty good space
Jesse (3m 12s): For sure. And in terms of coming out of the university of Toronto going, you know, meeting, meeting the, you know, the head of first national, was that your first path into real estate or was there, was there other companies that you work for prior to, to first national?
Andrew (3m 26s): No, that was my first. That was my first job out of university. It was, I was, I was quite lucky. Actually. I started a business lab in university, which led me to meet somebody who then introduced me to the Maury and went, you know, it, this is how the opportunity came about. And it's been, it's been a great opportunity that I really appreciated, you know, first actually has been just such a gold standard in the mortgage industry, Steven Smith and Moya Taz. And they've done a great job of being at the forefront of innovation. And, you know, like you said earlier, I mean, we're going to be close to $10 billion of new mortgages originated this year on the commercial side, the single family side is, is a leader in its space as well.
So we get a really good look at what's going on in the industry, you know, both from the commercial side and the, the, the, I guess the single family side and just the strength and the health of the overall industry. From that perspective,
Jesse (4m 18s): I'm curious to ask, I mean, it's not often you have a seasoned vet. That's been with a company like first national from inception in terms of the, the background that you've seen over the years, first National's evolution to, to what the different places that they lend within the capital stack. How has that evolved over your career there?
Andrew (4m 36s): So we used to be predominantly an apartment lender on the I'm only going to speak from the commercial side cause that's where, where I work, but we are mostly an apartment lender and now we've become, you know, we do retail, we do office, we do self storage, we do student housing and retirement. We've really become a very balanced lender. This is a time. I mean, there's definitely a lot of liquidity in the markets, both for on the equity side and on the debt side, it's a great time to be a borer. If you have existing assets, it's a very difficult time to be a developer, looking for land, looking for new projects, you know, it's become tougher and tougher to make money in real estate, both buying and developing.
But if you do have an existing portfolio, it's a very good time and there's so much liquidity. I don't think I've ever seen this much liquidity in our market, again, both from the, the equity and the debt side.
Jesse (5m 28s): So how has the last year, well, almost two years now, this environment that we've, we find ourselves in, how has that, if, if it has at all changed the way that you look at the debt markets, the way that you look at financing of projects, you know, anything different philosophies changed over the, over the last 18 to 24 months?
Andrew (5m 51s): You know, it's a good question. So I think we've been surprised at how certain asset classes have held up. I think at, you know, we were worried about apartment owners and, and, you know, we were wondering whether people are going to lose their jobs and not be able to pay their rents. And the apartment sector has held up incredibly well. You know, I mean, the government's done their job to, to support people and then people to their credit have done a great job of maintaining their rent payments and not defaulting there. I think, you know, rebel is had its challenges.
You know, obviously people shop differently. Now. I think people are spending less, I think on the office side it's yet to be determined, right? I mean, I, I'm a big believer in the return of the downtowns. I think, you know, we've seen apartment vacancies in the downtown core across Canada go from 0% to 15% almost overnight. I think we're starting to see the return now and nobody's really back at work, but very small people are, people are back in the office. I think that we will go back fairly quickly. I'm so bullish on, on the Canadian major cities.
I mean, I just think when I look around the world, I, I wouldn't rather be, I wouldn't be anywhere else really than, than here. So I think there's a big draw from an immigration perspective, economic perspective, our, our political system is good. Are healthcare systems good or universities are good. So I think, you know, Canada will continue to be a strong point of, of, of entry, you know, industrial of course has been booming. And so that's, we all know that everybody's looking for, for industrial space and, and rents and values and land and cap rates.
Everything is it's at an all time high cap rates at an all time low, of course. So the Canadian market is held up really well. I, I would say my biggest worry is really more around the retail side. I think the, the office side will rebound and I think the office sector for the most part is owned by very large institutional players that have a deep pockets. I think on the retail side, I'm more concerned about, you know, when you lose the mom and pop tenants and when you see some of the anchors that are maybe downsized or not quite taken up as much space, I'm not sure that there's a long list of replacement tenants that are waiting in the wings.
You know, in previous years or decades, there's always somebody new coming out of the U S there's always somebody new coming out of Europe. We just don't seem that anymore. And I'm just worried that that rents probably in the long-term are going to be flat lower than where they are today. And that's assuming the occupancy stays at the level that it's at, but overall the market has been good. I think you certainly put more emphasis now on the strength of the bore and their cashflow abilities. You know, it used to be that somebody got, they had a good net worth, they're good to go, but now it's, you know, they own a bunch of different plazas and they're not quite getting their full, you know, a hundred percent of rent that they used to collect.
So can they still support the loan or what happens when their loans roll over? And they start all of a sudden going to a higher interest rate, you know, which is the next point, which is, you know, I do think unfortunately we're in for a, a period of rising interest rates. I do think that everywhere you look, you know, it screams inflation, and eventually that's going to make its way into the interest rate environment. You know, there's talk about one a day data being, being slowed down or reduced at all levels and malt and other, you know, many countries.
And I think that that ultimately will put pressure on bond yields to move up, which will result in higher interest rates are interest rates can lead to higher cap rates, you know, maybe a reduction in values. And again, the cash flow is, is a big concern. So we're definitely, stress-testing our borders a little bit more, and we're looking very closely at the ability of the property as well to, to support their, that they plan on taking
Jesse (9m 32s): Yeah, in terms of a lot there. But for, for the particular asset class, I'm curious with retail, as you know, we've seen, I think whether in the states, whether it's 26 or 27 square feet per person per capita, and we're somewhere 16 and then, you know, European countries, sub 10. So all that to say that we, you know, a lot of real estate or retail, I think that even prior to COVID, we, we knew it was overbuilt, but now really getting granular. And the ones that at least we see is that the grocery anchored or the good anchor tenant malls or areas experiential areas I think are going to be positive.
But when it comes to you looking at retail as an asset class, are you looking, you know, with much more emphasis on the credit worthiness of, of the tenants and what that tenant profile looks like?
Andrew (10m 21s): Yeah. I think it's, it's the long-term stability of that tenant and trying to anticipate what their long-term needs are going to be. So, you know, when I look at a Canadian tire, when I look at a Walmart, Walmart, which used to be obviously the gold standard, and you have one of those in your Plaza and don't even have to worry about the rest of the tenant roster. I think you, you try to say now, well, where would they be in five years? Do they still need that kind of footprint? Is there a chance that, you know, we're competing with their own sites and they go somewhere else because they need more or less, you know?
And then when you look at the, the, the rest of the tenants and you look at their rents and you even look at the renewal rates, like, are they really going to be getting those rents? You know, considering that, you know, they spend more on cleaning, they spend more on staff, they're doing a little bit less business than they used to. You know, certainly if you go into the mall and all of a sudden you're allowing two people per store, four people per store, you know, what does that do to their bottom line? It's got to impacted, right? And then you add in, again, the extra cleaning Dexter wages, certainly the profit is going to be decreasing.
You start thinking about supply chain issues, you know, where they're getting their, their items that they're selling their merchandise. Does that cost them more? Are they still able to get it on time again, that affects their profit, which ultimately for them to stay afloat, do you need to come back to your landlord and say, Hey, I'm sorry, guys. I want to stay open, but I need to pay a little bit less. So I think it's more about not just happens right now, but it's really what happens two to five years from now. That's really important from a tenant by tenant perspective.
Jesse (11m 56s): Yeah. That makes sense. In moving over onto that office side, do you, do you, well, I'll say this, do you subscribe to the, this, this idea? I think I'm, I'm partial to, I'm also, you know, obviously biased in, in the Toronto downtown market, but the idea that I think that 24 hour cities are going to come back, whether it's the new Yorks, the Las Vancouver, Toronto, I think suburban offices have held up decently. I think it's, it's a lot of the mid tier, you know, the, the class B class C in mid markets that I think are going to be the questionable questionable office is the ones that aren't connected to the suburbs through transportation.
Like you just, you know, having a car and the ones that aren't downtown connected via all the transit that we have here. What are your thoughts on that?
Andrew (12m 43s): You know, for me, the question is about when people are going to feel comfortable being on public transit, right? So I'm a huge believer in that downtown. I'm a huge believer in, in, you know, not just the hybrid model, but a return to work model, because I truly think people need to be around others to brainstorm, to be more creative, to be more productive. I know we've all been very productive for the last year and a half, but the reality is everything's been shut down. You've had nothing to do blood work, you know, but now as things open up, you know, it's easy to, to, you know, not feel as, you know, energetic or enthusiastic plus you've been, you've been locked up at home for awhile.
You know, when you come into the office, is it just a certain level of energy that, that kicks in, right. And I think for the young people, not that, that I'm so old, but for the young people, you really need to be around to hear what's going on, to learn about deals, to learn about what's going on in the market. You just don't get that from the home. And so I do think the office market will come back strongly in the downtowns across Canada. I just, for me, the question is more, is this six months? Is it a year, is a year and a half. And I think the answer depends on when will people feel comfortable being on transit.
Cause you know, everybody thinks they're going to drive into work. I tell you I live 15 minutes away and it takes me 45 minutes now to drive in with 5% of the people being downtown. And so once everybody's back to work, it's just no chance I'm doing a drive in and out of downtown. So, but I I'm a such a believer in the return of the downtowns and, and it goes the same for buildings, right? I mean, people are not going to be working, living in the suburbs for the rest of their lives. You know, if you have family, that's a different story, but the young people, again, who may be moved home or, or bought a place for our way that I just think they'll, they'll want to come back into the downtown, you know, and once their friends are back and the energy's back, you want to be in and around the downtown.
And you know, that will signify the return of that 24 hour city that you're talking about.
Jesse (14m 38s): Yeah. I think that's born out by most of our experience that we've had with our office. We've, we've opened in October, so not too long ago, officially on, on kind of a rotational basis. And there's definitely that feeling that vibe, you know, just kind of interoffice sports are kind of slowly coming back. And I really felt during COVID or that at least the beginning, I really felt for the individuals that were associates and analysts just coming into our industry only, you know, the time where you should be making the most connections speaking with the most people, they were kind of forced to be at home during that time.
Andrew (15m 12s): Yeah. It's very difficult that you just can't learn the same way when you're at home. You know, you try, I mean, I have a team of analysts and you know, we try to get them on calls. You're calling your client, you get them on, but sometimes you don't get the client, you hang up, they call you back. You can't quite just say, hang on, let me put my house on line. And these are learning opportunities where you just around people and you learn, I mean, I've learned so much by, you know, the, the predecessors or the people that are still our company that had been there before me just listening to them. You know, that's how you learn how to talk to clients. You learn what to say, what not to say, you know, you learn about stuff that's going on in the market.
I mean, these are really valuable things that I really hope that the young people see the value in that. And they forget that it's been easy to work in your jogging pants and, you know, get a workout in, in the middle of the day. But hopefully you'll you realize that the importance of, of being in the office?
Jesse (15m 59s): Yeah. I think the interface, zoom, whatever it is, teams it's, they've got, they've done well, but there's definitely those subtleties. I, in terms of, you know, you mentioned interest rates, you know, I think it kind of went under reported with the fed kind of decoupling their, their target inflation. I'm I'm assuming I, I should be, I should be more up on this for the Canadian side of things, but I assume that we will follow something similar to what what's going on in the states right now you mentioned inflation and, and as a result of eventual, upward pressure on interest rates, how do you view, how do you analyze that?
How do you approach that when from a, from a lending point of view?
Andrew (16m 39s): So I think the challenges with the construction projects, you know, where you have, you're trying to underwrite the future value of the asset upon completion. And you're trying to peg a certain interest rate, a certain ceiling rates that you cannot exceed. So you're structuring your construction financing based on the end value. When you have a certain rate that you can't, when you convert to the term that you cannot exceed. And so, you know, the challenge with, with apartment construction is that the projects take so much longer than they used to.
You know, you start off with approval is taking years now, too. So the pre-development takes a lot longer. The construction is taking longer and you know, whether it's COVID related, whether it's supply global supply chain, disruptions related, you know, everything is taking longer. And so, you know, now you're looking at a project that could be five, six years before you get to completion. So we're essentially trying to peg where the interest rates are going to be in five or six years, because that's what we've tied our construction loan to. So I think that's, to me where I have the biggest concerns, we mitigate that by saying, you know, we're really just focusing on large bores that have liquid assets and very good cash flow in their portfolio.
But a lot of these apartment projects are getting to be very significant. I mean, we're doing projects that are, you know, $200 million upwards of $200 million. That's a lot of exposure. You know, you have a, a 50% basis point 50 basis point rise in interest rates, which could impact your cap rate by 25 basis points. You know, that's a lot of, that's a, that's a big value of sling. And I think if you try to say, look, you know, we're going to increase the interest rate in our underwriting by 50 basis points per year. Or if you're trying to Peggy at five years out, that's two and a half percent.
There's no chance that anything today is going to cover. So it's, it's a bit of a balance, right? But I think the biggest challenges in the multifamily sector, I think, you know, industrial, not so much office, but industrial and retail, usually construction is a lot shorter. And usually you have your leases done right at the beginning. So you don't even have to worry about leasing risk at the end. So it's merely just pegging your construction risk and then how quickly you can turn out the debt. But I think apartments though, you do have some, some serious interest rate.
Jesse (18m 53s): Yeah. At least with industrial construction too. I mean, it's a slab of concrete at, at a certain point. And the, the, the construction itself is simpler. I'm curious, Andrew, when it comes to the underwriting of apartment buildings, for those that don't know that the Canadian market is a bit unique, especially in comparison to the states. A lot of our apartments stock is older stock in terms of the actual, when, you know, when you hear that there's a class, a class apartments in whether, you know, it's in Miami or Boston, we really started building a class not very long ago.
So the projects that, that you would finance or that you would look at geographically, where do you find them clustering and what type of, what type of assets in the apartments fear are you financing? Are you lending on?
Andrew (19m 40s): So there it's our asset class that, that transacts the most. So there is a lot of capital chasing apartments. So the existing portfolios are being bought the existing older buildings. There there's a lot of demand for them. There are a lot of international players that are a lot of Canadian REITs. There are a lot of wealthy families and investors that are still looking to acquire multi reds in Canada. And so that's good because you know where your debt is today, and it's been very cheap.
And so you can lock into a 10 year rate and still get some pretty attractive returns. We send a lot of new rental development over the past five years. And the reason for that is because, you know, it used to be that interest rates were high and rents were low, right? We had rent control for many years and there was no incentive to build apartment buildings. And like you said, the apartment stock in our country is very old and we hadn't had new construction for a very long time. And so the shift happened when interest rates started going lower and lower to the point where we were at historically low levels, the financing environment became a lot more conducive to new development.
And a key part for me was that the tenant profile had changed. So tenants right now, whether you're dealing with retirees cashing in, on their home equity, young professionals that either can't afford or don't want to buy a house right now, or international students, these are very sophisticated pennants that have said, you know, I want a nice building. I want a superior HVAC system. I want amenities like rooftop, patios, and barbecue areas where we can entertain friends. I want gyms in our building. And so this level of demand from the tenants has driven the, the, the, the increase in supply of new apartment buildings.
Now, not all new apartments have been luxury. You know, we've built, you know, call it no frills, new apartment buildings as well. You know, new apartment buildings that maybe don't have the same level of amenities. And we've built those, not just in the major cities, on the major transit nodes, but on the outskirts as well. And so those have been really well received. So I think to your point, our rental stock is very old. And anything new that has been brought into the market has been received very well, because there are lots of people that have the ability to pay more for their rent and want to live in nice places.
And, you know, frankly, the units have gotten smaller, but that's okay because you live in a brand new, beautiful building. And again, you have these great amenities and you have people over, they're not going to be in your, an apartment. They're going to be in the, in the common areas. And so we've seen a lot of new developments in, in that sector. The challenge now is will that continue going forward? And I think, you know, the demand side is definitely there. I think the challenge is in those risks that we're talking about, namely interest rate risks, the fact that the projects have taken longer, they're becoming bigger.
And with the construction costs today, escalating rapidly, you know, the returns are now getting to that point where they don't really make sense. And so this all leads to this affordability crisis that we have in Canada, which is both the home ownership, we're home on affordability issue and the lack of affordability on the rental side. And the challenge is that people don't understand that the issue is a supply issue. It's not a matter of cap, the rents, you can increase rents anymore, or you can't get rid of and evictions.
It's not that the issue is that we don't have enough supply and pre COVID. We were pretty close to 0% vacancy rate across the country. Most cities we're going to get there again, as soon as immigration opens up, as soon as the international students are coming back, as soon as people come back into downtowns to the office, that vacancy rate goes back to zero. And yet here we are with facing a, an, an affordability issue again. And so we need to find a way to solve that.
Jesse (23m 28s): Yeah, I think that is kind of the knee, knee jerk reaction. It's it's these symptoms. I think of the problem that you, you go to like rent evictions or these, these type of things where it's it's, the constraint is supply. And I I'd like to get your thoughts just on the, the history, at least of our market. A lot of it has been this shadow market of condo development, being a proxy or a replacement for what should be purpose-built apartment buildings, people that are fully intending on, on renting. Is that, is that dynamic, do you think that's still happening and will happen between the two asset classes and maybe just a follow-up to that?
If so, is that because of the, the ability to build condos is regulatorily easier than, than a purpose-built right now,
Andrew (24m 18s): I'd say that's a complicated question. So I think traditionally, it was easier to do condos because, you know, you would pre-sell, you would have a certain profit built in there and then you'd go get your financing. And then you start construction. You also had a very level of construction industry where costs were an escalating, like they are today. And your, your development timeframe was a lot shorter than it is today. So it was fairly cookie cutter in that once you, the risk was in picking a site in and getting the pre-sales done, once you did your pre-sales and you locked in your profit, then it was just a matter of building it out.
And it was fairly straightforward. The challenge now on the condo side is that, you know, as a lender, I don't even know if I want our borders to pre-sale or to pre-sell the full, you know, 75 or 80% of the building to cover a loan because frankly cost escalations are so high that it's going to eat them through their profit pretty quickly. And then I don't really want them losing their motivation halfway through the project where we funded half. And now all of a sudden there's no profit left. So it's, it's very challenging as a lender to decide, you know, what do you want, do you want pre-sales or not?
Having said that the price is the sale price is seemed to continue to escalate and costs are not slowing down. And, but the, the sales side is not slowing down either. So you're seeing sale prices per square foot that are getting higher and higher in Toronto. So condo projects right now still make sense. The challenge is that the rental side no longer makes sense. And so we need to find a way to continue to enhance, you know, entice, I guess, developers to build the, you know, rental product because we need it.
But I think the difference between the two, I mean, personally, I would rather be in a, in a purpose still rent the building. You've got professional management, you've got a building full of renters that are going to be there. Long-term with the condos, there's constant turnover. People aren't as careful with the buildings, you know, it's just not the same crowd, but having said that they both been successful. And so that tells you that there's a lot of demand for whether it's condos or whether it's new rentals. The idea is that people want to live in newer, nicer buildings with nicer amenities.
And so right now the condo market seems to be really strong. Again, the rental market seems to be picking up as well again. And I think longterm they're both going to continue to be successful. The challenge is, will there be enough enticement to the developers to build rental, or are people all just going to, to condos now and be selling that because you can still make it work from a condo perspective.
Jesse (26m 49s): And as, as asset value is safer, multifamily increase and, and net operating income also continues to increase. Where do we hit that point of like that unaffordable point? And I guess more importantly from a policy perspective, w what do we do to, to ameliorate that aspect of, of what looks like the direction our market's going in?
Andrew (27m 12s): So I think the challenge is, so right now you have a federal government that has a very strong immigration platform, which is great for the economy, which is great for housing. It's really good all around. I mean, you know, as a, as a fellow immigrant, I know that people come here because they want a better life, right? So they come and they want to work hard and they want to, you know, own something, their house or a business. And so it adds a lot of value to the economy. So you want to continue to encourage that. So the federal government has done that. They're also offering financing through groups like CMAT, you know, to encourage development, the provinces are doing their part because they're giving grants at different levels.
And the municipalities are trying as well. They're, they're waiving development charges for affordable units. They're waiving taxes. The problem is that they're operating independently. And as a group, they need to come together to, to sacrifice a little bit more to say, what is it that we can each give up in order to balance the equation that the developers have? Because right now, what the government is offering is not enough to support for the development. I mean, these developers are building two, three, 4% cap rates.
And again, with the longer timeframe, and you were saying five, six years, by the time you're fully leased, that's a lot of time to wait and a lot of risks from an interest rate perspective and cap rate perspective and ultimately valuation perspective. So, you know, if it's barely interesting right now for developer to build, and they're only doing two or three, 4% cap rate, and that's assuming that everything pans out, you're just going to lose them, right? And so what can we do? We need to come together. We need to shorten from a municipal perspective, we need the shorter shorten approval times, you know, approve or reject an application within six months.
It can take two years, you know, maybe entice them, give them more density, but they have to build a certain amount affordable. But then you waive development charges on the full building, not just on the units that are affordable. Maybe you wave Realty taxes on the whole building, not just on the affordable units. These are things that, that have to happen in order for us to, to stimulate development. I mean, ultimately, look, if you're a developer, you have two sides of the equation, right? You have the development side, which right now costs are through the roof, and you need to reduce that.
And so from a government perspective, you can only help with agency self-assessment tax, where you can help out by waving or reducing development charges, or by, by maybe subsidizing land. But then once it's built on the operational side, if you're trying to put a cap on the rent that they can charge, and you're trying to entice them to reduce the rent to an affordable level, you have certain expense line items that can be adjusted. You can't adjust, you can't adjust insurance, which is going through the roof as well. You can't adjust wages.
I mean, again, huge inflationary pressures on wages and the staff. And so the only thing you can do is you can adjust Realty taxes, which is the municipality. So this is my point. Like the, you have to look at both sides, the development costs and the operational side, and, and is at all levels of government, we have to come together and we have to piece it to then entice these developers to provide more housing, which then in turn will, will alleviate your, your housing problem.
Jesse (30m 28s): Yeah, that's interesting because even on the office side, I think they've phased most of them out, but the tiger grants that we have where we're the tax incremental aspects of, of basically assisting whether it was developers or large tendencies with, with the tax piece, it's like, that's only one piece of the equation. And it's funny, we had, we had John Love on the program and other, you know, big name in Canadian commercial real estate, who said the same thing. It was a coordination problem with, with the different provinces that, you know, people need to be talking collectively and, and the federal government and the provinces need to need to work at this project.
Not, not unilaterally, but together. I'm curious if you want to pivot to an asset class. That was how I got started into, into the industry. And I know it's something that I wanted to chat with you about on the student residence, a student rental market in general, I think at the beginning of COVID just like you were mentioning before with our thoughts that apartments might be, you know, might be in trouble. And then it turns out they did pretty well compared to the comparatively. My first thought was when this happened, the first few months was that student rentals were going to get hit the hardest, just in, just in virtue of the nature of the pandemic.
How, how has the student rental market been, what, what has been the experience that you've seen over the last year or two?
Andrew (31m 47s): You know, I think as an asset class, they struggled a little bit and, and frankly, you know, they did because all of a sudden they had no students, right. And, and in the privately owned residences, you know, people stayed in, they weren't sure if they should go home or not. I think in the ones that were either owned by a university or managed by a university, you know, they allowed people to leave and basically let them walk out of their leases. But that's, to me was a shorter blimp. I mean, I absolutely love this asset class. I think it's got the most upside in, in Canadian real estate, you know, student housing to me, you know, when you think of it back when you're younger than me, but when we used to go to school, it was cinder blocks.
It was ugly buildings. It was, you know, poor locations, you know, the, the knock on it was you had eight month leases and you had kids that would just trash the place, right. I mean, that is completely gone. Now, you know, we do so much student housing at first Nash. Then I tell you, these buildings are unbelievable. I mean, you'll have, first of all, the wifi, capacity's huge. And it's the number one, you know, by far most important element in, in the decision of a, of a student. So that's different. They have amenities like gyms and, and, you know, again, these rooftop patios and study rooms and indoor parking and 24 hour security.
So that's from a tenant perspective, it's a dream they're located very close to campus in most cases. And from an operational perspective, I mean, these kids are now, they realize how lucky they are to be in those places. Their 12 month leases, they have parental guarantees. Sometimes they have cross tenant guarantees. So there's no issues with damage. And, and from a demand perspective, there's so much demand, you know, we have, we're, Canada's huge for international students. You know, I'm not sure if you know, but there, I think that the number is 5 million international students and Canada's third behind the U S and Australia.
Our education system is amazing. Our universities are ranked really well in the world. And so there's a lot of demand for these universities. Most of the students that are coming in have money there for them, whether they're paying $750 per month or $800, it doesn't really move the needle too much. And so you have really strong demand and equally important is the fact that it's the one asset class that is a great protection for inflation, right? Because you have 50% turnover every year.
And so unlike retail or industrial or office where you're locked into long-term leases for apartments, where you're maybe five to 10% turnover per year in student housing, you get 50% turnover. So it's the only asset class that allows you to truly capture the inflation should that materialize. So I think from a demand perspective, you're good from an operational perspective, you're good from a inflation perspective, you good? So I I'm very bullish on, on student housing and the quality of these purpose-built buildings are very high.
I mean, as a, as a parent, I can tell you that if my choice was a basement apartment for my kids with three other friends or one of those buildings, it's a no brainer we try to take and I'd be happy to pay more.
Jesse (34m 53s): Yeah, for sure. And I think when I started investing, it was in Waterloo. I went to school out there and that was, I think, kind of when I was finishing, they started to build these purpose built and, you know, pool rooms, gyms, like, eh, like everything you're describing here. And then the other piece is even compared to, in juxtaposition to regular apartments, where you have tenants that will stay in because we still have rent stabilization in Ontario or rent control in Ontario, you have the turnover. So you have the natural mark to market with, with the rents with student rentals that I think gets overlooked probably through the haze of this idea that students are just trashing these places, which it, you know, if you see, if you see the way that they're built today is not the case.
I'm curious when you are for student rentals, because you see a lot of these companies in, in the, in the states and in Canada that are signing up, sorry, they're, they're buying properties, they're developing them. And then they're actually taking on the property management of the companies. Is that, is that something that's being looked at holistically when you're underwriting those deals?
Andrew (35m 59s): Yeah. I mean, look much like seniors, housing, student housing is very much an operational business. So, you know, as much as I love the asset class, I think the caveat is you have to know what you're doing from an operational perspective. I mean, there's a different level of rapport you have to have with your tenants. You interact a lot more. They're very spontaneous. They want things immediately, right? Like they can't, I have a request for something to be fixed and you get two days later, it has to be immediate. You have to address things right away. So there's a different dynamic with your tenants at the same time.
Look, you are getting substantially higher rents because of this. So there's very much an operational component to the business. And I think the good operators don't know how to do that. And they can create synergies, especially if they have a larger portfolio. And so that's really important. So we do look at who the operator is, and it does make a difference that, you know, you're not a one-off and you understand what it's like to be and manage that asset class. You know, I think the more and more we're seeing consolidation in that as well.
I mean, we're, we're, you know, we're happy to have, you know, aligned with some Woodburn who are the top two operators in that field, and we can see how great they are managing their portfolio, because they understand again, how to manage. And they create synergies by having so many buildings in that, you know, a new player out of the U S Harrison street there they're coming in as well. And they've had experienced operating student housing in the U S so you're starting to see international interest in this asset class. You know, there's, there's squad Rio there, RBC, there are people that are large Canadian institutional investors, CPP, you know, who have large international portfolios, and they've never come into the Canadian market because it was too fragmented and it was too small.
And you know, now that there'll be some amalgamation now that you're starting to see players develop bigger portfolios, I think there'll be more interest because somebody that's large can come in and buy a large portfolio versus the one-off, which again is not going to move the needle. So, you know, again, I love the asset class, but I think it's, it's really important to understand the operational aspect of it, to know that what you, you know, when you're going into it, you need really need to know what you're, what you're doing and how you're dealing with
Jesse (38m 13s): On the, on the construction side for, for student rental, are you seeing companies that are building completely from scratch in some of these towns or, or actually buying existing existing properties and, and converting the use or, or, you know, changing something to student residents, whether that's complete change of use or just adding to the existing?
Andrew (38m 34s): Yeah, I think all of the above, you know, we've seen traditionally, it's been the one-off developers that have built, and then they've sold, you know, to the larger players, like the likes of Woodburn and align best. We're seeing these companies partner up with developers now as well for future developments. We have seen, you know, people come in and buy finished products with the hope that they'll be able to acquire more in that market. I mean, there are certain markets that, you know, certainly Waterloo has had a lot of development.
Kingston near Queens has had a lot of development. Toronto has had a lot of development, you know, I think though for the most part, what people don't understand is that these universities are full and the buildings, the good quality buildings are full as well. And so if you're building a good project, I don't think there's a risk for over-saturation. You know, I'm not worried about what a loo being oversaturated, because when you look at the enrollment, it's increasing substantially every year, and these kids again are coming from abroad, or they're coming from Toronto, or they come from Montreal, they come from other cities, they're there for the quality of the university.
And they're gonna pay if they're paying so much for tuition, they're certainly going to pay an extra a hundred dollars a month to live in a brand new purpose-built building over a, you know, an old basement apartment. So I think the good quality buildings in these places are full and the good operators know how to run them, to keep them full. So I'm, I, I do believe that that this will continue. You know, the other thing is some of the universities own buildings on campus, but they're old buildings, you know, they need retrofitting and to do that, you need to really gut them.
You need to empty them and got them and start them almost, you know, from the beginning, which means there's a, they're gonna decrease supply. Right. Which means that you're going to need more, you know, off-campus supplies. So that, that helps as well. The markets.
Jesse (40m 29s): Yeah, for sure. Andrew, we have four questions. We ask every guests at the end of the show and want to be conscientious of your time before we, before we get into that, we'd just love your thoughts on, on where you see opportunity in maybe the, the short to mid term in, in whether it's Canadian market us, you pick,
Andrew (40m 50s): I would say the only asset class that I really like is the one we just talked about, student housing. I just, I liked the protection against inflation. And I liked the fact that your tenants are not rent sensitive. I would say that is probably my only real opportunity. I mean, I still like multi-racial development providing that it's in the right markets and you have a very longterm outlook on it. You know, I don't think you should be building an apartment building if you have a five-year timeframe.
I think if you're a generational investor and you're building good quality real estate, that you're gonna pass through generations, I still like rent a multifamily, but you know, if you're just buying for the short term, I don't like it as much.
Jesse (41m 35s): Gotcha. All right, Andrew, if you're good to go with these all, I'll fire them off at. Yeah. All
Andrew (41m 40s): Right. Let's see it.
Jesse (41m 42s): Okay. What is something that, you know, now in your career, it can be in first national or, or business in general, you wish you knew when you, when you got started in this industry,
Andrew (41m 55s): You know, I would say understanding the, you need to add value to be properly compensated. And I would say, you know, don't be afraid to ask, to get paid, providing the, you add value. You know, most people, you know, they're always uncomfortable too. And I was too, too, oh, I got to talk about fees now. Well, that's who I got to ask to get paid, but you know what? I've come to realize over the years, if you truly add value, you should get compensated for, for your services.
You know, nobody works for free and you know, you should get paid. But the key though is understand how you add value. So understand who you're dealing with and what it is that you can provide to make that person, that company, that board, that developer better, you know, how do you enhance their life? To me, it's about, you know, making people money, saving the money and mitigating the risks. You know, these are the, this is sort of the mantra I live by. You know, when I talk to somebody it's like, can I help you make more money? Can I help you save money? And can I help mitigate your risk?
If you do these things, you're adding value. And if you add value, I think you should get properly compensated for it.
Jesse (43m 2s): What does mentorship mean to you? And what would you, what piece of advice would you give the younger individuals coming into our industry?
Andrew (43m 11s): You know, mentorship for me was huge. I mean, you know, everything I know in this industry started with Maury and I am forever grateful for, for his mentorship and his guidance and his, you know, introduction to people and watching him, you know, how he talked and how he dealt with people. It was, it was really useful for me. I think as a young person, you know, try really hard to be around good people and try to listen as much as you can. You know, there's so much knowledge and the people that had been around in the industry for a long time, they have so much knowledge, you know, of how deals work of real estate of just so many tidbits that you can pick up along the way.
I would say, if he can really put yourself in an office that's surrounded by and surround yourself with good people, you know, really do that, which is why I'm so adamant about people coming back to work. Cause I think that's the only way you can really learn. You know, you're not going to learn by being on a team skull, you know, you need to be there in person. So surround yourself with good people and just be a sponge, try to learn as much as you can also have a really long term outlook. You know, don't focus too much on what am I going to get paid today? You know, what's my job title today. Think about, you know, what is it that you can learn and are you around good people?
Because if you are, then you're going to learn a lot and you're going to, you know, benefit more in the long run. That's
Jesse (44m 33s): Great. What a book recommendation would, would you be able to give our listeners, we can put it up in the show notes,
Andrew (44m 41s): Huh? Atlas drug, but that's about a thousand pages and that takes a really long time.
Jesse (44m 47s): That's hilarious. I, that is the first we've gotten that. That's a, that's pretty good. And that is a long one though.
Andrew (44m 53s): You know, I, I thought the Steve jobs book was interested in the way he constantly challenged the status quo. You know, whether you like them or didn't like him as a person, I just loved the creativity and the ability to constantly challenge that I'm not satisfied with this, make it better. I want this. And every idea of his was always challenged and questioned, but that's how you create new things. Amazing things.
Jesse (45m 16s): I'll take us a month to make, okay, we need it next week. Last question. The, a nice softball first car make and model
Andrew (45m 26s): A Ford tempo, Ford
Jesse (45m 28s): Tempo. I
Andrew (45m 29s): Like it.
Jesse (45m 31s): That's funny. We had a, we had a Ford Fairlane on which I think, I think it was a car that my dad drove back in the seventies, but that's the first Ford tempo right on Andrew for first of all, thank you so much for coming on for individuals that if they're in the area or want to reach out connect, where's the best place for them to go
Andrew (45m 51s): LinkedIn or the first national website? My contact is there,
Jesse (45m 55s): I guess today has been Andrew Drexler. Andrew, thank you for being part of working capital.
Andrew (45m 60s): My pleasure, Jesse. Thank you.
Jesse (46m 9s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Bob Lachance is a Real Estate Investor, a Nationally Recognised Speaker, Mentor and Trainer who Specialises in Helping Customers Build their Businesses through Automation and Outsourcing. Bob currently Owns Four Businesses and Helped Start One of the Nation’s Largest Real Estate Coaching Programs.
In this episode we talked about:
- Bob’s Bio & Background
- “Who Not How” mentality
- Bob’s journey from pro hockey player to entrepreneur
- Why outsourcing is so important in real estate
- How to Find and Hire the Right Virtual Assistant
- How to integrate VAs in your business
- E-mail Management, Cold Calling, Admin Management
- Mentorship, Resources and Lessons Learned
Useful links:
https://revaglobal.com
https://www.linkedin.com/in/boblachance/
https://www.facebook.com/REVAcareers
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, my name's Jessica galley and you're listening to working capital the real estate podcast. I have Bob on the program today. He's a real estate investor.
He's a nationally recognized speaker, mentor trainer, and everything related to real estate. He helps out with, and I believe Bob correct me if I'm wrong. You are a ex pro hockey player.
Bob (44s): I am, I played eight years and four years here. Four years in Europe,
Jesse (48s): Right on, well in recognition of a Leaf's a home opener here. Yeah. Great to have you on how you doing?
Bob (54s): Very good. Very good. Thanks for having me. Appreciate it.
Jesse (57s): Awesome. So, Bob, typically what we do, we have a new guests on the show. We do a little bit of a background on the guests. Maybe you could give listeners a little bit of your history as it relates to your career and, and real estate.
Bob (1m 11s): Yeah, absolutely. Yeah. W what's fast forward today. I'll back into it. I run a successful virtual assistant company out of the Philippines have been doing since 2014 and also have a, a real estate company. We should be at about a hundred and probably 40 to 50 transactions this year. So we're on, we're on a pretty good trajectory there, but how I got started to get back to that, I went to Boston university on a four year scholarship for a ice hockey league, which has talked about, and then I was fortunate enough to be offered a two year contract by St.
Louis blues. So I left two classes short of getting my degree with the thought process of, you know, you can always go back, but being obviously you've been from Toronto and understanding the hockey mindset, I never went back. So my thought process was I could always go back and get those two classes, but as you know, you know, once life gets in the way it gets rolling. Every summer I lived in Boston, I would be working out training and never ended up back in school.
So it's kind of comical though. It's when you actually go in school or when you're in school, you don't appreciate it as much as when you're actually out. So I, and I'll get back. I'll get to that a little bit later, but just starting with my path. I played at eight years, four years here in us and then four years in Europe. And then my last year I had my first son and my wife was working in the United States and I was in leave. I was in Switzerland at the time and I D I had to decide whether I was gonna hang up the skates or bring her with me.
And she had a very successful career in medical sales at the time. So we decided that, you know, I was going to hang up my skates and figure out what I was going to do with my life. So just probably 99.9% of all people that do real estate. I was reading books and read rich dad, poor dad. I bought a course online, a guy by the name. I think he's an attorney, David wisdom all about real estate, but you know, nothing in particular. I was a course about that thick, probably about 3, 4, 5 inches thick, but I read the thing from top to bottom and decided, Hey, you know what?
I don't have to go back to school to be a real estate investor. So I was a real estate investor. I was quiet, coined myself to rephrase. I coined myself as a real estate investor. This is 2004, started from there. My first flipped in 2004. And I decided to really do it as a, as a passion and a career and got my first business partner. I think it was the end of 2004, 2005. I was actually door knocking to people that were losing their houses.
Pre-foreclosure my buddy gave me a script at the time just, and I knew it and let me, let me rephrase it. I knew nothing like zero. I came from the hockey locker room, which for those of you who actually listened this, that came from any type of locker room, you learn zero in business. You learn how to cuss. You learn how to you learn how to, you know, kinda have a, a, a camaraderie, if you will. But on the business side, you don't learn much. And being in Europe for four years, you don't have a network either like you do have here in the United States.
So when I got back, I was kinda, you know, you're you go through any, any athlete understands this, you go through kind of a depression. I think you're a football player, right? Jesse. Yeah. I played football and hockey and hockey. So after you're done the planning, you understand this, you go, you know, before you start, or even when you join, you jump into a different industry, you go through some sort of, kind of a depression. It's, it's, it's not, I don't like saying the word depressed, but you go through a law if you will. And it takes a little while to find out and really get your team again.
Right? Because when you're hanging out with your buddies and you're hanging out with, you know, you, you know, you got your, you're going to block your butt, you block for your buddy. You're going to pass to your friend, you know, and you're going to win as a team when you're out there as a solo preneur, there is a transition, right? And it took me a little while. And I, you know, when I first got in real estate, I got a deal by myself that a rehab to pretty well made about $32,000 on it. But I also realized that there's no emotion in a dollar, right? When you get a big check the first year, you know, there's a quick high, there's a quick, it's kinda like when you, you know, back in the day, when you took Sudafed three Sudafed before you played, right, you can't do that now, but I'm just saying Sudafed.
So I took a couple Sudafed before I played every game. Maybe some coffee too. And you get that, that you get that quick high, right? You get that quick, quick, Joel. And it's the same thing when you get a big check, but when you take a step back, there's really no emotion in money it's really has to do with the goals that you hit. So I realized I didn't want to work by myself. So I joined a real estate investment association. I saw the speaker on the short-sale industry. So I bought that course and next event again, I had no network.
So the next event I had this, I had to go to within the regroup I had asked, Hey, who's the, who's the best short-sale person in Connecticut. And they all pointed this gentlemen, Patrick, pre-court went up to him say, listen, do you have no idea who I am? I'm not looking for a penny, but are, do you have any openings in your business? He said, you know what? I actually am looking for a door knocker. So for those of you who know what a door knocker is, it's kind of like working your first job as a janitor, and you have to work your way up because it is not sexy.
It's not your you're literally, you have a list of individuals and names, and you're driving from house to house with a script knocking on a door, right. It's door to door sales in essence. So I ended up having a little bit success in that. And then I, I hired someone to take my spot, jumped into negotiating with banks, because we were doing short sales, which means, you know, their, their debt was they're over leveraged. So they had $200,000 of debt. The property is worth a hundred. So now I'm talking to banks on a daily basis negotiating, and then brought myself out of that.
Hired. Somebody started a national coaching program while I was investing, started a virtual assistant staffing company for not only individuals like myself, but for other students as well, that needed extra time in their day that are working part-time or full-time and needed to, you know, needed to, to offs offset some of the tasks. So I know that, sorry about the long-winded answer, but
Jesse (7m 38s): No, that's great. I mean, I think it touches on a, I'm sure there's listeners that are coming from the sports world. I know in real estate, in general, there's a lot of ex players of all sports, but especially here in Toronto, our office is a lot of ex hockey players. My partner was drafted to the pens, played ECHL, kind of went all over and really didn't start in brokerage until he was in his late twenties. I think it was, yeah, it was late twenties. And I can a hundred percent appreciate the fact that, you know, you got somebody staying late in the office and you're trying to figure out what what's this guy doing.
And he's just trying to just get caught up on things that, you know, guys had, you know, Excel and just being able to figure out the emails and everything. But I think that's probably what, at least on the brokerage. And that's probably what the draw is for a lot of players to come over to brokerage because you get that team camaraderie aspect that you maybe don't get in other businesses. And certainly not as a, a solopreneur. So Bob, when you, when you got into kind of, when you say door knocking, you mentioned that you were doing some flips at that point, was it starting to get into the flipping business and that's you started doing transactions there or was that something separate?
Bob (8m 49s): Yeah, so I actually did it my first flip. It was just driving for dollar. So I saw a, a house that was, you know, needed it, it needed a roof, it was beat up. You could tell it was vacant. So I got in called the broker, actually it was listed property, got in, walked in, opened the door. And there was like a, a rancid smell of cats CRN. Right. So I opened the door and I'm like, all right, I read in this book that, you know, a lot of people are going to turn away from this. So I ended up making an offer. I think the property is listed for 180 5. I made an offer at 1 35 and lo and behold, the owner accepted it.
And I was like, oh, what do I do now? Right. Obviously you need money, you need contractors, you need all that kind of cool stuff. But I figured it out, ended up doing okay. And then after that, it was just, you know, I had zero systems, zero marketing, nothing. Right? So that's when I actually got a door knocking when I met my future business partner and he actually taught me, he said, listen, you know, he'd go door to door. Here's one of the, the systems and strategies for getting motivated sellers to sell your houses. So my whole mindset was, I want to start from ground up to learn the business because if one day I'm in, this is what pat taught me.
He was my old business partner that, you know, the, the success rate of businesses that last two years is not very high. I think it's, I don't even know the rate. It's very, very low of any business being successful, let alone partnerships. So John me that's my mindset was, you know what? I got to learn everything from ground up just in case I have to start my own company, whether it's a brokerage, whether it's a real estate investment company, whatever that looks like. I think it's very important for everybody to learn from foundation down or foundation up, I should say.
Jesse (10m 28s): Mm. Yeah. Fair enough. So you, you kind of, you start getting into hitting your stride in terms of doing transactions, moving up in the career in terms of where you're at now. Cause you mentioned kind of on the outset talking about virtually virtual assistance and that business. And I think it kind of takes a theme of a lot of people that we've come on the podcast, basically the who, not how mindset of, of basically trying to figure out what tasks are absolutely mission critical that you do, which ones can you outsource?
How do you do that? Can you afford it? So how did you get into that side of the business?
Bob (11m 3s): Yeah, it was interesting cause we, 2007, we actually got approached. There's a company called fortune builders here in Connecticut. And, but three of our buddies that actually started it, we're, we're flipping properties. They're were flipping properties. We would wholesale them. Some properties, we'd do some short sales together, a bunch of different stuff. And they approached us because pat and I actually started our first education program with a company out of Florida, end of 2005, 2006, and then 2007, when they were launching fortune billers, they said, Hey, listen, we've never done fulfillment.
We've never done coaching. How do you, you know, what do you guys do? And then we started mapping it out and they said, Hey, you guys want to be partners with us handshake partners. Right? So we were, our job was to take care of this. And, and then we grew that to, I think the biggest, they were were probably about $300 million in sales. Well, took care of the backend, started a coaching program from ground up hired coaches filled from within. And so after going probably through and working with over 30, 40,000 students, there's a lot of common themes, right?
Not only with my own business, but a lot of our students were either working part-time or full-time. And one of the things that we've noticed, I mean, you probably see this in your business. They're not making any more time. There's 24 hours in a day. There's not much time left to do a lot of this stuff. So I was always looking for some sort of service or product to, to help our students. And then in 2013, I actually got introduced to what a virtual assistant was and virtual assistants most likely when I talk about it, it's someone who doesn't live in the country.
Right. And I know there's, there's people that live in country in the same country that are virtual assistants, but not in the same state, et cetera. But I got introduced to a couple of different countries. I tried India, I tried Pakistan. I tried south America. The best virtual assistants that I found were in the Philippines. So after a year of working with them, a light bulb went on and I said, you know what? There's a business here. And the partner that I had at the time had no idea what I was talking about, but I said, listen, I said, you're using virtual assistance.
I said, you're pretty good on the systems and processes. I helped start coaching firms. So let's create training right behind the virtual assistant industry. So we started launched our first company, 2014, tested there for two years for proof of concept. It was a big hit. And then, you know, fast forward today, we're at over, they were at about 560 virtual assistance within, within a couple countries.
Jesse (13m 43s): So I'm curious on that point about trying different countries, whether it's Pakistan, India, like you see a lot of, you know, Upwork or fi wherever people kind of go resources that they use to look for virtual assistance. And it's been my experience too. I've had a, I've had three virtual assistants, the Philippines, two of them, the Philippines one, not in the Philippines. And I found the same thing. And I hear a lot of people that even just colleagues of mine or friends of mine, one just comes to mind, just started a Keller Williams brokerage on the residential side.
And they have found success in that side. Is there, is there something about what you were looking for or real estate that it seems to be the Philippines keeps coming up as, as the place to go?
Bob (14m 24s): Yeah. I just think it's really more cultural based. The Philippines Philippine culture is very family oriented. They look at your business as their business and they really, you know, they, they have a lot of pride in what they do. That's one thing, but also English is one of their main languages there. A lot of people don't realize that. Of course there's other kind of other kinds of like tagalo is one of them, but English is what they're taught and the newer generation too. And they're getting, you know, their English and accents getting, you know, more improved each year that they, you know, they've learned and they, you know, think about this now they got the internet here.
They're watching YouTube to watch a Netflix all day long, et cetera. So it just improves on that side of it. So we just selected that because of those main reasons.
Jesse (15m 13s): Yeah. It was one thing I was really surprised by when I started looking into this was, you know, part of the, the friend I mentioned the business that they were doing was cold calling. And like, to me, I was like, you can't outsource cold calling you can't and they say, well, why can't you? It's like, well, we outsource it. Like we, we teach younger guys and gals every day in our office there. Why can't you do that? And part of it was the first question was if you're in Toronto, you're in Boston, you're in New York, like you have the cultural or the, the proficiency in English is one thing, but not to have an accent and immediately think it's a cold call is another thing.
And what surprised me is that the people that we interview in the Philippines, like the first one had a UK accent, like fluent. And, you know, as a north American, there's, there's nothing better than a cold call from somebody from the UK or it's just a very, in a very endearing or disarming accent. So that was something for sure. I, I, I could see that a hundred percent that every year you're starting to get that proficiency up higher and higher to the point where yeah, you can hire for cold calling. It's just a matter of them teaching, teaching them the same way you would teach somebody local on the specific task of cold calling.
Bob (16m 24s): Yeah. And that's a great point. I literally had a, I had a presentation or a, I don't know if it was a podcast or a webinar to a, a real estate. It was a, it was a mix of investors and agents. And we had that this same conversation. And a lot of people don't realize is that, you know, I live in the Northeast, Northeast, Connecticut, United States. And I don't know if anyone's ever been there, but you know, growing up in Boston and Connecticut, there, there's a different kind of attitude there with people.
Right. So if they are okay with having a Filipino call them and they're giving them information, then anybody in this world will be okay with someone from the Philippines because you know, the attitudes of the Northeast are kind of like, you know, they look at you a certain way, like, what's your angle? What are you putting in that? So, so just, just to that kind of going off of that, if you have the right script and like you said, they follow a process, the main thing for any, whether it's it's the brokerage side or the investment side, the only thing that you want as an operator is for them to pretty screen that potential lead to say, yes, I'm interested to talk to either Bob or Jesse or whoever.
That's all you want. You do not want any, any virtual assistant closing a deal for it. Because if you do, it's your, it won't work. It's your business to close those deals. So driving those motivated leads to you. It's a, it's a very good way to keep your energy.
Jesse (17m 57s): Yeah. I think that's, that's for those listening that are looking at on the say on the investment side, you're calling off market deals because of how crazy our market is right now, especially industrial and multi-racial, but you're calling those owners of property. And you're trying to figure out if they're sellers. The, the thing that clicked for me, especially with the VA side of things is that their goal is not the same as yours. When you're calling, when I'm calling. It's a certain, I know that I have the ability to pivot to it, to the sale, but even for myself, the first part of the call is usually, you know, not somebody is not going to say, okay, yeah, well, I'll sell right here.
So what I underestimated was what you just said, the piece about them, first of all, their goal is to get them in contact with, you know, their team lead or their that's, who that's you, whoever, you know, whatever way you describe getting that call, but it's basically booking a meeting for us and to, to actually close the deal. And what I underestimated was that, that layer of having that seniority, when you go on the call, it actually helps you because it looks like you, you know, you have a staff of people that your, your time is valuable too.
You're not just calling.
Bob (19m 3s): Yeah. Yeah. And, and it weeds through a lot of the thinking about this. If you're sitting by your desk all day long, calling four hours a day, I guarantee you will be burnt out. Right. I mean, it did for me. So what I did, I didn't finish my, actually my, I didn't finish my story on every day from 10 o'clock to 3:00 PM, I would door knock. And then I would go home in that same list, I'd go to either white pages, four eleven.com or whatever. And I would skip trace the number in out and hammer the phones before I would have dinner. Cause obviously my wife would have killed me if I, if I kept working all night, but that's what I would do all day long and over time.
And that beats you up, that beats you up. If you're hammering that all doing that, if that's the only thing you're going to do. Yeah.
Jesse (19m 44s): That's a lot of fatigue. I mean, even, even in our industry, you do that for your first couple of years at most. And then hopefully, you know, you get some, some deal volume. So Bob, in terms of, for somebody that's, they are completely outside of the realm of, of hiring somebody. It doesn't seem like something that'd be part of their business at this point. A lot of times people that justification will be the costs, which, you know, I think Kevin kind of get dispelled fairly quickly with the fact that you're outsourcing it. But the, just the fact that talk a little bit about the need for one, when people say, I don't think I'm at that stage yet.
Yup.
Bob (20m 22s): And I look at it. It's, it's funny. You said that. Cause I had this conversation earlier with someone too, I look at is, and this is not what I, I, how I looked at things when I first started, I look at things as an investment now. Right. So if you're going to hire somebody, it's not a cost, it's an investment. Right? So we just added a transaction coordinator in our office. And that to me is a huge investment because that's going to give your team is going to be way more right then if you don't have it.
So that's the way I look at adding a, let's say a cold color because you have to look at what we do on a daily basis. And you say, okay, if I'm doing a $10 an hour task, most likely I'm gonna have a $10 an hour bank account, right? Because if you're doing those tasks, our jobs as business owners or whatever role managers, whatever role we are is not to be cold calling all day. It's not to be, you know, spending our time prospecting. It's not to be, you know, doing admin work, posting social media, doing all of that stuff that you should literally look at your calendar for the next two weeks, write down all of your tasks, identify what tasks you could take off of your plate and pass off to somebody else.
Whether it's a virtual assistant or your office assistant, whatever it is. Right. And then you'll realize like, wow, I actually have 20 plus more hours of my week. Hey, you may, you may decide to go to a Leafs game then and get out of office, get out of your office early. But if you have that extra time, then you could decide, Hey, do I want to use that to build this or build this or build this or go on vacation or whatever it is. But you'll realize with an extra 20 hours, you can do a lot.
Jesse (22m 5s): Yeah. For sure. What do you find from the individuals that you work with in real estate? What do you find is the task that they find that is the one that they end up saying, this is something I, I need more time to do or when they take these other things off their plate, they're like, this is really the thing I should be focusing on.
Bob (22m 23s): So are you saying that the tasks typically that they're doing, are you saying then that when that's off or do they do
Jesse (22m 29s): Once, once they offload, like you said, you go through your tasks, you, you identify the ones that you don't need to be there that you can offload to the VA after that, do you find there's one or two tasks that those individuals find that, okay, here, this is what I should be focusing on. Okay.
Bob (22m 44s): So yeah, that's kind of tough question, but I'll give you, I'll give you the answer of me personally. What happens when you, you're not overwhelmed and you're not looking at this phone, you want you, you're not checking the list and checking the box. You could actually take a step back and look at your business through a 10,000 foot overview. And once you actually can do that, it's kind of like sports, right? When you're, when you get better, the game gets slower, right? So it's kind of the same concept. And in, in, in business, if you could then have more time, you could pull yourself out, you could see how things are moving, right.
They move really, really slow. So now you'll be looking at your acquisition team, how many calls and now you can really oversee them. How many calls are they doing? Maybe you're going to listen to calls maybe, oh, you're going to realize, now you need to add another individual on your team. So you could really look at it on a and again, this all depends on what type of business you're in. If you're in the commercial brokerage right now, you're going to be building relationships, going to dinner with a banker or with a v-neck or you'll have that much more time to build your business and look at your business in a different light.
Does that, does that?
Jesse (23m 51s): It makes sense. Yeah. A hundred percent. And I think it, it, it is probably a tough question because I find it'll probably be different for each type of individual and worker or, or type of entrepreneur, especially. I think that's a good point because I feel like most entrepreneurs like pure entrepreneurs at heart, I think are, are creative and big picture. And part of, one of the worst things you can do is get them bogged down in, in my new HSA and task oriented things. And like you said, it's almost like a it's sports or it's like Neo in the matrix, everything kind of slows down and you know, you're seeing everything around you and you can finally say, you know, what are we doing in six months?
What are we doing a year from now? And have that big picture plan.
Bob (24m 33s): Yeah. And you can start, you can start doing quarterly, you know, start setting quarterly goals. And you know, a great book has traction. Right? Very, very good book to read, to start that scaling up as another one, but it's really good. You could now start implementing this in your business and you could do more training. You know, there's nothing more important as you know, is, is training your team because, you know, if you could have spend more time on the ground with the team training, they're going to be that much better themselves in the companies you have that much better.
Yeah.
Jesse (25m 3s): Fair enough. So when you let, for example, if you have somebody that, whether it's, you know, most listeners are on the real estate end on the investment side, when you have an individual that's looking for a virtual assistant, they hire the virtual assistant. Do you find that there's kind of a hierarchy of tasks that you, you know, you say start with these types of things before you go, for instance, into more sales oriented stuff. So here's an email list that we need cleaned up, or here's a know here's some administration work that we need done and then move them towards sales or cold calling or acquisition, or is there it's, everything's, you know, everybody's different.
Bob (25m 42s): Yeah. You know what, that's an extra, very good question. And the answer is everyone's different. We identify that right or front, because the way our process is we have a sourcing and recruiting team in the Philippines. We also have a training team where they train three to four weeks a month on real estate tasks. And then we have a placements team where we use predictive and index and disc profiling. So once it gets to the placements team, we already know when sales comes in, when an individual wants a cold call, or let's say, it's almost like match.com and in placements, right.
They match up the, the disc profile, that predictive index in the qualities that, that particular virtual assistant has with the tasks that you're looking for, I'm looking for. So that's what we do as a company to match them up. Because you know, you know, this, if you've ever, if you've ever gone on a company like Upwork, it's a pain in the butt, right. You have to sift through hundreds and hundreds. I mean, I hired here in my office and I use wise hire or indeed or whatever, it's the concept I got to do all the heavy lifting.
Right. So we, what we did in our, my Reva global company is we funded all of that heavy lifting and just hand it over to them.
Jesse (26m 53s): Yeah. It's funny. It's almost a, the irony of when you do go on Upwork, you almost want a virtual assistant to, to hire for you on Upwork tonight. When you, when you say disk, just, just so I'm following you, it's like the personality tests, like the, the profile. Okay. So you go to that, to that level of, of granularity when you're trying to match up the VA with the professional. Yep. Correct. And what, what was the kind of the origin of that approach where you start actually looking at all right, is this person really psychologically the right person for this task or for this, this matchup?
Yeah.
Bob (27m 32s): And you started looking at that over the years. You know, it started, like I said, I started this in 2014, you'll realize that, you know, cold callers tend to be a certain kind of profile. Right. And you'll have, you know, bookkeepers are a certain type of profile because you'll never want to put, and I'll give you an example. These is accurate it's dominance, right? So you have dominance and eyes for influence interaction or interactive. So those type of individuals, they love being on the phone. Right.
You know, just the fi finish up that S S is for, for a steadiness and a CS for consciousness. Those are more of your bookkeepers that are really attention to detail. You know, you know, there's a lot of salespeople, you know, their attention to detail. Sometimes you don't want them.
Jesse (28m 19s): There's a couple of zeros there.
Bob (28m 21s): Exactly. So that's how we look at that to, to help, you know, find the best fit.
Jesse (28m 27s): Yeah. And I think that's a missing piece with a lot of it. I think that goes for not even VAs. I think that's just hiring in general, trying to match up culture. And that's, you know, it goes back to the beginning of our discussion here, you know, where you have certain industries, I find are more conducive to X athletes. It's a very, you'll have very similar cultures and working together.
Bob (28m 49s): Yep. Yeah. There's I mean, you know, ex athletes, it's typically it's sales, right? You got a lot of Phi X app, that's going in a financial industry, right. Medical industry, same thing, pharmaceutical industry. That's a lot of how, how a lot of these companies, actually, I got a buddy that's pretty high up in principal financial, and that's what they do. They look at, you know, they look at resumes from, from bigger companies. And I know there's a lot of colleges that are tying to some companies now, which is actually really, really, really good.
And you know, the funnel.
Jesse (29m 21s): Yeah. Would you not to put you on the spot here, but would you be able to name a couple tasks or jobs that you would think, or that most people think is, is something they wouldn't put on a VA, but, but you've, you've found success in it or are there certain things that people are surprised that VA's can, can do?
Bob (29m 43s): Yeah. I mean, on the multifamily level, just talk about the multifamily side. We have a lot of our multi-family investors. We have a lot of our blog. We have a lot of single family investors that own hundreds of units. Right. I have one individual that has 15 virtual assistants with us that does everything from bookkeeping to taking tenant calls, to doing tenant placements. Right. So those are some of the things off the bat right away. The other marketing properties that are actually some of those properties that go vacant, someone needs to then start marketing them and push them around to all of the sites that they have.
The there's a, some syndicated sites. So you push them out too. So there's a lot of those types of tasks that other people don't think of in reference to that. Another one is, is a big part of all of our businesses. I mean, you have a podcast, right. It's using a virtual assistant to splice up your videos and send it out to your, whether it's your email list or whatever list that you have posting it on YouTube posting on Instagram, posting it on Facebook, all that kind of stuff that takes a lot of time. And it's a pain in the butt, right.
So I have a podcast. That's what we do.
Jesse (30m 52s): Yeah. 100%. It is a, it becomes a bit of a full-time job, but, and once you hit your stride with something like that, really the hardest, the hardest part I found is the, is that setup piece. So like you're saying whether it's going an Upworker, it's going on another site, it really, a lot of it is that finding people and you find, you find that you, you really need a virtual system for that job itself, just trying to get other people on.
Bob (31m 15s): Yup. Yeah, for sure. And, and, you know, it took me a little while at the beginning and that, that was the business model that we, we figured out at the beginning because of the pain, you know, I felt you could go for places that, you know, I always look at in this kind of funny, you look at, I look at my company, I'm not the cheapest. Right. And I've, I've come to realize after 17 plus years in business, if you go for the cheapest, you're going to get the cheapest. Right. That's the way it's pretty, you know, you start looking at that, the older we get, you start seeing things a little different.
And I always go back to, to this one of my first houses I ever bought, I bought a home Depot cheap door for 99 bucks. And the, and it was a you're the next door and every winter and every summer, my, either he bill or electric bill was through the roof. And I was looking at that door doors. I think I probably should've spent probably over 500 bucks and I probably would have saved thousands of them, thousands and thousands of dollars. So that's the way I look at, you know, you pay for in life, you pay for what you get rewarded, you pay for
Jesse (32m 22s): Yeah. A hundred percent. So just wrapping up close to the end here, we usually have a set of questions. We ask every guest, but before we do them, I'm, you know, selfishly on the VA side, I have a question about email and calendar management and, you know, just like a lot of these things that you think can't get outsourced, that it turns out that you can, from an email management point of view, how, what do you recommend if somebody is they've, you know, for whatever business it is, they want somebody to offload or shoulder some of the things that they're doing through email, you know, for strategies from that point of view, whether it's calendar and email, just email and you know, what techniques do you find these that, that people are, that are the VA's are doing?
Are, you know, the aggregating, the most important ones. Are you training them up on that piece?
Bob (33m 13s): Yeah. So just on, on email management, I mean, we could get, I don't know how many emails you get a day, but I get a billion. Right. And you get some that don't, you know, they're just junk mail. You signed up for a Travelocity Expedia and they sell your email over to something else and they sell it to something else. Right. So I find what works out well as virtual assistance, just sifting through and going through each, probably each hour and then getting through some of those. And then we set up a side email to send the really important ones over to.
So that's how it worked out very well. It saves that does save a lot of time. I know it sounds so simple, but if you actually took the time and you're like, all right, you're looking at, you're looking at your emails, how many junk emails you actually get per day or emails that just waste your time and are not important for you on a daily basis. It's hours upon hours on a day.
Jesse (34m 8s): Yeah. And it's, it's time is one piece of it. But I think another piece for sure is just the stress. It's, you know, when you look at your phone and there's 200 emails or there's 78, whatever it is like you go, if somebody can be like, okay, I have somebody, whatever. I was just text message or emailed. I know those are the important ones. I don't have to stress about it. I can manage it. Yeah.
Bob (34m 26s): And I, I know if anyone's like me, it's I look at this, I gotta get mine down to zero.
Jesse (34m 31s): Yeah. I'm the same way. I, if it's over like 20, I'm starting to get stressed. Awesome. Well, we've got four questions. We typically ask every guest. So if you are a, if you're ready to go off, throw them at you, let's do it. All right. What's something, you know, now in your career or business, you wish you knew when you started out
Bob (34m 52s): Don't chase the shiny objects. Because typically those shiny objects where losing a lot of money and wasted a lot of time.
Jesse (34m 60s): I like it in terms of mentorship for younger people getting into, in, into the industry, whether it's real estate or other specific areas, what would you say to them? What's your view on mentorship?
Bob (35m 12s): I say 100% invest in it. 100% because mentors will cut your learning curve over time and will make you way more money than being a, a lone Wolf in a, in a solo preneur and saying, Hey, I can do it all myself. You know, if you learn anything from, from, from sports it's you need a team. I don't care if it's Wayne Gretzky, right? Wayne, Gretzky has a team with them. Doesn't matter. Right? I mean, look, how good look, how good Toronto is? They have a lot of sprinkles stars, right?
If they learn how to play together, they might win a cup. Right?
Jesse (35m 46s): So fingers crossed any resources or books you're reading right now that you'd, you can share with the listeners.
Bob (35m 55s): I would, I would definitely say books like scaling up or traction or some of the books that 100% I would highlight. And we talk about our, in our business, outside these walls here all the time. And I think those are, if you're going to read some books, those are very, very powerful books. The other one is one of the, the ones that I think is for me, it has been very powerful as a it's called a compound effect. Darren. That's a very good one. Yep.
Jesse (36m 21s): First car make and model.
Bob (36m 23s): First car was a Nissan Maxima, white Nissan Maxima. This is when I got my signing bonus. I bought a used one. So it was back. This is hallway back.
Jesse (36m 33s): That's awesome. Right on Bob. Where, where can listeners find you on the interwebs?
Bob (36m 40s): Yep. Actually you go to my website@rivaglobal.com, R E V a global.com. I'm on Facebook. I'm on LinkedIn. I'm on Instagram. So you can find us there. We have a podcast called Friday coffee break. It's on every Friday at 10:00 AM. Eastern standard time. So you check me out there and yeah, all my contact information is out there.
Jesse (37m 4s): My guest today has been Bob Bob. Thanks for being part of working capital.
Bob (37m 9s): Awesome, Jesse, thanks for having me.
Jesse (37m 18s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Joseph Biasi spends his Days Analysing Economic Trends and their Relationship with Commercial Real Estate for CoStar – the Leading Real Estate Data Analytics and Aggregator in the US.
In this episode we talked about:
- Joseph’s Bio & Activity
- Commercial Real Estate Market Outlook
- Retail Property Analysis
- Industrial Real Estate Overview
- Interest Rates
- Government Policy
- Single Family VS Multifamily Real Estate
- The Effect of Inflation on Real Estate Investors
- Mentorship, Resources and Lessons Learned
Useful links:
https://www.costar.com
https://www.linkedin.com/in/joseph-biasi-a5a1b669
Transcriptions:
*Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, welcome to working capital the real estate podcast. My special guest today is Joseph Biassi. Joseph spends his days analyzing economic trends and the relationship with the commercial real estate sector.
And he works for CoStar advisory services. For those of you that don't know what CoStar is, they're the leading real estate data analytics and aggregator in the us. And I'm not sure if Canada as well, but I wouldn't be surprised we use them pretty much every day. They're our go-to for analytics, for properties, for research and a part of our underwriting process. Joseph, how's it going? Great. How are you doing? I'm doing great. Do I have that right, Joseph, in terms of CoStar where they're at today, maybe you could, you could let the audience know a little bit about your position there and CoStar in general and what you guys do.
Sure. Yeah.
Joseph(1m 10s): CoStar is a data analytics platform and a data vendor. We, we track pretty much every commercial building that we can at least get research on across the United States. We are moving into Canada as well, more and more. We're getting better coverage in Canada and as well as Europe, my job in particular is I sit on top of that data as a consultant. I'm a senior consultant with advisory services. And my job in particular is to advise client both developers as well as investors on macro economic and commercial real estate trends
Jesse (1m 45s): Right on. Yeah. What I've noticed is we have, I think 84, 85 offices now, and we've, we've pretty much switched over completely to CoStar and that goes for Canadian and, and us markets, but it's definitely come a long way in terms of the coverage that we have at least, you know, in our major markets, you pretty much, you've got everything covered there.
Speaker 1 (2m 7s): Yeah. I mean, we've been really pushing research recently.
Speaker 0 (2m 11s): So this was, this was something we were at, we were at this panel and in new Orleans this past, I guess two weekends ago now, and we were talking about, you know, where, where people can find information, those people looking for deals in the market and a lot of, a lot of what we do on the investing side and not just in brokerage, but we'll, you know, when we tried to track down owners, a lot of times we're looking at properties on CoStar trying to find the beneficial, the true owners and reach out to them directly for off market deals.
Speaker 1 (2m 38s): Yeah. So I, I, before actually, before I worked at CoStar, worked in brokerage. And so I was, I I've been a user, it's a fantastic site for anybody who wants to do any kind of real estate deals, right. On a little biased, but
Speaker 0 (2m 52s): Yeah, a little biased. So in terms of the, the actual market, I thought what would be, will be just that would be useful and educational for our listeners is talking a little bit about what's been going on in the market over the last year or two and the outlook for the next, let's call it a mid to mid to longterm. And by longterm for me, I think five years, I don't think longer than that, but yeah. You know, let's talk a little bit about the commercial real estate market in general, over the last two years, how have things changed in terms of the data that you're seeing in terms of the way you approach the market and, and your analysis?
Speaker 1 (3m 31s): Great question. Yeah. So, you know, when the pandemic hit, I think there was a lot of fear going around and that translated into a lot less commercial real estate deals, particularly in the office sector. Everybody began to work from home. We knew, we noticed a pretty steep drop off in transaction activity, which has since returned. And that's, that's pretty much been the story is we had this initial 20, 20 decline, a couple of, a couple of quarters of, you know, pretty severe transaction volume decline. And it's all become back effectively, but it's come back in a very different way.
And that's the actual story behind what's happening in the commercial real estate market is if you look at the macro macro numbers, you know, total amount of transaction, the total transaction volume is back. But if you look at where that's happening, it's very different. For example, the Dallas Fort worth had more transaction activity in 2020, the first half of 2021 than New York. That's not normal. We're seeing, we're seeing those rooms moved down to, if you're talking about retailer, multi-family, we're seeing them move down to the south, the study United States, as opposed to, you know, the new York's and the San Francisco's of the world.
Phoenix is another market we've seen, which is, I suppose, as a Western market, those, those Sunbelt markets are where we're seeing the most demographic growth. We're seeing the most transaction activity. And we're seeing the biggest pricing gains across all four, four major property types
Speaker 0 (4m 55s): In terms of the, to go from geographic to the property types, if, you know, starting with retail, I guess. Cause that's, that's the one where when the pandemic first started, there was the big question of retail, which I think for, for the most part has been overbuilt. I don't think it's a surprise in the U S Canada. Canada's pretty. Yeah. I mean, we are as well, but I think we're somewhere in between the U S and in most European countries on a per square foot basis. But talk about retail, you know, how has that analysis been over the last, you know, call it a year to two years?
Speaker 1 (5m 29s): I think retail, it, at least in my opinion is one of the most fascinating property types. Like, yeah, you're absolutely right. There needs to be some level of rationalization. If the landscape has changed, it is no longer the place where people go deep. The only place people go shopping to buy goods, that doesn't mean it's going away and there's still, I would argue opportunities. And I think that's the way we've been trying to, to talk about retail, which is look, you know, you're not, if you're looking at a class B or class seem, all those are going to struggle, but if you're looking at, you know, there's still good opportunities and you just, there's a lot more nuance and a lot more detail that you need to look into for a retail building the tenants matter so much in a retail building, even more than an office or an industrial building, because if you have a good grocery anchor, a neighborhood center in a well-populated area, that's still a good asset.
And that, that I think has kind of been, under-reported just due to the fear around retail during the pandemic and the fear around retail because of e-commerce.
Speaker 0 (6m 36s): Yeah. It's a, it's one of those things that we've always talked about that, you know, good grocery store, anchored retail. I can't imagine in a lot of these markets, if anything, they were a bit, some of those properties were buoyed by the fact that the only places that were open were the Walmarts or, you know, these grocery stores that were anchored.
Speaker 1 (6m 54s): Exactly. And we're, you know, we are seeing, you know, returns to normal leasing patterns in the Southern states where, you know, where retail really does follow rooftops. And in those Southern states, we've seen pretty much a full recovery, and we've seen a pretty much a full recovery in terms of pricing as well. Whereas if you talk about, you know, these, these tertiary markets in the Midwest, or some of these coastal gateway markets that have really struggled during the pandemic, there's still, there's still losing people. They're still struggling to kind of recover.
Speaker 0 (7m 25s): So have you seen, I know you, you track a lease terms and different differently structures. Have you seen a difference in the way that retailers are approaching their leases? You know, where you could have some retailers in the past doing 5, 10, 15, 20 year leases, has that, has that shifted or is it, is it too early to tell
Speaker 1 (7m 43s): It's a, it's a little early to tell, just because we're, we're finally kind of getting back at least down south, but the, the tenants that they're looking for at certainly become far more focused on either, you know, necessity based retail, certain tenants like dollar stores. So these, these discount stores are doing really well. And then experience-based tenants have done are something that landlords are really looking into as a long-term longer-term play. At some point, this pandemic will become less and less, have less and less of an effect on the economy.
And a lot of landlords believe that the future of real estate of retail is experiential. That you're drawing people there for something more than just a shopping experience.
Speaker 0 (8m 28s): Does CoStar track the rezoning or reclassification of buildings in terms of, for example, one of the, one of the, the guesses that, you know, that we have is that retail and, and certain types of office buildings may be converted, maybe switch the use might be switched even in hospitality, potentially hospitality going to multi-family. But if do you track that type of thing?
Speaker 1 (8m 54s): Yeah. It hasn't occurred as much as you would think, given the amount of airtime, not an ink that's been spilled on it. It really hasn't happened. It does happen, you know, so I went to college in Worcester and the Greendale mall in Worcester got turned into an Amazon distribution center, but that isn't really the rural quite yet. They're still working on that because, you know, it's, a lot of people think that a mall is going to turn into an industrial center, like a distribution center, and it's more likely to be knocked down and turned into multi-family center because it's still the highest and best use is, is multifamily for a dense urban area.
We're, we're, we're starting to see some of these malls really struggle.
Speaker 0 (9m 36s): Yeah. I think you're absolutely right with the amount of ink that's been spelled as a that's been spilled on it because it is one of those things, I guess, more of an academic thing. It's logical to think that okay. But I think the reality is you get in transaction costs the actual time it takes to convert these things. There's a little bit more that goes on with it. If you, if you kind of slide from retail, move into the, the office space. So my partner and I on the brokerage on predominantly work in office investment sales, as well as leasing, they, I don't, you know, despite some of, you know, what, what has been said last year, that markets haven't been affected.
I just think a lot of people were saying certain things were, what we saw was a large, large drop-off in office. And not surprisingly, I'm assuming that's, that's what you S what you've seen. And if not, maybe you could provide some insight there.
Speaker 1 (10m 26s): All right. No, absolutely. I, I, if you look at where most of the transaction activity has fallen off, it's been an office and it really has a lot to do with uncertainty. Right. It's, you know, what will work from home look like in five years from now, because if you, and you know, this probably better than I do, if you're buying an office for your leasing office, it's, it's a five to 10 year lease or three to 10 years typically. So you're, you're really guessing what's going to happen down the road. So when you're buying office, it's, it's a little scary right now.
And I, I understand that the shop view for CoStar advisory services, and I do not speak for all of CoStar district health, say for CoStar advisory services, is that, you know, the office, there will be less demand for office because I work from home, but we don't believe this is the death of office everybody's going to be working remotely. And we also don't believe that. And I personally don't believe that, you know, these downtown offices are going to, you know, go away anytime soon. I I've in that downtown, these downtown clusters are going to severely struggle.
I think the actual concern for office, if we want to think about where, where we might see struggle is those class B offices in urban areas that have less, that don't have as good a commutability score that aren't dark, aren't able to draw. Don't have the same amount of amenities. Those, I think are the ones that well, we think are going to struggle a little bit more. Yeah. It's funny. You
Speaker 0 (11m 53s): Mentioned that I was having a conversation with a, with a colleague of mine. And I was, we were talking about that specific thing where a lot of suburban markets actually, haven't been doing particularly poorly with office and then these downtown connected, but there's, these Midtown markets are like these markets that are tertiary markets, that if, unless they have good connectivity, it's a really, you know, there's a question mark about how they'll do well, we've also seen though, is that the, the office side, like you were saying before, the underwriting has changed to the extent that, you know, we, they want to see is what type of tenant, what, you know, where are they in the lease?
What are their rights? And, and it's funny too, that you mentioned five-year and then kind of went back to three-year because what we've seen is that, you know, when I started in brokerage, really, it was rare to find even three-year head leases. It was typically a five-year minimum. Where now, if one thing has happened from COVID, we've seen all kinds of different lease lease terms.
Speaker 1 (12m 47s): Yeah. I mean, if you, if you think about going to selling a building, occupancy matters more than anything else, even, you know, that's the, that's the first and only thing I, if you have to take some rent losses, you'd rather take some rent losses and lose occupancy. So peop landlords are for office buildings are, you know, it is definitely a tenants market right now, but we, in terms of the, the urban areas, I think the reason they lose out is because the downtown offices have that commutability and then the suburban offices have that advantage of being able to drive to them.
If I'm in, I'm in Boston, which is a famously difficult Metro to drive in. And there's no way I'm going to go drive to, let's say Brighton, which is just outside the main city to go to an office there, but I'd be willing to go to suburban office and I'd be willing to take the T down to than the downtown crossing, for example.
Speaker 0 (13m 37s): Yeah, for sure. And you, you know, one thing too, is like we've had, what we've seen is that the CFO or COO, depending on, or the real estate, you know, facilities manager, whoever's dealing with the company's real estate. It has been a lot of like kicking the can down the road, because like you said, it's, it's, you're making a decision. That's going to impact five, 10 years. Whereas if you're buying an investment, one thing you can say is that interest rates are where they're at right now. You can, you can, you know, logically pursue maybe a little bit more risky investment, but for the people that work at a company, they're like, I'm not going to make a decision where in a year from now I could look like this was the terrible, the worst thing I did for the company.
Speaker 1 (14m 12s): Right. Right. Exactly.
Speaker 0 (14m 14s): So if we, okay, so that's retail office. If we switch now to, to industrial, because one thing that was really a cool stat that I saw when, when COVID just happened was the fact that retail sales did not decrease. It's just where the sales happen changed. Right. There was a pivot to online sales, total sales didn't D decrease, at least at the beginning of the pandemic, the data that I was looking at. So I'm curious, I mean, I think it's no surprise industrial's doing pretty well today.
Speaker 1 (14m 48s): Yeah, no, it's not. It's no surprise. And it continued to do well. The pandemic, you are somehow seeing cap rate declines, which I think if you said two years ago, most people would be like, there's no way, but I just given how quickly we begun to really shift into e-commerce and the, you know, the room to run in terms of e-commerce. If you look at Europe, Europe uses e-commerce far more than the United States does still, but kind of going back to your point about retail sales it's, I've been tracking it very closely for that specific reason.
If you look at retail sales, and this is because, you know, the government stepped in and enacted a lot of stimulus by, by June of 2020 retail sales had more sales than you would expect, given what you would expect pre pandemic. So if you forecast it out pre pandemic, but retail sales should be, and it's a fairly linear trend, you would expect them to have, you know, X amount of retail sales. And we're, we've seen exceed that basically since June of 2020, and about 35% of that is e-commerce, which is impressive when only 16% of retail sales is e-commerce right now.
So e-commerce is pushing along, is pushing along retail sales. And realistically there's only, only it can only go up in terms of e-commerce. I want to be careful in saying that, because I know that's gotten people in trouble before. It can only go up in terms of e-commerce industrial is starting to become, starting to see a lot of construction. If you want to talk about the property type in particular, we're starting to see more speculative construction, but on the, at the, at the, at the other end of it, you can make the argument that it's pretty easy to turn off the industrial tap.
If you it's just, you're building a big slab of concrete and yeah, exactly. It's a slab of concrete. Got you build a box and you're good to go. And there's a lot of reasons to believe that structural shifts from retail, from onsite retail to e-commerce means strong sales, and that's not even getting into three PLS and manufacturing tenants that we do also expect to do quite well. Amazon alone accounts was one, a hundred million square feet of absorption in 2020. And I, I don't know if they're going to do that again, but they are already, they're already in the, you know, they continue to be the player in the market and continue to push industrial.
So do you think,
Speaker 0 (17m 20s): Look at the, on the topic, the three PL or third, third party logistics and last mile delivery, like, do you, do you, do, do you break down industrial into these sub categories for your analysis?
Speaker 1 (17m 31s): Yeah. Yeah. I mean, you almost have to, right, because that's how, that's how tenants think about it. You have these big distribution centers and then you have these last miles and, you know, these last miles tend to be these, these crappy frankly buildings that are in well better located areas. And the great thing, if you're looking from an standpoint about these last miles, they're not usually the highest and best use. So there isn't a ton of new construction in the last mile, despite the huge amount of demand for the last mile, at least according to what we're seeing.
Speaker 0 (18m 5s): So in terms of the, the actual investment sales side of the industrial coin, when, you know, we see in our market, which I think pre pandemic, we were at 2%, I know Toronto is, I know LA and Toronto you'd know better than I would, but I know that we were at the top and north America with the, in terms of how lower vacancy rates were and continue to be on the industrial side. And what we've seen on the investment sales side is there's only so much product that, you know, you've seen, oh my God, that thing's traded again, that's traded three times in the last year.
Are you seeing that same stuff in these really hot markets where properties have, basically, I'm assuming it's a constraint on the, on supply right now.
Speaker 1 (18m 45s): Yeah. I mean, I, you know, everybody is out for industrial and they're continuing to increase their allocation. It's it's, you know, when we talk to clients, it's the first thing they always say is don't worry, we're going to increase our allocation to industrial really? Usually at the cost of office and retail. Well, not usually, always at the cost. No. Yeah. It, it, you know, that's, that's the other side of the coin, right? Is we saw 6% rent growth so far in 2021, we can be concerned about construction and market specific.
If you look at like, you know, inland empire, for example. Yeah. There's a lot of construction or, you know, Las Vegas, for example, there's a decent amount of construction, but at the same time, the amount of demand that we're seeing come in and given it's a structural shifts, it means that you could, you should expect continued demand. That being said, we're getting to a point where cap rates are going to struggle. Maybe a little bit to continue to decline.
Speaker 0 (19m 45s): I was going to say, it's for reminds me like economics 1 0 1. We're like, no, that the shift it's the whole demand curve moving, not just going up along, right? Like there's a, there's an innovation here. There's, there's a structural shift to less retail and more, more industrial distribution.
Speaker 1 (20m 0s): I was actually trying to the other day to think of a, a good comparison. And I think we landed on radio for retail retail's radio where it it's still gonna have a use, but it's not the same use that it used to have an industrials TV now, the television. Cool. That's the entertainment. Yeah.
Speaker 0 (20m 22s): So where does, where does vaulty Rez line up with that? If we, if we go to multi Rez, which you have to think that, you know, prior to the pandemic, we were like, can cap rates keep going down? And then they kept going down. And even right now, buoyed by I'm sure interest rates are multi-res team. I think, did their, did their had a banner year for 2020, like a record year for them?
Speaker 1 (20m 46s): Yeah, we we've hearing that a lot is that, you know, 20, 20 and now 2021 in particular, it's been a great year. 2021 saw the largest increase in rent we've ever seen quarters for Q3. So we just finished up two, three, we're still finalizing the results, but shaping up that Q2 Q3 and Q1 of 2021 are the top three years in terms of demand for multi-family. And it, you know, that's across the board. However, if you start breaking it down by markets, the south in particular is really, really very strong.
I mean, I'm going to keep harping on myself just because it is as strong as it is, but you know, multi-family is price per unit has gone up by 30% compared to pre-recession averages in Sunbelt markets rents in, like, for example, Austin increased by 15%, six months, you get, you kind of become to begin to become worried more about affordability than anything else, which is at some point, this becomes a economic macro economic problem, which of course then comes back to haunt investors.
You know, a lot of that gain has already happened and really have seen a deceleration, which you would expect given seasonal trends in multi-family. And, you know, in some of these markets, you really are beginning to hit the, the affordability limit. And that's where you can start making a great argument for like, for manufactured homes or for mobile home parks. For example, particularly in the south, the Southern states, they don't work as well in the Northern states. I would argue at least mobile home parks.
Speaker 0 (22m 27s): Yeah. Neither up here.
Speaker 1 (22m 30s): It gets a little chilly. I know, but it's, multi-family has done, has probably been the outperformer, which, you know, given all the news around how well single-family pricing has done is isn't that surprising. And if you, if you look at single family, a single family price growth compared to multi-family rent growth, single family price growth in almost every single market has grown faster.
So it's not like your, your other options is getting any easier to, to afford.
Speaker 0 (23m 8s): Yeah. And in terms of like your outlook on this, in terms of the actual properties themselves, like, are we finding that in these markets that there are underperforming assets that are now being utilized to their, to their, you know, market rents, you know, value, add deals. Do you think that is what's happening in a lot of these markets? Or do you think that the pressure of lower interest rates is, is what's fueling most of, most of the acquisition in, in multifamily being an asset class that's pretty much being subsidized or was subsidized for the last year, year and a half by the government in most in countries.
Speaker 1 (23m 46s): Yeah. I mean, that's a huge part of it. And then on top of that, I think lower interest rates is extremely helpful for multi-family acquisitions. You know, part of it is it, some of it has to be just the inflation hedge that you'd get for multi-family. If, if you were to all concerned about inflation and you want to look in real estate multi-family is probably your best bet just given. And we can talk about this at some point, just given the short lease term is, but the, the eviction moratorium also, at least in our opinion, has had a pretty big effect on multifamily demand because on one end, you're, you know, you are seeing a huge spike in terms of demand, but then we kind of scratch our heads at it for a while.
But then if you think about it, we weren't evicting anybody. There's 800,000 evictions in the U S per year. I don't know what it is for Canada. That's 800,000 units that aren't going, that aren't in negative demand. We aren't, we aren't building, you know, these, these class C units were, if we're building anything, it's, it's a class, a, a, that's the only thing you can really afford to build right now that will, that will pencil. So, you know, people are, people are basically sitting in their home, sitting on their apartments, they're unwilling to move.
So we aren't seeing that, that negative demand. And on the other, the other side, we're seeing a huge uptick in people separating how tools, if you're, let's say you're a 22 year old kid and you you're living with four roommates, we're seeing people decouple those households and begin to move out into their own places. All of that kind of leads to these, this huge spike in, in multi-family.
Speaker 0 (25m 36s): Yeah, I guess the real question, like you said before, it's, it's the affordability aspect you have, like you said, 30% increase, I think in evaluation, but 15% increase in rental rates. And there is, there is a certain level where, you know, you, you just hit a, you hit a wall in terms of affordability from the, from the consumer point of view.
Speaker 1 (25m 56s): Yeah. I think it's, it's going to have, it was a concern even before the pandemic was, you know, a home affordability shelter affordability, and it certainly did not get better.
Speaker 0 (26m 8s): And on the construction end, you, you, you mentioned class a, are you seen quite a bit of construction on the multi-family side? Generally,
Speaker 1 (26m 14s): It's pretty, it's pretty much in line with the last couple of years, to be honest with you, which was pretty significant. But on the other end, we saw a huge amounts of construction delays even before the pandemic. And it, it kind of acted as this filter for, for supply being added, frankly, especially, especially down south where there's huge amounts of demand, there's huge amounts of supply waiting to be added. But at th at the same time, they just can't get it out. Whether it be supply costs, labor is certainly a problem. Anybody and anybody who's trying to build multi-family right now has told me that labor is almost impossible to find at this point.
Yeah.
Speaker 0 (26m 51s): I mean, just even on the small scale or we're doing projects in our area, it's, it is extremely slow. And, you know, you talk to anybody in the construction industry. They'll, they'll tell you the same thing right now. Not just supplies, but labor as well. If we shift over to, to that piece on inflation, it's been a hot topic in terms of ink spilled. I'm sure it was one of those things that, yeah, the over the last little while there's been enough fuss bulled over on, on the inflation side, what's your view from the data that you guys are seeing?
Speaker 1 (27m 25s): Yeah. I, I take the view that I am in agreement with the bond market and the fed that it is transitory. I think the definition of transitory has been changing pretty significantly because at first I think it was six months and now it's probably going to be a little bit longer than that. Kind of where I begin to split a little bit from the fed at least, is that it's inflation is likely to be higher for longer. I don't think it's going to be quite as high as it has been. A lot of that. A lot of the reasons it's been high currently, it has a lot more to do with the pandemic and kind of short-term factors.
You know, you can think about shortages and chips. You can think about shortages and car parts, for example, or appliances, as well as transportation demand, which should burn itself off and on top of the stimulus. But the fed changed how it does it targets inflation. And I think it really went under reported. I think a lot, it, it didn't really make as much noise as it should have because what they're essentially doing now is they're saying, okay, we need to make up for really chronically low inflation in the, the last cycle.
So we're going to allow inflation to run hot, to get the labor market gains that we saw at the end of the last cycle. Because if you look at between 2018 and 2020, the federal site statistics around minority wage gains, for example, it didn't really begin to appear until the economy was basically at full employment. What that three, 3.5, 3.4% unemployment rate. They want to see that again, that's Jerome Powell has basically explicitly stated that that's what they're looking for.
That being said, the fed has begun to sound a little bit more hawkish. Cause I think they, I know they were taken by surprise by the how high inflation got, and they're, they're likely going to raise rates by the end of next year. All of that said, I, I still believe the fed is willing to let inflation run above that 2% mark for the next couple of years.
Speaker 0 (29m 30s): So for those that don't know what you're referring to in terms of the under-reporting is the fact that they've, they've broken off of the, the, what they used to be the 2% target, is that right?
Speaker 1 (29m 40s): Yeah, I, yeah. I mean, I was in colleges, every continent was, you know, they target 2%, they adjust rates based off of that. That's obviously a little more complicated than that, but now they're targeting a longer term inflation average of 2%. And because inflation from 2010 to 2019 ran between, you know, according to their measure of inflation PC around between 1.5 and 1.8% for most of that, they view allowing it to run from two to 3% as making up for some of that loss, those loss pricing increases over the last cycle.
Speaker 0 (30m 15s): So in terms of, from the investor perspective, if your outlook as to how that informs your decisions from a real estate point of view, you know, what does, what does that leave us with in terms of the discussion that we've had even today in terms of the different asset classes and how you view economic decisions and investment decisions?
Speaker 1 (30m 35s): Yeah, I mean, look, inflation is here to stay at, which is actually fair, especially since it's not, you know, hyperinflation I, where the fed is going to be forced to raise rates quickly. Hopefully, you know, it's actually good news for real estate. Real estate is a real asset, you know, I'm sure, you know, everybody, every economist has said this at some point, you know, real estate is a real asset. It, it benefits from a real value gains and holding real value, which means that in an inflationary environment, commercial real estate itself is a good play within those property types.
There are some that are better than others, especially if you're unsure of how stable and the inflation rate is going to be the shorter, the lease term, especially in a higher demand property types that, you know, you can think about industrial or especially multi-family, it means you can adjust your, your rent increases to match inflation. If you look at, and we've seen this actually in the market, if you look at NOI gains real NOI gains from Nate grieve since 1990, there was only two real periods of actual real NOI gains from the nineties to the, from early nineties to the late nineties and from 2010 to 2015.
Other than that, if you deflate real and alive for multi-family, it's basically flat, which, which essentially means that NOI is just, is, is working as an inflation hedge. You get the same real return year after year. That that makes multi-family really attractive. Industrial actually has not done that well, based on that same measure up until very recently.
Speaker 0 (32m 12s): Yeah. I liked the idea. I was always told by a mentor of mine there where, you know, real estate is one of those few industries investment that you can download inflation to your, to your customer, you know, pretty much one for one.
Speaker 1 (32m 27s): Yeah, you can, it, it is extremely easy to just pass on that inflation to the investor, unlike pretty much any other asset class. I mean, if you think about bonds, for example, you can't do that for the most part. You just, you know, if you invest in a bond, you you're losing real value every, every coupon payment.
Speaker 0 (32m 44s): Yeah. And I th and I think to your point earlier where you have those shorter terms with multifamily, it's obviously easier to do, but I was just reading a lease yesterday that was kind of the old school lease where the, it was over 10 years, but the, the bump ups, the step-ups and rent were basically the CP attached to a CPI inflator. So we haven't seen those as much, usually landlords, if anything, at least prior to the pandemic, they would just say, okay, it's, you know, 10 bucks a square foot now 12 bucks 14. And usually that would be more than inflation, but they have some mechanism in there.
Speaker 1 (33m 17s): Yeah. Well, I was going to say, the other thing landlords might want to start thinking about is, is indexing it to inflation and that's, that's actually the great part. I mean, that's why we target a specific inflation rate is because then you can make these easy decisions. I know inflation is going to be 2%, it's a very stiff assumption. So, you know, we can, we can just assume a 2% going forward. Now you have to start thinking about, okay, is it, you know, is it going to go, you're making a bet. Is inflation going to be long-term?
Is this higher inflation could be long-term or is it going to come back down? How much is it going to come back down? It's really difficult. And while it does sound really nice to indexed, to inflation, if you're an office, a landlord right now, I think you struggle a little bit because you don't have the negotiating power necessarily that you did two years ago.
Speaker 0 (34m 5s): Yeah, absolutely. So in terms of, so in terms of that, how that view informs the interest rate discussion, the way that, you know, the fed will respond, if, you know, if employment is higher than, or full employment, or if changes in inflation that, that they're measuring, how, how do you see that impacting the interest rate decisions?
Speaker 1 (34m 27s): Yeah, so I, I I'm, I think I'm in the minority here, at least in terms of the broader economics where I really don't see interest rates increasing significantly. And I know that's a really economist answer to touching it a little bit, but I don't see interest rates hedging or increasing significantly because one of what the feds, the fed said about how they're going to react to inflation, they said, they're willing to let inflation run hot. They care more about the labor market gains right now on that needs us more liquidity in the system for longer, which, you know, can go only a few places.
It can, it can drive. And we have seen equity increase by multiples. And then the only other place we can go really is bonds for, you know, those multi-trillion dollar that multi-trillion dollar liquidity pool we have right now. I mean, it's at the point where the banks just basically don't know where to put the money. All of that, to me suggests a, you know, short, you know, lower interest rates on top of that. If you think about the demographic factors that are affecting the United States, you know, slower demographic growth going forward, that's not going to change.
That's baked in effectively. Unless people begin to move here in a mass on top of technological change, you know, you would expect to see more automation going forward. I think it's coming faster than a lot of people like to acknowledge that pushes down prices, which then pushes down interest rates. And I know globalization is no longer it, maybe isn't moving forward as quickly or as moving forward at all. But globalization still means a lower interest rate environment.
You know, the fed in 2018, tried to push interest rates to 2.5% and ran into huge liquidity problems in the market. There isn't there, they don't and they view, and this is their view. They don't view the neutral interest rate as much higher than rate where they're no longer stimulating nor creating drag on the economy is much higher than two or two and a half percent. So all of that, to me suggests maybe slightly higher interest rates from what was the tenure at. At one point I, you know, 50, 50 basis points, but maybe not, it's probably gonna be lower than it was before, before the pandemic.
Speaker 0 (36m 45s): Would there be something that would change that view for you or, or a few factors that would change that view for you in terms of where interest rates could go? Cause, I mean, that's usually the big thing where a lot of people say, oh, if inflation is going in this direction, interest rates have to, you know, come up to that, you know, come up as a result of that. But yeah, what are, what are, what are some factors that may, may kind of give you pause to, to think it might go the other way or at least increase over what you're, what you're talking about?
Speaker 1 (37m 13s): That's a great question. And, you know, as inflation has continued to stay high, it's been something I've been thinking more and more about, but the, you know, inflation first and foremost above all else, if inflation gets out of hand, it, it becomes a inflation spiral. That's when I think, you know, you'll begin to see interest rates really start to hike. The other, the other concern would be the fed. It depends on who Biden dominates next year for the fed.
If we get someone who's hawkish, if we see you're going to see some more hawkish fed governors, I think that in a more hawkish fed chairman that could change my view on interest rates. And finally, we begin, we begin to S you know, removing chewy really begins to drain liquidity faster than I thought it would. No we're right now, we are still buying billions of dollars of bonds every month. I don't expect removing QV would do that, but that could drive interest rates higher if the, if the market begins to react to, or begins to become concerned about liquidity in the us, into global bond markets.
Right. I, I sh I should mention real quick that also there are wars and pandemics that I can't predict. I learned that last year.
Speaker 0 (38m 40s): Yeah. That was a, it was, I remember two, two or three years ago. And I won't say who the company was, but, you know, I remember it was couched almost as a joke, you know, barring any geopolitical disputes or a global pandemic. And I was like, oh my God. But yeah, those are always the things you're like, you know, there's these extra exogenous factors that you're not going to be able to, to forecast these black swans. So I guess the, you know, from the real estate perspective, that's a good overview of where we're at today in terms of the different asset classes.
And we're, you know, the view of the economy is just want to be mindful of your time. Joseph, we have four questions. We ask everybody before we, we end the episode. So if you're okay with that, we'll kick it off.
Speaker 1 (39m 25s): Absolutely.
Speaker 0 (39m 26s): What's something, you know, now in your career, you wish you knew when you started.
Speaker 1 (39m 32s): That's a great question that it's okay to be wrong and it's okay to make a mistake. I think I was, at least at the beginning of my career was a little more concerned about mistakes and being wrong. If you're, if you're an economist, if you work in economics, you know, if you work in real estate and you're trying to forecast trends, you're, you're going to be wrong and that's okay. It's just, just, don't be wrong. You just learn from the mistake. Don't make the same mistake twice, twice, I think is what I needed to learn as opposed to you have to be right the first time.
Speaker 0 (40m 1s): Yeah. It's all always lies. I camera it was like Truman or something that said, ah, give me a one-handed economist. Everyone says on the, on one hand, on the other hand, but yeah. I
Speaker 1 (40m 11s): Mean, I'm certainly, I'm certainly guilty of that
Speaker 0 (40m 15s): While you want to be precise with your answers in terms of mentorship, what would you tell younger people coming into the industry or your views of mentorship in general?
Speaker 1 (40m 25s): Oh, I would not be where I am without mentors. I think it's so important to talk to people who that are in a place that you want to be, or are doing things that you want to do. I've had some fantastic mentors for both in real estate and in, in economics before, before I worked in commercial real estate, I was working in banking regulation. I was thinking regulation research, I suppose I worked with some fantastic economists that taught me everything I knew, including, you know, my, my advisor in college.
I, I, you know, like find someone that you think is worthwhile to talk to and then just bug them. I think I was my first job. I was in the chief economist office, every opportunity I could just asking questions, being curious, trying to learn as much as I could cause that, and it's, it's paid dividends for me.
Speaker 0 (41m 25s): Awesome. Are there any recommendations you could give a book recommendations, podcasts, I guess, with the spirit of this conversation, maybe in real estate or economics? Yeah.
Speaker 1 (41m 34s): There's, that's not a good question. There's two, there's two, there's two that I, one that I love just for all time, which is thinking fast and slow by data economy, which, you know, I, I like to think that I don't necessarily subscribe to the, the basic, the, what a lot of mainstream economists think about in terms of models. I think there's more to it than that. And David Kahneman does a really good job of breaking down how people think and how that relates to economics. Fantastic book.
It's a really interesting read, even if you're not an economist and the other one is the rise and fall of economic of us economic growth. I believe it's, I'm reading it right now. So I should know the name.
Speaker 0 (42m 17s): Yeah. We'll put a link. I think I know the one, the one you're talking about,
Speaker 1 (42m 23s): I, you know, the first economist I worked under was an economic historian. So he instilled that interest in me. And it basically shows that, you know, the century from 1870 to 1970 was a period of unbelievable technological change and economic growth. And I it's really fascinating and it informs a lot of what I think will happen going forward in terms of slower, you know, slower but steady economic growth. We're not going to see those four to 5% GDP gains without, you know, huge amounts of stimulus anymore.
And it was good.
Speaker 0 (42m 54s): Yeah. I have a, if it's Robert Gordon, is that a that's right? Yep. Okay. We'll put it.
Speaker 1 (43m 0s): I think it's a fantastic book. I really like it. If you liked economics, I would suggest that it's.
Speaker 0 (43m 6s): Yeah, no, it's, it's one of those things where I w was interested in reading, but unless you get like a recommendation, sometimes you go down a rabbit hole, but the Conaman that's I think, correct me if I'm wrong. I think Conaman was the first non economist to win the Nobel prize in economics.
Speaker 1 (43m 23s): Yeah. He was a psychologist and I it's, it's a lot about how the brain thinks and makes decisions and you know, it really attacks that idea of rationality and really looks at why people actually make decisions. It's, it's a great book. It really changed how I thought about, you know, economic modeling and where I work, how we, how markets work.
Speaker 0 (43m 45s): Very cool. We'll put a link to both last question. First car, make and model.
Speaker 1 (43m 51s): Oh, I had a 2004, a Honda accord, which is it. And it was, it had a bigger engine than it was supposed to have, which was great because if you've ever driven in Massachusetts, all of the on-ramps are about five feet long, so you have to really gun it. And so that was a fantastic car. I missed that car still. I would rather drive that than when I'm driving now.
Speaker 0 (44m 20s): Right on. I feel like a lot of engines were stuffed into those older Accords and civics, Joseph, for people to connect with you or a, you know, anything related to the information or data you do with CoStar work and they reach out,
Speaker 1 (44m 34s): Yeah, we have a website, I'll send it to you for blankets, CoStar advisory. You know, you can always find me. I write a lot of articles for the website, so you'll see me on CoStar, if you have it, which I would suggest otherwise, you know, just I'm on LinkedIn.
Speaker 0 (44m 54s): My guest today has been Joseph Biassi Joseph. Thanks for being part of working capital.
Speaker 1 (44m 59s): Thank you for having me.
Speaker 0 (45m 10s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse, for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.*
In this week’s Just Ask Jesse we received a question on the limitation of using cap rates for analyzing real estate. I run through four scenarios where I think they are not as useful and don’t tell the whole story about a property.
To Just Ask Jesse contact:
Email: jesse@workingcapitalpodcast.com
Instagram: jessefragale
Website: www.workingcapitalpodcast.com
Transcriptions:
*Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, welcome to working capital the real estate podcasts. We have a another just ask Jesse this week. And for those that don't know that's anybody that is interested in getting a real estate question, commercial real estate question answered.
You can reach out to me either on Instagram or you can directly email me for emails. You can just type in jesse@workingcapitalpodcast.com or check me out on Instagram. You can direct message me there. Jesse, J E S S E for galley, F R a G a L E so either or so this week I was asked a question that was related to cap rates, and it was talking about when to use a cap rate or scenarios that a cap rate isn't useful.
And the way I framed that question was, I thought what I'd look at is the limitations of the cap rate, because oftentimes, you know, in real estate, we see the cap rate all over the place and to recap, no pun intended in terms of the calculation that's net operating income divided by the value or purchase price. And that'll give you a percentage. So for instance, a hundred thousand dollars divided by 1 million. So a hundred thousand and NOI divided by 1 million, say that's the purchase price that would equal 10%.
And that would be a 10% cap rate. Now, in terms of understanding when or when not to use it, I thought I'd go over four limitations that we have when using cap rate to keep in mind. You know, ultimately the positive aspect of the cap rate is it's a very quick way to figure out what the yield is on a property, what the percentage return is on a property compared to another property. And the best time to use them is when you're comparing two very similar assets.
And in that case, you can do a quick test. And really what it will allow you to do is figure out if further analysis is required now, in terms of the limitations of the cap rate, or just some things to keep in mind. Number one, I think it's important to understand that it does not include debt. Doesn't include the mortgage. So firms or individuals with different capital structures that is that they have different leverage or they're using different types of financing at different rates.
It's really difficult to compare those two in general, but when you're using the cap rate, it's silent about those two things. So how you finance a deal is silent. So you got to keep that in mind because when you're looking at the properties, gross income minus expenses, that will include everything, the gross expenses, but not the mortgage payments themselves. So as we know, in commercial real estate and residential real estate investors put debt on commercial property during the whole period. So the fact that the cap rate doesn't include debt financing will limit its useful usefulness.
When you're looking at two deals or multiple deals that are leveraged differently now in terms of number two, the variations in calculation and the time period that's used. So what I mean by that is investors, brokers, sellers will all use different metrics or different time periods when calculating the net operating income, not all the time, I shouldn't say always, but oftentimes. So for instance, what we call the T 12 or the trailing 12 months, some investors might use the past 12 months of net operating income to derive the cap rate.
It's probably what I would do. It's probably what most investors do now, sellers or brokers. When you see the offering memorandum, you might have the potential NOI. So they're using a figure. That's not necessarily what is the actuality, but maybe what the market rents are and ideal vacancy and maybe no vacancy at all. So keep that in mind when you're taking a look at cap rates and whether they're coming from investors or they're coming from people trying to sell the asset.
Now there's also the different schools of thought, whether items like what we call replacement reserves, whether they should be included or not in the calculation. And I use a replacement in reserves as just an example, but for those that don't know, a replacement reserve is when you put money aside monthly or annually for items that are large ticket items like the roof boiler window replacements. And we know those items are expensive and they're a large amount of money, but it usually happens in one year.
And in order to smooth that over, we put a little bit aside every year. Now that little bit we put aside brings in the debate of whether replacement reserves should be calculated as part of expenses for the cap rate or they shouldn't. Now, if you can think about that, if they aren't calculated. So what we say is replacement reserves are below the line below the NOI line that would have a big effect on the percentage cap rate that we derive, right? Because we're not putting it into the gross operating expenses expenses.
Conversely, if you put them above the line and you include them, that's going to have another hit on what that yield looks like. So ultimately these variations do matter when you're trying to drive the cap rate and it's something that you just need to pay attention of when you are using it. Now, the other one I like is that when you're doing value, add properties, the cap rate can be misleading. And that's why they're so useful when comparing like unkind assets, you know, when you have to assets that can be compared fairly easy, that's the time you would use a cap rate, alternatively value add properties that offer oftentimes have significant vacancy reduces the effectiveness of the cap rate, for example, a property that has great fundamentals, but it's poorly managed may have a 30% vacancy in a market that, you know, the average vacancy based on your research is 5%.
So immediately this vacancy will drastically and artificially reduce the cap rate because of the lower NOI. And it's really easy to think about that because you could have cap rates that really don't make sense in a market 1%, 2%, because a building is poorly managed and maybe has much more vacancy than it really should, or, or that it would compare to the market. So that's another thing that you definitely want to look at when using cap rates on the other end, you want to look at properties.
Like I said earlier, that are similar, similar in age, similar in area, but also similar in that they're representing what the market is in a particular area. So in this example, that'd be vacancy rates. The last one I'll mention that I find really doesn't get mentioned that often is that they ignore the lease expiring risk. And perhaps it's not mentioned as much because it may affect commercial deals a little bit more, but you could easily see it in an apartment deal in an apartment deal leases are typically one year in length or month to month.
So in that case, we don't really see the lease expired profile as, as having a huge issue. On the other hand, if you look at office industrial and retail deals, the leases can be five years, 10 years, 15 years in some cases, 20 years. So the cap rate does not illustrate the risk of key tenants coming up to expiring. The, this is a major problem as there may be substantial vacancy losses and expenditures required for Lisa. So for instance, if you have a, a tenant that has a 20 year lease, that might have the exact same cap rate as if you had a not so great tenant with a three-year lease.
And I remember this a couple of years ago when we work was, was IPO going can't believe that I think it's been a couple of years now, we would see in our area, the cap rates change, depending on, depending on if we work was in the building. So they would capitalize instead of doing the NOI divided by the value of the building, in order to figure out the value of the building, the little algebra, you have to capitalize the NOI. So you take the net operating income and you divide into that, the cap rate.
So what they would do is they would use a different cap rate, a higher cap rate to make up for the fact that they saw we work as potentially a riskier tenant. So definitely you want to look at the leases and go into depth as to the quality of the tenants, but also the length of the leases. So those are four things that you should look at when using cap rates and understand their limitation. At the end of the day, the cap rate for me is a quick test of whether you should be doing a further inquiry.
And it's something that 100%, if you're comparing very, very similar buildings, it's a good way to have a high level overview of whether those buildings, whether you prefer one or the other, but obviously more analysis is required for any deal that you look at. Cap rate is just one tool. So hopefully that answers that question just shows a little bit of the limitation on the cap rate. And anyways, I hope you enjoyed it. If you have any questions, like I said, Jesse, at working capital podcast.com or just reach out to me directly on Instagram.
Thanks so much. Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.*
Avery Carl is a Full-Time Real Estate Investor and Real Estate Agent Based in Florida. She helps Real Estate Investors Gain Knowledge in Order to Be Able to Invest their Money in Short Rentals, and Create More Passive Income. Through Strategic Investment and Short-Term Rental Properties and Maturification? Rental Market She was a Millionaire by 31 years. She Owns Over 24 Properties and is a CEO and Founder of Short Term Rental Shop, a Real Estate Team that Helps Investors Acquire Short-Term Rental Properties in the Most Recession Resistant Markets.
In this episode we talked about:
- Avery’s Bio & Background
- Short-Term Rental Properties
- Vacation Rentals and Airbnb
- Approach in Financing with Short-Term Rentals compared to Multifamily and Single Family Homes
- Management Approaches
- Metrics Used For Underwriting Properties
- Out-of-State Investing, VAT Complexity
- Avery`s Vision on how the lockdown has Affected the Real Estate Market
- The Deals Avery is Looking For Currently
- Dealing with Investors Out of the Country VS Dealing Local
- Mentorship, Resources and Lessons Learned
Useful links:
https://theshorttermshop.com
https://www.facebook.com/theshorttermshop/
Transcriptions:
*Speaker 0 (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, my name is Jessica galley and you're listening to working capital. My special guest today is Avery Carl through strategic investing in short-term rental properties and mature vacation rental markets.
She was a millionaire by 31 years old. She now owns over 24 properties and is the CEO and founder of short-term rental shop a real estate team that helps investors acquire short-term rental properties in the most recession resistant markets and trains them on the methods that led her out of the corporate rat race and into financial freedom. Avery, how you doing?
Speaker 1 (51s): Pretty good. How are you? And actually we're at 96 doors. Now that, that outdated. Sorry.
Speaker 0 (57s): I kind of feel like that. That's great. That's good to hear. We were just saying before the show that I was looking through some old emails and it looks like we both spoke at BiggerPockets conference so hard to believe now it's 2019, but you're going to be talking it's this weekend. You're going to be talking on short-term rentals.
Speaker 1 (1m 16s): Yes, yes. Again, as will you, but not on short term. So we're, we're doing it again
Speaker 0 (1m 21s): Right on. Well, that's great to hear. Well, thanks again for coming on to the show. I think our listeners will get a lot out of this. I really want it to have an episode where we can talk a little bit about your background and how you got into real estate, but also specifically talk a little bit about the short-term rental market for people that, you know, they know what Airbnb is, but perhaps don't really know how people do invest in this market. And you know, also what the impact has been over the last 12 to 24 months in the short-term space. So maybe to kick it off, you could give our listeners a little bit of your background, you know, where you started and, and how you got into real estate,
Speaker 1 (1m 59s): Happy to do it. So I started in real estate kind of by accident. So my husband and I moved from New York city to Nashville in 2013. And we both had corporate music, jobs, music business, and we weren't didn't know anything about real estate or real estate investment. We knew we wanted to buy a house to live in because you can't really do that in New York, at least not on the salaries we were on. And so the real estate agent that we had at the time was really trying to direct us to this really fast appreciating hipster area of Nashville called east Nashville.
And we said, eh, we are sick of neighbors. We came here from Brooklyn, we moved to Tennessee to be out in the country. So we want to buy something out in the country. So about something out in the country. And we thought, well, you know what, maybe there's something to that fast appreciation. And people are selling their houses two years later for a hundred thousand dollars more. And we decided we wanted to do that, which is not the way to invest by the way. But we thought at the time, well, you know, maybe we can keep this house and maybe buy one more sometime and sell it in.
You know, however old our kids are at the time, we didn't have any kids. So when our future kids go to college, we can sell those and pay for their college. And we'll be like so smart and cool and savvy and not have to pay for that. And so we did buy a house in that area. And luckily that was a really, really great investment. We didn't know it at the time that one, the mortgage was 650 bucks a month. We were renting it for 1500 a month. And after we got a few rent checks, we thought, okay, we really want to get into this. We're going to build a business out of this.
So then we did all the educating ourselves piece that most people do before they buy a property. And we started reading all the books and listening to every podcast imaginable and we thought, okay, well we have one more down payment left. So what can we buy? That's going to make the most amount of money, the fastest so that we can scale our portfolio as quickly as possible. So we landed on short-term rentals and we didn't want to do it in Nashville rear living at the time because we thought that the regulations in Nashville are crazy. They're changing all the time. It's just not really somewhere. That is a safe place to invest regulation-wise.
So we thought, well, where can we go? That it's the normal thing for people to go rent a house that somebody has to own instead of a hotel. So we landed on the smokey mountains, which is a few hours east of Nashville. Everybody goes there and stays in cabins on vacation, long story short, we bought one of those. Again, had no idea what we were doing. We knew we didn't want to pay a property manager, 35 to 40% of our gross income. We knew there was a way to manage it ourselves from three hours away. We just had to figure out what that was. We figured all of that out, you know, lots of stumbling and figuring out it ended up working really well for us scaled that one property to five cabins in the Smokies within about a year and a half, five years later, we've used all of that income to go buy weather more traditional long-term real estate investments.
We've got a bunch of single families duplexes. We've got three 12 units and a 26 unit. We also, so of the 96 doors, we have eight of them are short-term rentals. And that's about the gist of it. And I started the short-term shop on our second short-term rental investment because I kind of realized there weren't any agents in that marketplace that could answer our questions about return on investment and remote self-management and how much should this property make. There was nobody who could really answer that. So I became that agent and bridge that gap.
And now the short-term shop is in six markets soon to be seven. And we have helped over 4,000 investors buy cashflowing short-term rental assets,
Speaker 0 (5m 42s): Right? So in terms of the short, short term rental aspect of things, so you get into this space and only a few years ago, it seemed like there was only one or two players in that space in terms of whether you're using Airbnb or different things to actually rent out the space. But when you're going in to look at at short-term rental properties, what, what type of things are you looking at off the hop in terms of, in terms of, if something qualifies as a good short-term rental,
Speaker 1 (6m 8s): The market is going to be the most important thing. So we look for areas we specifically invest in and then also work as agents in areas where that I call mature vacation rental market. So these are areas that people have been coming to stay on vacation and renting cabins, condos, beach houses, rather than hotels for decades and decades. So these are areas that are very safe for that regulations wise. These are areas that the cities and counties figured out how to monetize short-term rentals through a small local occupancy tax decades and decades ago.
So the regulations are very established. So we focus on those types of markets rather than Metro markets, just because with Metro markets, there's a lot of industry outside of tourism, which means there's a lot of primary homeowners, also a lot of hotels. So between hotels and then primary homeowners who don't want you coming into their neighborhood and opening up a mini hotel next door to them where they're trying to raise their kids. It just is a recipe for a lot of change in descent dissension. So we try to focus on those regional drivable, true vacation rental markets.
Speaker 0 (7m 17s): And in terms of the vacation rental investing, as opposed to just somebody on Airbnb, is there a distinction or do you make a distinction between that?
Speaker 1 (7m 27s): I do. Yeah. So a lot of people will I call Airbnb is just there any short-term rental property, anywhere in the country, a vacation rental is going to be a property in one of those vacation markets where pretty much, I would say 90% of the real estate in those markets are short term rentals. Like the smoky mountains in Tennessee, the Emerald coast and Florida, which is destined Panama city beach. I mean, you know, there's tons of areas that, you know, anybody in any of the region, any of the regions of the country can kind of think, oh yeah, that I know like Aspen.
So things like that.
Speaker 0 (8m 1s): And in terms of, so when you go out to buy these properties on the short term side of things, is there a little bit of a different approach you take in terms of financing, you know, compared to multi-family or even single family homes.
Speaker 1 (8m 14s): Yeah. So if you are buying the, one of the cool things about buying short-term rentals is that they are also vacation homes. So if you are buying a vacation home that you plan to rent out, when you're not there, you can get what is called a 10% down, a vacation home, or sometimes it's called a second home loan and 10% down, you know, typically you have to put 20 to 25% down on an investment property, but a property that you plan to vacation in, I think the Fannie Freddie rule right now is 14 days out of the year.
You have to stay there. So all of those 14 days you are allowed to rent that out. So you can utilize that 10% down, so lower down payment, lower interest rate, and you can have one per market. So you can have one in Florida, you can have one in Tennessee. So it's a really cool way for people to be able to get in for less money. And then also be able to scale more quickly. Yeah,
Speaker 0 (9m 7s): For sure. One thing, I mean, I'm sure people that have looked into this area, whether they're in real estate or not one of the big things, at least for me, has been this idea of management of these properties. Right. You know, for us, when we think of like, longer-term, whether it's commercial or residential management, you have this, these companies that take a certain percentage usually off of gross or effective rent. And this seems like a lot more time intensive in terms of turnover, people coming in and coming out. So how does, how do you approach management and how is it different than say traditional rental properties?
Speaker 1 (9m 39s): So I will say for my long-term rentals, every single one of those is with the property manager. That's an entirely different beast property management in a long-term space. Yes, I'm all for it, but in the short term space. So the way that prices are right now, and this is by no means a metric to measure anything with real estate investing. It's just a very loose rule of film, observation that right now, the way prices are typically in the markets that we're in, people are netting after their mortgage, after all their expenses, anywhere between 35 and 45% of their gross.
If you have a traditional management company managing this and 35% is the average amount they charge, you might be breaking even, or possibly losing money right out of the gate. So as there have been more self managers coming on the scene, and not most people that are buying short-term rentals nowadays are self managing there's tons and tons of technology to help you do that. The biggest one is a group of platforms called channel managers, and they automate a lot of the process for you.
They sync with your cleaners, Google calendar or icon or whatever they may be using and let them know automate the scheduling of the cleanings, automate a lot of the communication for between you and the guests. So you're not having to just cause when I first started, you had to just a question would come in, you'd have to go answer it. And you'd have to answer that same question a hundred times when every single person did that, but now it automatically sends templated messages back so that you're not having to do a lot of that stuff manually.
Speaker 0 (11m 16s): Okay. So it seems like they've, they've streamlined quite a bit of it, but that, that seems like a pretty hefty management fee for these short-term short-term companies.
Speaker 1 (11m 24s): Yeah. Yeah. So I guess that kind of stems from, you know, back to say 2000 and earlier there weren't, BRBO Airbnb, those weren't in existence just yet. Maybe some form of them were, but they weren't widely used and areas like the ones that I've talked about, there were still real estate there. People were still coming in vacationing to these places, but the owners who owned properties in those markets, if they wanted to put a dent in their expenses at all, they were forced to use these local property managers.
So they just found that, Hey, there is nobody but us, so we can charge these exorbitant amounts or they can just, you know, have to pay their own expenses. So I think that just came around from there kind of being a monopoly on that.
Speaker 0 (12m 8s): Yeah. So is there, is there a middle ground, like you said, there's these systems in place in, you know, maybe not having a full-time manager, but also not wanting to be there for every call for every issue that somebody has in, in a vacation home. Is there, are there systems where you have something resembling a middle ground between those two?
Speaker 1 (12m 25s): What most people do when they have over five properties would be to hire a, a VA, a virtual assistant don't know what that is. We have a VA for ours. There is something in Airbnb called co-hosting where you can hire someone else who owns properties. If you're going to go out of town and you just don't want to be gotten a hold of for a week or two, that you can hire them and it will allow them to log onto your account and, you know, handle all that business for you during that specific time. So there's, there's some ways around it, for sure.
Speaker 0 (12m 57s): So talked a little bit about the selection process. It's highly driven by market in terms of the actual, the properties themselves say you've selected the market, you have three or four properties, you're comparing them to each other. What kind of metrics do you use in terms of underwriting these properties?
Speaker 1 (13m 14s): So if there, if I'm looking at three properties and they're all the same size and similar amenities and good locations, I use what we at the short term shop called the enemy method. So the enemy method is, and let me back up just a little bit. There are tools you can use. Data-wise like air DNA to see how the properties in that neighborhood have been performing. But what the computer can't tell you about how the performance of the properties are, is the, the different amenities, the intangible items, that data doesn't show you like does one property have a pool and the other one does not have a pool.
A is one really, really beautiful and updated. And the other one's kind of falling apart. You can't really tell just from the data. So we use the enemy method, which is, if you're looking at a property, you get on the booking platforms, Airbnb and BRBO, and look at the properties around you, your enemies, and see, okay, this property is about the same size as me. I can improve on this property here. They have bad pictures. This property doesn't have a pool. The one I want to buy has a pool and you can kind of by using the data and the enemy method, figure out where you should be.
Speaker 0 (14m 24s): Okay. Right on. And in terms of actual the metrics side of things, cause you do you know, other than short-term rentals, do you use a hard and fast rule in terms of, you know, we're looking for this type of internal rate of return or this type of annual growth rate, or is it more so look at cashflow as, as maybe a percentage of your gross income.
Speaker 1 (14m 44s): That's a really good question. So I use gross annual income to, to analyze everything monthly doesn't really work because of seasonality. And it's really difficult to calculate a net number because the success of a property is so dependent on the way it's managed and not necessarily the property itself, but we do look for a minimum of a 15% cash on cash return, really kind of more like 20, but that's kind of, we're looking for, you know, if it's 20 or better, we're buying it if it's 15, but it can be improved, then we're looking at that as well.
Speaker 0 (15m 20s): Yeah. And you know what, that's a, it's a good point in terms of the, the seasonality of these rental properties. Are there areas that you won't invest specifically because of the seasonalities regarding weather or is it just more, more so the seasonality of that particular tourist tourism market?
Speaker 1 (15m 38s): It just depends. So I own properties in the mountains and I also own several beach properties. And when we bought first bought at the beach coming from a mountain experience, we were a little concerned about the seasonality of a beach market, but we found after our first one that our four bedroom beach property performed really, really similarly on an annual basis to our four bedroom mountain property. But whereas the mountain property made all of its money between probably March and December and just slow down a little bit in January and February, the beach property is between March and October.
So you do have those few months at the end of the year where you're just going to be booked here and there, we were really worried about that, but it was kind of a nice little break and on an annual basis, the income was almost the same. So it's like, you get a little break, like a summer break, but you know, over the holidays,
Speaker 0 (16m 28s): Like an ice cream shop. Yeah. That's cool. So in terms of the, the, like, given the fact that these are predominantly in vacation areas, so like you said before, most likely the regulatory framework is going to be, you know, it's going to be there or is going to have the ability to have short-term rentals. Is there anything else you would still say to people whether it's HOA or any rules within a building that you would still say, these are the things you got to make sure you check prior to purchasing, just make sure that you can do short-term rentals or other things maybe that, that they wouldn't have thought of.
Or are there any tips or advice you'd give on that end?
Speaker 1 (17m 4s): Yeah. So after you checked the city and county-wide regulations as a whole, you want to check and make sure that there's not any zonings that don't allow short-term rentals. So even though the markets that we're in are really, really friendly towards short-term rentals, there are still a very few small little geographical areas that they don't allow it to preserve primary home ownership for the people who actually live there. Then you want to check hos because every now and then you're going to find one in a resort area that is specifically for only second homeowners.
They do not want any renters so that, so you want to go city and county and then like say inside the city limits zoning, and then you want to go HOA.
Speaker 0 (17m 45s): Okay. No, that makes sense. Just because I'm, you know, I'm in the city here, I think to your point of Metro, like whether you're in a city that's popularly nursery, densely populated with apartments or condos, a lot of times the boards or whoever runs them will have something that basically completely prohibits short-term rentals. So it makes sense that if you went for, rather than just Metro rentals, but you're going to actually season markets that expect that, that you'd have lighter regulations there, if any, at all, exactly.
Right on. Okay. So Avery, can you talk a little bit about, so you've, you've done short-term rentals. This is part of the business that you have right now, before we get to the shop. I'm just curious, the other properties that you bought, what was that you branching out from short-term rentals or did you buy those assets prior? What, what has that experience been like for you from an investor standpoint?
Speaker 1 (18m 36s): Yeah, so I, even though I bought mostly short-term rentals at the beginning of my investing career, it was never the goal to own only short-term rentals. I am not by any means saying that that is the right and only way to do things. Some people do. People ask me all the time. Well, if short-term rentals are so great, why do you have so many long-terms because the goal for me was to generate cashflow quickly so that I could go buy more passive assets, which is exactly what we've done. So whether you want to use that cashflow to go buy more short terms or buy more passive assets, that's totally up to you.
And that's the beauty of real estate investing. So for me, the goal was to buy more passive assets and that's what we've done.
Speaker 0 (19m 14s): And what would be a, maybe you could talk through a couple of the types of assets that you buy now, you know, the last one or two assets, what, what type of space or those are vertical, are those in?
Speaker 1 (19m 27s): So I do not recommend that you do what I'm doing right this second, but this is what we're doing. It's working really well for us. I recommend that you focus on one thing at a time, but we have been buying multi-units in a market in the Midwest. That's working really well for us. So we have some great deal flow going there. And then also we have a market in the Southeast where we focus on value, add single families, maybe duplexes, not a lot of duplexes anymore. So we have both of those trains kind of rolling at the same time.
Speaker 0 (19m 56s): Very cool. Now the, the company itself that you started for the short-term rentals, the short-term shop. So is that, is that you're a, you're an agent by trade, is that right? Yes.
Speaker 1 (20m 7s): Yes. So we are a real estate agency. We are brokered by exp. I have to say that or else I get in trouble, but I don't do the whole multi-level thing. That's annoying, but we're in six markets right now. So we're in the smoky mountains in Tennessee, the Emerald coast and Florida forgotten coast in Florida, the Disney market in Florida, blue Ridge, Georgia, and Gulf shores, Alabama. We are adding crystal beach, Texas next week. And what we do is we work only with short term rental investors. So we don't even take any other types of clients and for our buyer clients, if you choose to use us as your agents in those markets, we're all very, obviously I train all of my agents to learn how to analyze these things.
Most of them are short-term rental investors themselves. But if you choose to use us as your buyer's agents in any of those markets, we have a whole back end training program where we teach you everything that you need to know from getting your Airbnb. And BRBO listing set up to all the automation tools and the tips and the tricks to streamline things all the way down to helping you source your cleaners, handyman vendors, boots on the ground. So if you come to us, not only are we going to get you the house, we are going to make sure that you're successful with it. So that's what we do.
Speaker 0 (21m 14s): Very cool in terms of the out of state, you know, or for the Canadians out of province investing. I imagine most of the people that are investing in vacation rentals don't live where their, where their investments are. So in terms of that complexity, how is that dealt with? Is it a non-issue? Is it something you need to put systems in place? What's your experience been with that?
Speaker 1 (21m 37s): So for us, we have always done a ton of videos, showings, lots of videos, and you can't, it's true. Like you can't always live in the best place to invest in any certain type of real estate. So if you are going to invest out of state, I do recommend reading David Green's book about out of a long distance real estate investing. That's a really good one because you do have to build a team. You have to vet your team remotely, and you have to make sure that you are working with the right people.
When you're, I know a lot of people that listen to a lot of real estate investing podcasts are trying to work with like a hundred agents. You really need to find the agent that knows what they're doing, or at least the top two or three, and not just go work with everybody who responds to you. I see that a lot now, especially as the market has gotten really, really tight that people will, like, I had some money who I sent him an off-market listing that I had, that I w it wasn't listed yet. And he said, oh, no, I think I'm gonna pass on this. And then I put it on the market like a week or two later.
And he offered on it with another agent from another town. That's not even in, not even in the market, they didn't even have access to the right MLS. So don't do that because you want to get, you know, work with the top agent or two that work in the space that are going to be working for you in the market that have the most relationships either with past buyers. So people who own things who might be wanting to sell things soon, that's how you will get stuff off market. And also the agents who have the best relationships with all the other agents in the market, because that is also a good source for off-market deals.
Speaker 0 (23m 14s): Yeah, for sure. And I'm assuming that your brokerage will also assist know downstream in terms of the investment. And, and by that, I mean, putting them in contact with, with a broker or a mortgage broker for financing of these deals, I'm sure you have some preferred vendors that you deal with in specific areas for these types of properties.
Speaker 1 (23m 31s): We do. We actually also just started a mortgage arm called the mortgage shop because we were overwhelming so many different lenders and brokerages. So we just started our own to help our clients. And we focus while can do, you know, regular, if you want to buy a house with us, whatever, but we focus exclusively on in are not explicitly, we're not allowed to, but we focus mainly on investors, especially short-term rental investors with our mortgage products
Speaker 0 (24m 2s): In terms of the last 24 months now, which is crazy to think that way, there's obviously been an impact on the economy, on a rental properties in general, hoteling, tourism. What's your experience been like over that period of time, just with, you know, with the pandemic, with lockdowns and have, have you, you know, lessons learned have, have there been things that, you know, perhaps without the pandemic you wouldn't have got into or, or have kind of moved the business towards?
Speaker 1 (24m 31s): So I will say that what we thought was going to happen at the beginning of the pandemic was the opposite of what actually happened. So the beginning of the pandemic, when they shut everything down and everyone short-term rental calendars were wiped clean, we thought, oh, crap, there go there short-terms, there it is. It's happened. And after two weeks, when everybody, you know, got off the couch and stop watching tiger king and things opened back up the tourism and the markets that we're in, like people just busted the doors down, everybody was dying to get out of their houses and that our short term side of our business boomed, whereas it was actually our longterm side that we had to worry about with the eviction moratoriums.
And that's just not anything that at the beginning of COVID week that never crossed our minds. We just thought, oh, people are going to stop going on vacation. Well, actually the opposite happened. So our short term side of our investments has really, really boomed. And luckily we only had to do two evictions, so it wasn't too bad. And those people were problems well before COVID, but we, we just happened to be in the right place, right time with the short-term rentals and the COVID
Speaker 0 (25m 45s): Right on in terms of the market going forward, then, you know, let's say the next one to two years in terms of investing for you. I know you mentioned that you're doing a lot of different things with investing. Is there a specific asset class specific areas that you're you're looking at or that you like?
Speaker 1 (26m 1s): So it's just so hard to find deals now that I've, I've got my eye always on the short-term markets that we're in and then the Midwestern market that we're in for the multis and then a few different Southeastern towns that we've invested in over the past few years for the single families and duplexes. It's just so hard to say because a lot of people think, oh my gosh, we're in a bubble, everything's going to the bottom's going to fall out. But then part of me feels that way. But then the other part of me is like, well, there is such a housing shortage because of all of that construction that did not happen between 2008.
And now that I don't know how long it's going to take us to get back to equilibrium to where it is, where things more normal, and it's easier to get deals again. And people are able to actually buy things without 10, 15 offers. So it's just really hard to say, I'm, I'm picking things up as long as they make sense. I'm, I'm steadily grabbing what I can just because it does kind of feel like this might not go back down. It might continue to be really difficult for primary homeowners to buy. Let me know. Great example of that first house that I bought in Nashville.
I just sold that. I listed it a little bit high because that was 10 31 exchanging I had a hedge fund come in and offer me $40,000 over asking cash. I think, have any other offers? I didn't have multiple offers. There was no reason to offer that much 40,000 cash, no inspection closed it. And that kind of stuff is I think, going to continue to happen in Metro areas like that. And, you know, it's just really hard for the typical home buyer to be able to compete with.
Speaker 0 (27m 37s): Absolutely. I mean, we see it just on the commercial side, it's the same situation for at least on the apartment and industrial as well, where, you know, there's, if it's a good property in a good market, you know, you can expect five to 10 on, on bid date, you have five to 10 people competing. I'm sure for, you know, markets that you're around, it's a similar situation in terms of the, so on that, on that end on the brokerage end, is this something that, I mean, when you don't talk to agents or brokers, it's one of those things where if you talk to them about fully being a hundred percent investor, it's always just so easy to continue to be a broker, but you also have the, the shop will you be as hands-on going forward or is the goal to, to pretty much be on kind of the, the ownership or investment side down the road?
Speaker 1 (28m 25s): I'll probably stay pretty hands-on with it. It's just, it made such a difference in mine and my husband's lives that we were able to figure out how to do this and how to self-manage. And it's really rewarding because I'm 33, I'm nowhere near being able to retire and just, I mean, I can retire, but my brain cannot retire. I can't just sit around and deteriorate. So it really is rewarding to help other families transition the way we did from being, you know, I, I was making $37,000 a year and we get emails here and there from clients who were like, oh, you know, it allowed one parent to be able to stay home with the kids, or it allowed one person to stop working to take care of their elderly parent.
And it's that kind of stuff that it can be a really life-changing thing. You know, two or three short-term rentals is, oh, like over a hundred thousand dollars salary in some cases that somebody might never have achieved, just climbing up the corporate ladder. I mean, I know I'd still be waiting on my $10,000 raise to make $50,000 a year. So it's really rewarding to help other people do that.
Speaker 0 (29m 35s): Yeah, for sure. I just curious, you said that one of the properties was 10 31 exchanging. I was just looking on, on TV for those that don't know, that would be a like unkind asset where you sell one asset and you, I can't remember what the amount of time is, but you purchase a likened kind of asset and you defer the taxes just for us Canadians up here. I heard that it is possible. You guys are going to be having, I know there's some, there's some talk about getting rid of the 10 31 exchange. Is that real or is it just more of, you know, just talk,
Speaker 1 (30m 4s): I think it's just talk, I think the worst it'll be is that maybe you cannot defer a hundred percent of the taxes. Maybe you can only defer 80 or, or, you know, some other percentage, but yeah, I think that was just something that was big talk during the election. I don't, I just, I don't see that going away. We've had it. I think I'm going to get the year wrong, but I think it's been around in the U S since the twenties or thirties. So it's made it through this many presidents so far think it will probably continue in at least some form or fashion through the next few, hopefully.
Speaker 0 (30m 37s): Yeah, it is a it's something that would be, it'd be great to have here because it just, the, the actual frequency of trading happens. I think just that it's a huge benefit. Being able to actually transfer and move out to properties and have somebody new, put more money into properties on that note, I'd say about 55, 60% of our audience is, is Canadian, or it's close to half and half Canadian and us with the balance overseas, in terms of somebody that's looking into buying a vacation rental property, say they come to you, but they live in Vancouver or they live in Montreal.
You do, you deal with people investing out of, out of the country into vacation rentals and is the approach different? If so,
Speaker 1 (31m 17s): We do, we get a fair amount of overseas. Investors of the financing is a little different because there are very few lenders and brokerages who will work with truly, can't think of the word with Canadians basically, unless you have like a, a green card or a social security number or some specific type of work visa. So we have a few of those, but other than getting past the financing part, it's really very, very similar.
Speaker 0 (31m 42s): And would there be a benefit to if you have a partner that is an American or US-based partner in terms of the financing, like my thinking would be, you know, we have a number of investors that will have colleagues or have people that they will invest with better Americans, maybe that's you just organize that through the, you know, the financing aspect happens through an entity maybe that you both create or something to that extent,
Speaker 1 (32m 5s): That would definitely be easier because having an American partner would open you up to a lot more options in terms of financing. So if you could form some sort of LLC or entity with them and then do it that way, I think that would probably be the easiest route.
Speaker 0 (32m 20s): And as per the usual, a disclaimer, we are not giving any legal or accounting advice, but Avery, we do something a little bit, sorry. We do something at the end of the show with every guests. It's a four questions I want to be mindful of your time. So maybe we could get into that, but we do. I just like for you to just let listeners know if, if they are interested in that aspect, number one, the short term rental vacation rentals through your company, what would be the best route to, to kind of get, get to you?
Speaker 1 (32m 55s): Yes, go right to our website, the short-term shop.com. There's a little button right in the middle that says schedule a consultation. That's the best way to do it.
Speaker 0 (33m 2s): Okay. Sounds good. And if you're good to go, I'll I'll log these, these questions that, yeah. Okay. Okay. What's something that you know now in your real estate career, you wish you would've known when you first started out.
Speaker 1 (33m 16s): Oh, I, I wish I would've known. So when I was 19 20, 21, I was going to university of Texas. I lived in Austin, was bartending, downtown making great money. And a lot of my older friends who were bartending with me were buying these 70, $80,000 houses on the east side of Austin. And at the time I was like, well, if I'm not going to buy something impressive, like my parents' house and why would I buy a house? Why do I want to buy one of these dinky little houses? Well, now those dinky little houses are worth a million dollars. And if I would have just done that and not been a snob about what, what was worth buying that, then I would have had a headstart on, on everything.
So I wish I would've done that differently.
Speaker 0 (33m 57s): I had a, I had somebody on the show recently said the best time to buy something as a hundred years ago, the next best time is now. So I was like, that's pretty good. Tell that to clients. Okay. Question number two. What is your view on mentorship for people that are older in our industry, or even people getting into our inter industry
Speaker 1 (34m 18s): Go for it, especially in short term. I think there are a lot of people you really have to vet your mentors wisely. So what I've seen with short term rentals and Airbnb is, and I've seen my own clients do it. They will buy one or two in a six month period. See all this money come rolling in. We call it green light syndrome. Cause you get a little green button, green light, every time somebody books with you, they start seeing all this money coming in and they realize that they can do it. And look at me, I have no training wheels and I'm driving this thing. And so then they go immediately start some sort of Airbnb academy and want to charge people thousands of dollars to teach them how to do it.
When they've only been doing it for three or four months, they haven't even owned the property for a whole year yet. So while I think that mentorship and, you know, taking these online courses can be a really, really great way to learn. Just make sure that you do your research. Don't just run off and pay a thousand bucks for everybody on the internet because not all mentors are created equal.
Speaker 0 (35m 15s): Yeah, for sure. A lot of gurus out there. Yeah. Okay. In terms of the, you, you know, you've been on the podcast circuit, are there one or two books or podcasts that are indispensable for you that you'd, you'd recommend to listeners
Speaker 1 (35m 31s): Bigger pockets podcast? Of course. And then I mentioned it earlier, but David Green's long distance, real estate investing. I sent it to all my clients to read. So they kind of have a primer on because most of them were buying out of state with us. So he answers a lot of those questions that they ask us. So it's really good. Good reading material.
Speaker 0 (35m 50s): Yeah. That's been on my list for a long time. This the long distance one. So yeah, I'll put a link to that as well. Okay. Last, last question. First car, make and model.
Speaker 1 (35m 60s): It was a yellow Jeep Wrangler,
Speaker 0 (36m 3s): Austin, Texas. How could I have guessed that?
Speaker 1 (36m 8s): I have a purple one. Now I have a purple Jeep Wrangler now.
Speaker 0 (36m 12s): Yeah. They've come a long way right on. Okay. So you've, you've connected people to where they can reach out to you for anything else in terms of, you know, where you're, where you're talking podcasts, you know, is, is the website, is that okay or other social media that you'd like to plug that people can, can reach out to
Speaker 1 (36m 32s): Instagram and Facebook? All of that is posted in both of those places. And Instagram is at the short-term shop and Facebook is slash the short-term shop.
Speaker 0 (36m 43s): My guest today has been Avery, Carl Avery. Thanks for being part of working capital. Thank
Speaker 1 (36m 48s): You so much for having me.
Speaker 0 (36m 57s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.*
Sandy Mackay is the Founder/CEO of MacKay Realty Network. Sandy is an Experienced Realtor and Investor. Sandy has Worked on Hundreds of Real Estate Transactions since 2011. Sandy is also One of the Hosts of Breakthrough Real Estate Investing Podcast.
In this episode we talked about:
- Sandy’s Bio & Background
- Legality of Wholesaling
- Pivoting from Real Estate Wholesaling to Building a Buyer`s List
- Brokerage Model
- The Importance of Taking Actions
- A comparative framework for commercial and residential markets
- Real Estate Changes in Terms of Technology Companies Entering the Space
- Dealing with Real Estate Broker
- Real Estate Market Outlook
- Mentorship, Resources and Lessons Learned
Useful links:
https://www.facebook.com/sandy.mackay.3
Transcriptions:
*Speaker 0 (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Hello, welcome to working capital the real estate podcast. I'm your host, Jennifer galley. And today we have a special guest. His name is Sandy Mackay. Sandy is the founder and CEO of McKay Realty network.
He is a, an experienced realtor and investor. Who's worked on hundreds of transactions since 2011. He's also host of the breakthrough real estate investing podcasts. Really awesome podcasts. Check that out if you haven't heard it already, Sandy, how's it going?
Speaker 1 (49s): Awesome, man. Happy to be here. Excited to share some great content.
Speaker 0 (54s): Absolutely. Well, we're excited to get into it. I thought would, would be a bit of a treat for listeners is to talk a little bit about what we normally talk about, which is real estate and maybe zero in a little bit on the focus of what you do in brokerage in the companies that you've built. And I take it today. You're joining us from Hamilton, Ontario, Canada. Is that correct? Yeah.
Speaker 1 (1m 16s): Nailed it in Hamilton, Ontario.
Speaker 0 (1m 18s): Perfect. For those that don't know, that'd be a, I guess a pretty solid one hour west of Toronto, great area to invest. Well, Sandy, you've worn a number of different hats over the last few years. You've done some pretty impressive things on the real estate investing side, as well as brokerage. You were actually introduced to me by, by my partner that I work with in commercial real estate. And what we do with most of our guests is take a step back and talk a little bit about how you initially got into real estate. So how did it all start for you?
Speaker 1 (1m 49s): Yeah, I mean, I got, I got, you know, got when way down the path further than I ever thought in the real estate world starting out. I mean, we kind of reached out for that as a book in my life and my, my, my whole outlook on life and my path, my, my wife now girlfriend at the time we kind of were working together actually. Yeah. Give or take 10 years ago. And, and, and somehow got came across that book. It went to a weekend seminar thing with the rich dad, poor dad programs, never didn't buy into the whole big, expensive ticket item there, but like just got a lot out of it actually changed my whole outlook on things.
And then being more of a, you know, that business owner sort of mentality, and then working for self versus, you know, how we're trained in life to kind of just work for the, the big companies I guess, out there. And then that was my upbringing too. It was just like being trained to, you know, go work for a big corporation. So that book changed my life. And my past got a little interested in real estate side. We started to look for ways to make money in real estate without having any money cause we had none. And so how do we get creative to buy or invest?
And we started doing wholesaling. So we started like looking for deals that were, that were hard to find, but there's so much good content in there still is around how to do that. And you know, we started to look for distressed properties, motivated sellers, people that were eager to get out of their property for whatever reason. And, and so we started building out kind of two less like our in our investor list, people who were gonna buy these properties and then the sellers motivated sellers. And it was didn't really think of it this way at the time.
But looking back, it's like we are building out our, our, our, our, our database of clients essentially. And really it really turned out well, we building out our investor list was probably the best thing we ever did cause we, you know, gravitated towards the realtor side, eventually got their licenses, joined up with a great mentor of mine on his team at the time. And that kinda, he kind of pulled us into the real estate realtor industry and we're building out our list of investors at the time, which turned out really well when the real estate side, once we got our licenses, those are our pool of potential buyers.
And, and, you know, we kind of realized we were always looking for the really difficult to find deals. There's a lot of other deals out there to sell to. They don't have to be home, run deals all the time, but you know, so we got our license, we started selling more properties and doing more deals. We, we, we did have some success in the wholesaling side of it bought our very first property because of the $25,000 wholesale fee that we made on a, on a deal in Burlington, Ontario, right in between Hamilton.
And Drontal, that was, that was the literally the, all of the funds we had to buy our first property for like 260 grand, which you've been Oshawa, Ontario, other side of Toronto, literally the 20, it was 5% down. I did, I did some hands-on work there, which I'm not very good at doing, but they had a bit of hands-on work. It's been about 10 grand on a credit card to fund some materials and whatnot. Look at YouTube, watch YouTube to tell me how to lay floors and put trim on and stuff. And first and last time I ever really did any version of that.
And yeah, from that point forward, like kind of luckily in a way that property was worth 400 grand, like two years later, parlayed that into more properties started raising money for deals, started working with lot of joint venture partners. Yeah. Just soak up so much knowledge that was going to have so many courses and events and things like that to network and grow our education. And, and people just started asking us about like, what are you doing? And all of a sudden, you know, over time, a few years went by and money started to kind of coming our way.
And we started doing some bigger deals and, and yeah, just done like tons of deals over the, over the time. Now we ended up starting a few different companies. We, we were doing a lot of renovation projects realized that we needed some construction, help realized we needed to property management help. We started, my wife runs our private manager company now. So we have a company that we work with there and, and I run the real estate side of it, the realtor team, largely residential real estate. And, and then lots of brokerages here too.
So we have a brokerage, the realtor team, my wife does, my wife does run mostly the construction side too. We have a construction company, but she kind of oversees that more than I do. And she runs the, a property management company.
Speaker 0 (6m 34s): You've been keeping busy clearly in terms of there's a lot there. But in terms of the wholesaling aspect, you hear a lot about this, you know, especially from the Canadian and us perspective, a lot surrounding the legality of, of wholesaling, you know, what exactly is it? So for listeners, can you unpack a little bit, a little bit about what you mean by wholesaling?
Speaker 1 (6m 58s): Yeah, totally. We, yeah, so there's a lot, there's variations on it, but essentially, you know, the, the basic model. Yeah. You're, you're selling the contract, right. You're not actually ever buying the house. You're, you're, you're having an agreement to purchase a house on paper and, and unless otherwise stated in Canada, at least, you know, all, all contracts are assignable and so you can always assign it to someone else. So you can basically change the name into someone else's name. So we go talk with the seller, they want to sell their house for 200 grand.
Let's say, that's that? That's, that's, that's the way back numbers. Let's say 500 grand. Yeah. Let's say 500 grand. Yeah. A real actual house. Not a, not a, not a little chunk of, you know, 10 square feet, but an actual house. Yeah. So let's say you're going to buy 500 grand the seller once. And you know, they wanna, a lot of times it's, it's something urgent. Like they want to in two weeks or they want it this month, for whatever reason.
And going through the avenues of like hiring a realtor, maybe fixing it up, all the things that you might need to do to, to sell it. It's not really an option for them for, for whatever reason. And, and so, you know, you offer them, Hey, I could, I could bring you a list because I've built out my list of buyers here. I have a big chunk of buyers that would love to buy this place and I could bring them to you, you know, in two weeks they can close, you know, a lot of times those are cash buyers or, you know, putting a big line of credit, ready to go. They can, they can buy that 500,000 asset dollar assets quickly.
And so, you know, you go to them and, and you say, Hey, I'm going to buy this from 500 grand. You basically go to the investor database now and go, we have this place it's available for 5, 5 55, 25, 10, whatever you want to mark up. And, and, and you split it, you make the difference. So that's your, that's your kind of margin there. So you sell it to them for five 20, let's say they pay the 20 grand to you. They pay the 500 that you agreed upon with the seller. And that's it.
And pretty much some legal stuff in between all that, but it's, it's fairly simple at the end of the day, it's, you're taking that spread and not much different than putting on a commission on a deal, right. It's not too much different. You're just, you're the, you don't need a license for it. And it's, it is legal as much as it seems, almost kind of shady at times. And, and, and when you, when I explained that is fully legal and you know what, at the end of the day, you're, you are addicts value to some people like it done well, you're, you're helping that person out of a sticky situation that they're probably,
Speaker 0 (9m 37s): Yeah, for sure. I think part of the, well, ultimately if somebody's signing a contract, you'd like to think that there's a meeting of the minds and everybody is doing it voluntarily. I think part of the misconception of assignments, or at least part of the issue, there was a number of articles a year, a few years back that was a boat assignments. And basically the tax implications of them. Cause a lot of definitely a major Canadian cities pre-construction condos, you were basically assigning or selling the paper. And I think part of the issue was people were claiming that as capital gains, when it really it's its operating income, as far as I understand.
Speaker 1 (10m 17s): Yeah, yeah. We never scaled it up too big. I there's a, there's some huge companies, you know, I always back when we were doing it, I don't think I was oblivious. I think there just wasn't the exist a really proper business around this. Like I think people were doing it here and there they'd do it for bid and then parlay into some other things. I only saw so many videos on these American guys doing like such high level of this. They always selling hundreds of wholesale deals a year. And I was like, man, that's crazy. Can't find them.
I could never find them any opportunities. Now there's like, you know, there's, there's a, there's at least a handful or more of, of, of people around Ontario, for sure that are doing a ton of deals, wholesale deals and just growing into proper businesses. Whereas before it was kind of this, like, you know, under the, under the roof, nobody really knew about it. And it was kind of like a under the radar thing. And like, it was almost, you know, if you were actually wholesaling deals, it was like crazy. Like nobody could find real hook.
Now. I'm like, I open my inbox every day. There's a wholesale deal sitting there of some sort ready to go. It's interesting how that, how that stands. Yes.
Speaker 0 (11m 25s): I think under the radar is exactly it. It's one of those things that's mysterious until, until you know, a little bit more about it. Same thing with, you know, your first time you hear about hard money lenders, you're just like what people will be able to just lend you money. What is it a back alley? And you realize there's actually a number of these people in our, in our industry. So you started with a wholesaling and then what you said as you start building a list together. So how did that, how did that grow your business in terms of pivoting from wholesaling to building a list and that there's value in this list from investors that would be buyers and sellers?
Speaker 1 (12m 1s): Yeah. I mean, we, you know, I, I joined, I joined up with a team originally. That was, that was my first realtor side of a business. I, I had, you know, it was a great mentor of mine at the time for awhile. And he just, he was, he was someone I met through real estate investor circles and kinda convinced us, my wife and I both to get into the realtor world. And, and I was really thankful that went down that path, learn so much working with him alongside them day to day, opened my mind up significantly to what was possible and, and just, just thought so much bigger after working with him.
And yeah, we, we, we got into that side of things. We, we were living in Bon. So just north of Toronto, Hamilton was the like hot up and coming city. And thankfully we, we just kind of went all in on it on Hamilton and moved out this way, kind of for a few reasons, just timing made sense. It wasn't the very, very sexy city to move into at the time, you know, 10 years ago it was, or we're not, we're not quite 10 years here, but getting, getting there, it was, it was not a cool place.
Really. It was kind of like the really, really ugly thing that you bypass over the bridge on the way to the Buffalo and then the U S then it would be like, you know, it's all, it's all steel city, right? It's like very, it's not the most dealing working city as you drive past it. And it's transformed so significantly in the last 10 years, it's just gone from like this really dirty, ugly place to a really kind of cool hip place. You know, a lot of gentrification, cool restaurant scenes, all that sort of stuff. And it's, it's, it's been really cool to watch it.
A lot of it's Toronto money coming this way and, and, and coming in the city and developments and all that. So, you know, over time, we've, we've kind of read that, rode that wave to an extent, you know, it was really good timing. We brought a lot of our contacts from Toronto area this way and did a whole bunch of deals, bought a lot of, a lot of deals ourselves, you know, went from kind of, we kind of started with that niche of real, like real estate investors and then, you know, kind of branched off and diversified into just typical residential sales and, and, you know, typical stuff buying, selling real estate.
So we build up a network here of people, not investors per se, just, just everyday people and, and yeah, built up the realtor business eventually that led to opportunities to open a brokerage within the Keller Williams world. So we opened a Keller Williams franchise in, in what, nine months ago in bond back where we came from. And so I'm kind of in between there again now. So I'm commuting here and there and living the dream London, a brokerage, which is like a whole nother topic. Probably we won't get into too deep, but, you know, brokerage models are like just evolving a lot in real estate worlds is really ensuring all the different prop tech companies out there.
And just a lot of, a lot of what's the word, just a lot of things shaking, getting shaken up in that industry with, you know, the traditional brokerage model is kinda fading, I guess, in, in, in terms of the value it offers. And so it's just a lot of, a lot of different things happening in that world.
Speaker 0 (15m 17s): I think we should talk about that in terms of just the, the model itself. I always say real estate is an informationally challenged business. If you're not on the inside, it's really challenging to find information and that's slowly changing, definitely on the commercial side. If you're not in the loop, you're not connected with brokers, it's just very opaque. And it's something that I think, you know, I think generally people think that brokers prefer that, but not me. I really think that we should be opening up our industry and have more communication and more transparency.
I want to talk about the, the brokerage model, because instead of starting a boutique brokerage, you went instead to a franchise model. So what was that like basically starting a business with a little bit of help from a, from a franchise head. How does that look in the real estate world?
Speaker 1 (16m 10s): Yeah. I mean, we like a lot of the kind of path for any successful. Let's say realtor generally is like, you know, you build up their book of business, you start scaling it and then eventually you go, well, do I need this like franchise that I'm under? Or do I just start my own or do I, you know, am I going to be the broker running? So there's a lot of different ways that that could look right. You can be, you can run your own boutique shop. You can, you know, do you want to tack onto one of these big franchises and open up something like that? A lot of options, I guess, that are there.
I, I, you know, I, I got into this kind of Williams world. They eight plus years ago now, and just, it's a really easily scalable model, which I like the system, the models are kind of built in to, to, to run it really well, to a point where like, like we were talking before the show, you know, nine months in here, I'm not like spending every waking second running this business. And it's, you know, we're only nine months old. So it's to get to that point on my own, starting from scratch would be very difficult if I was having to come up with all these different models myself.
So, you know, for me, and I've never opened a franchise before. So this was a new experience in a sense, we have some other businesses that we've started from scratch and we're kind of trying to figure it all out as we go. Is there a sense, a lot easier running a franchise, as long as the franchise has good, like, you know, models and systems to, to, to run with? I don't know. I think I've learned a lot of a business actually in, in running one and opening. It is just the importance of operations and models and systems and, you know, for scalability of any company and you really need to focus on the models and what, what you're going to, where you're going to systematize.
You know, it's like a McDonald's thing that you can just like, that's why are they there? They're running a systematic, scalable business. That's the, every franchise is very, very similar. It's all the same. McDonald's university Keller Williams is very similar. On the brokerage side, we have a Keller Williams university and they teach how to run, how to run the business of a brokerage. You know, how to recruit people, how to run the books and everything. It's just like, almost like a masters in business is how to run that business.
This is what I've enjoyed a lot about. It is just, I, I can now implant the same sort of thing in our other businesses. I've learned a lot about that through the franchise side is just, you know, in our property management business, we use the same sort of models to run that and, you know, running the administration, which is not my like Bordeaux by any means, you know, having the right people to run that I can train and lead them through the same models that Keller Williams teaches. So yeah, I've, I've, it's been a fun experience.
We've, we've built it out from scratch to 75 or so agents right now, and, you know, it's as more and more agents come on and there's a lot more stuff that gets thrown out you, but, you know, being systematic, running with that in a, in a systematic way becomes all the more important.
Speaker 0 (19m 14s): Yeah, that's great. I think from a business point of view, I've always been a big believer that 80 or 85% of the success, you know, whatever success I've had has been due to taking action. And it's one of those things that you think it's sounds so simple. Take action. But so many people don't make the first step or don't take action on, on something that they totally can take action on in a given time. And that's where you see, I think you see people that, you know, they're not the, maybe not the smartest person in the world, but they're super successful.
And really, they just, they didn't question certain things. They just said, okay, if we need to buy this, we gotta buy this. Okay. If I need to invest in this, you, you know, we'll figure out a way to do that. And all of the behind the scenes stuff that needs to be done at the end of the day, you don't see that stuff. You just see, you know, the final product and you really don't understand how they got to that point. But I think action's is a big thing.
Speaker 1 (20m 10s): Yeah. It takes, it takes, yeah. You know, we were talking about that, like three kind of the fun part of it in a way is all those different things and no business, any business is just, it's chaotic at times, for sure. There's so many things to do. I think people get scared of that, right? They get scared of all the unknown and that's one thing I'm real estate. I can be really thankful for once we, like we going back to the start of this, once we just took action on that first property we bought, we actually just went to that weekend seminar.
We went to, and like the amount of most people, you know, it's kind of almost that almost has a negative outlook on it, going to leads and weekend seminar things. Cause they're all upselling on all these courses and whatnot, but the simple act of going there, like literally the path and we got a lot more action oriented from that and changed the path of our life in so many ways. And you kind of get used to taking action over time. If you just one simple decision, right. It can change your life. Just take an action once, you know, it's like, it's just like waking up earlier every day.
Like it takes, yeah, it's uncomfortable for the first couple of times. And then it starts to get just in rhythm and in a habit. Right. So yeah, one of the best habits you can get into is taking action consistently and no ready, ready, ready, aim fire. I guess this is kind of ready. Fire aim, ready? Fire aim. So to an extent you obviously, you know, there's obviously a bit of a dichotomy of that, but you know, taking an action, you learn so much through that, that you, you could spend hours and years or days trying to figure it all out beforehand, but eventually you just gotta jump in and, and go and, and, and kind of figure it out as you go.
And you're going to screw, screw stuff up, and you're going to have some big losses, but got to get comfortable with that. Right. You got to get comfortable taking some risks.
Speaker 0 (22m 2s): Yeah. I couldn't agree with you more. I, it's funny, just circling back to the, you know, that action oriented stance, it's usually the smarter, younger or less experienced brokers or people in our field that they look at very successful people. And they're just astonished, like how, you know, how did this person do this transaction or as a part of this deal. And a lot of times it's somebody that, you know, thought that they could do something that maybe at that point, they probably shouldn't have even been thinking at that scale, but they took action and it, and it panned out for them.
So anyways, Sandy, I want to talk a little bit about the, kind of the dichotomy between commercial and residential, because you went and you started a brokerage shop, and I'm curious of the kind of mechanics of that in terms of the hat you wear, whether that's a managing director hat, are you, are you kind of passively a part of it now, because we talked a little bit before the show, how this is something you might want to do in the future open different franchises. So maybe you could talk a little bit about the framework that you're currently in.
Speaker 1 (23m 4s): So we have like same way. I look at my realtor team side of things, you know, I, I always look for, I'm not the administrative person. I'm not going lead that out. I, you know, we're looking for us, we have a, we call it a market center administrator there, they're running our admin side. They're, they're owning their like business within a business is leading the admin team and running the operations. That's not me, but I'm leading that person. They're, they're leading that whole division. And then we have a growth partner team leader or whatever, like in many brokerage operations, they would be like a broker manager, but they're not necessarily that in our world, but that would be kind of what most people would think of them as I'm managing the brokerage, they're running the whole growth side, helping to train the agents on growing their businesses, et cetera.
So they're doing a lot of the recruiting side and they're, they're kind of like our CEO, which is, it's not really me doing that role, which is why I'm, you know, most businesses, if you're starting out, you're the owner, you're usually the seal for awhile in this model. I I'm kind of able to, to, to not be the CEO more of like a chairman role, I guess, like kind of overseeing the vision for where we're headed, but not getting into the weeds of day to day. And so I have a CEO as most people would think of it as, and she kind of runs the day-to-day does all the hiring and the sales growth side of things for the brokerage.
So we have two different towns, the girls side recruiting sales side, and then they'd been side and, and those are really, for me, those are the, I lead those people and they lead everyone else, which allows me to, to not be in the weeds of day-to-day there as, as if I was starting my own brokerage boutique, I would be in there everyday. I'd be the CEO, for sure. So it's, that's the difference, I guess, franchise versus, you know, boutique style and, and big brand, I've got to, I get to feed off their models and, and, and, and step aside a bit quicker than I would have otherwise.
But yeah, we have 75 agents who are, you know, running their own businesses within our business. And, and so there's a lot of, you know, there's a lot of training and education that goes in line with that to help them grow. They obviously need to be successful if they're going to hang around with us, they're not going to hang around if they're not successful. So we spent a lot of time on that training, helping them run their business and be better business people. And, and yeah, and then it's, it's, it's all sorts of fun along the way.
Speaker 0 (25m 39s): Nice. So to circle back on this, just the changing landscape, the technology and, and data that's out there in real estate. I recently had a friend of mine. They're looking for a house in, in our market, which is very, very competitive. And there was a frustration, and this wasn't even an investment property, but there was a frustration about just the lack of transparency. Obviously there's a wrinkle with the fact that there's multiple bids on many properties, commercial real estate, and residential alike wanted to get your thoughts on how you see real estate changing in terms of technology companies entering the space and how data will play an impact.
And just the model in general. Do you think it's it's broken or do you think it's just something that we need to improve on?
Speaker 1 (26m 27s): Yeah, I, yeah. That's, that's like, that's what everyone wants in the tech world data information, right? That's, that's, that's the big play with all these companies. I think long-term and scandal. I don't know. I, I w w one thing I like about being partnered with Keller, it's an American based company. I kind of feel like we got a little bit a heads up on things coming, because us is always a little bit ahead of us. Ken has been very like, like that was the real estate industry for so many years. Right. We have the information you don't, you need to pay us to get the information.
And that was it now disruption in tech world. Right. They're a little more, a little more freedom of information, a little bit more, not fully, but some more out there, like how Sigma you mentioned right there showing data around how sales and things like that, that, that is open to Republic. They're also a brokerage. So like, they're like, I always look at like, what is that? What is the place for these tech companies? You know, sometimes. Yeah. Yeah. Whereas, I mean, and you can look at like a lot of the U S ones that are there.
For some reason, I'm surprised haven't really grown into like a Zillow would be a very easy example in the U S that's a massive company. Not, not even really doing anything in Canada, or very minimal, if anything now, but they're also a brokerage. Like a lot of them are brokerage oriented. And I think ultimately there's a billions of dollars in commissions that are out there. And, and in real estate world of sales that are happening. And surprisingly, it took so long for the tech world to try and get a piece of that.
But now everyone's trying to get a piece of that, right. So how do we, how do we, how do they, how do they get a piece of that it's it's information and sharing information and being able to control the, the lead of the buyer or seller, or at least there are less, less, or whatever, whatever someone's trying to do in real estate, whoever controls the lead controls, you know, they have the power. And so they're all, you know, you control the lead, you can get all the information through the process. There's so many different plays out there, but ultimately it's about information controlling the leads.
And ultimately they're trying to get a piece of the commissions, which are so there's, there's so much money there. I don't blame them for trying to get a piece of it. So I think the little bit of a battle, right, between the, the tech world and the traditional brokerage shops, kind of wanting to maintain their value, but, you know, the tech world's really taken over. So I think, you know, a lot of realtors are kind of battling with that now, and are they going to be like relationship based or tech based or some version of in-between and, and you have to utilize what's out there, like you guys, a realtor, and if you're going to run your business, you've got to utilize the text as much as you can with the caveat that like, you know, just kind of thinking about where your information is going, where, where is the data that you're, you know, you're there almost a lot of times as a realtor, you're kind of giving information to these tech businesses, but they're actually not trying to help you.
They're trying to take over your business. You're like dying a slow, slow death almost by giving them this information. No, it's really interesting. There's a lot of like things that play with that. And obviously me being a brokerage owner, I'm, I'm trying to battle in a way for the broker, for the, for the realtors to maintain their business, but also got to keep in mind that inevitable, that tech is going to be taking over a lot more as we go. And, and so trying to kind of utilize what's there and what innovations are happening.
But also, I, you know, real estate is very still relationship based. I think there's, there's not a, maybe a one day, there'll be a time where like, there's no in-person version of real estate, but I think for the foreseeable future, there's still, you know, a lot of people trust and want to deal with the person eventually and not just be totally automated. Like, you know, like you're buying your, your, your, your, your dinner or something on Uber eats like you, you can pretty much be okay with just not having a person involved in that.
There is a person there, but you don't really need to communicate with them. I don't think, I don't think that's necessarily going to be buying or selling or leasing houses or space. I don't think that's quite there yet if ever might be.
Speaker 0 (30m 48s): I don't think we're quite there yet. I think it's generally at the end of the day, I think it's the complexity of the deal, whether it's commercial real estate or residential real estate, I think there is nuances in these deals. And oftentimes it's those things that, you know, people think that it's, it's not that complex to put together an offer or to have certain items in the offer, but, you know, state by state province, by province, there is different nuances. There's different representations that are made. There's the legal aspect of this stuff.
So ultimately, you know, at the end of the day, I think that you see a lot of these companies, I think don't quote me. I think one was called 42 floors, or you see other companies. I think that was based out of New York, where even in commercial leasing, you know, they put in the parameters, you put in the size office, the type of plan you want. And then it spits out, you know, you put your email in, but then eventually they connect you with a broker, right? So even though the technology's come so far, you still need a sales professional or broker, at least right now.
And at the end of the day, for most people, if it's not an investment, it is the largest transaction you've probably ever done in your life.
Speaker 1 (31m 60s): That's the thing, it's the biggest asset that people have in life. In residential side. It's generally the biggest size of that. I know commercial might be a bit different maybe for businesses and whatnot, but yeah, they're our biggest asset. I mean, Canada, look at how the wealth is made in light and life it's real estate, right? Like that's, people's life, life. That's how Canadians make money in life. They had to have their jobs, but their wealth is built through owning their own home. And, you know, that's, that's the American dream owning your own home, but it's Canadian.
We actually have made so much money in the last 30 year run of a, of a real estate where it hasn't really gone backwards at all. So that's where all our wealth is made. It's a huge asset. So having, I think, yeah, people still want that personal feel with it. I think it's, it's gone away a little bit maybe with the way that tech has, it has disrupted, but it's not going away fully. It's just changed the way things are running and, you know, yeah. The millennials and younger are so technology savvy that they, you know, they're finding information, it's changed a bit in the residential world has changed a bit to an extent where you're, when we're meeting with clients, buyers or sellers, they have a lot of information already.
They already know like roughly what their houses were like. They used to know people that had no idea what their houses were worth at times. Now they know they know what the neighbors sold for. They know, like they know all the, they know a lot more information. So it's just changed the way that we add value to people and, and what the business model looks like. We have to come up with more creative ways that value, ultimately just having the information of what a house is sold for or what it could sell for is not enough. We have to, we have to, we have to be better ultimately at delivering the service and value.
Speaker 0 (33m 47s): Yeah. That makes a lot of sense on the commercial side. You know, when we deal with institutional landlords, whether they're pension funds, real estate investment trusts, or the like people almost don't believe that landlords generally speaking, they want to deal with a broker on the other end because they feel that at least from my experience, not dealing with a representative, they're basically walking through and teaching really the, potentially the entrepreneur, the owner in a leasing, a transaction, basically how to walk through an APS or walk through a letter of intent or offer.
I'm curious, how do you deal with that unrepped situation in the residential space?
Speaker 1 (34m 31s): Yeah. Interesting. Cause there's, you know, in the, in the greater Toronto area, for example, right, there's 60, 60, 60 5,000 realtors. Now, I believe it's the biggest real estate board in the world actually are in north America. So many realtors, cause obviously they're attracted to the potential financial benefits they get from the industry. And so there's so many that, you know, represented or not even, even even represented, it's often we're training the other side on how to do a deal because they do one deal a year or, or they do no deals a year.
And so even, even when they're represented at that time, it's a lot of work for like, if you're experienced and they're not often, you know, you're doing some of their work for them or helping them through the process in some way. And, and most people are represented, I would say here and there, know we do, we do deal with people that aren't, but fewer and farther between, I think it's a lot of education and training. It's not the most fun thing I would definitely, you know, we definitely prefer dealing with that.
We've dealt with before that we'd like, and trust them just like anything, right? Like anyone hiring a realtor in general is going to deal with someone they know like, and trust we like dealing with on the other side of the deal, people we know like, and trust just makes for a smoother process in general. It's funny. It's funny. There's a, there's, there's more, you know what, this seems like. There's more, I think unrepresented, if you were to ask the general public, probably I don't think it's true. I think there's actually maybe more representative than ever.
Speaker 0 (36m 10s): Yeah. And I think there there's a statistic, don't quote me on this, but it's something like of the board members and I'm sure this is similar for other boards, like 25%. You didn't sell one thing in any given year. So a lot of them just have the license and then something like, you know, you'd go up to 50%, didn't sell more than, than 10 assets or 10 homes in residential. But yeah, it's pretty, it's pretty amazing how many we do have in our board.
Speaker 1 (36m 36s): I just, I just probably have 20,000 of the 60,000 that I mentioned there. It was 20,000 sold zeros houses. So a third, a third cell, literally zero. Yeah.
Speaker 0 (36m 49s): And I think one thing I do think has gotten better, at least in our market that they have increased the barriers with how long it takes to get a license. You know, it's, it's just, it's not something you can just in one weekend. Okay, there you go. Your license. And I think that's important to kind of limit how many, how many people that we have just jumping into it and not necessarily, you know, committing to, or wanting to really be in there. Long-term
Speaker 1 (37m 13s): I know you asked some states where you can just get it the next week, you know, just like, you know, it's like a couple hundred bucks or maybe, maybe a couple of grand at most, and I'll just have my license in a week and I'll, I'll, I'll, I'll just, I'll just represent myself because then I'm going to go sell my house this month. I'll just, I'll just grab the license and go somewhat sell it. Yeah. It takes one a year. Maybe, maybe less, probably last six months to a year to get your license here and maybe five grand. It's still, it's still relatively low barrier of entry, considering that we're representing people on their largest, if not one of their largest assets, it would be awesome.
I guess once, once we're in it, you know, it'd be awesome if others could get in as easily, but at the same, to the same extent, you know, I got in real easily and maybe I would never have gotten my license. I got into this. Or maybe, maybe either of us were never invented this. If it was more difficult. I don't really know part of the reason that I got into it because it was kind of easy. I think they say like 80% are out of the business in two years, you know? So it's, it's a very high interest rate, very high partially because it's so easy to get in.
And because people want to collect quick, quick fat paychecks, and it's not the reality once you can get in and like any business, right? Anyone starting a business, it's going to be, I want to be a business owner. It looks so fun and exciting. It's grueling for the first couple years. Typically often make no money for a couple of years. And so it's, it's a lot harder than it looks that's for sure. A lot harder than it looks.
Speaker 0 (38m 45s): Yeah. A hundred percent. I always say it's a, it's a five to seven year business. I mean, you really have to commit, I don't know if you know, probably a little different for residential, but I always say in commercial, you got to put in five to seven years to really get there. And it's funny in our industry, a lot of times people are like, oh, people in commercial real estate, they, you know, if you're in commercial real estate or you must make a lot of money and it's that kind of survivorship bias. It's like, no, no, no, no. Like the, the guys have just hung around the longest. A lot of people have left earlier, moved to, you know, in our world on the landlord side or just switched careers.
But yeah, I think five to seven years, Sandy, generally speaking, I'd love to get your thoughts on the market, the real estate market right now. Let's maybe talk locally and then broaden it out to, to a larger scale.
Speaker 1 (39m 32s): I mean like, yeah, it's I, you know, and this is all over north America, if not the world where people have gone away from a little bit away from being like urban life and a little bit more into the rural life. And then there's a bit of an attraction to that. I think millennials younger, especially, right. We're a little more attracted to, we're not as much attracted to money as, as traditionally, like our other generations have been, we're more like attracted to lifestyle and what that looks like. And a lot of people that's not living in a 500 square feet, a condo with a concrete jungle.
It's more like let's go have some land or some space. And so that's been honestly a little more available or a little more of a real life reality with, with COVID right. You can actually work more remotely. So a lot more of those opportunities where you don't need to live in downtown Toronto to, to work. So we've seen that all around outskirts of Hamilton and Toronto is just people looking for more land, more space, more, more value too. And then the property values have gone up based on that line demand.
Pretty simple there, but Canada everywhere across Canada basically is just such a shortage of supply, super high demand. We're in an election month here. So we'll see if that changes anything. It probably won't, but there's, there's, there's extreme demand because we in Canada, we have such high immigration, right? Good quality immigrants. So it's their homeowners within a short time and, or want to be homeowners. So the demand is through the roof and we can't build homes fast enough.
And so supply is very, very short on supply. I don't see that changing anytime soon. And so, you know, based, based on those two simple concepts, when money is cheap to tack on, you know, to throw an extra, extra spur on the fire, their money is dirt cheap. So it's, you know, the better, the best time to buy a house a hundred years ago. The next last time today, you got to buy as many as you can. I'm throwing on my investor hat on. I always tell people this just buy houses. You got to take action.
You got to buy houses, buy as many as you can. And then you're never, you cannot go wrong. If you have a long time, you might next year. Sure. The market could drop slightly. I don't think it's going to collapse by any means. It could drop slightly if, if money gets more expensive than, yeah, it could maybe just taper off a bit, but don't see anything drastic happening. And yeah, like if you, if you don't own a home right now, or you don't own multiple homes, you should, you should be definitely getting into the market.
And the Canadian market is just so robust and there's incredible market, probably the best in the world. So it's, yeah, it's silly not to be involved in it as much as it can be buy as many properties as you can. You're you're going to, we don't, I think we're also, you know, one other thing, look at Europe anywhere that's been around, like we're a really young country. So we have a few generations worth of like actual, not even a few, like one or two generations of actual wealth in this country.
Whereas like Europe has, you know, hundreds and hundreds of years worth of wealth filled up. So we're very young in that sense. So, and just look at, I think you can't, you're not really buying houses in, in, in really developed European countries. They've been around forever. You're inheriting properties. You're not going in and buying that many properties yourself. So we're going to be like that too. Eventually we're running out of space to an extent. I know we have a lot of space in Canada, but we're running out of where we can build in and actually people want to live. So if not for yourself, you have to buy houses here.
Kids are not going to be able to afford this stuff, but you can argue about that all day, but affordability is not going to, I don't think it's going to change anytime soon.
Speaker 0 (43m 22s): Yeah, I agree. That's good though. Best time to buy as a hundred years ago next to time is now. And, and you know what, I think it's the, it's still the case today. I mean, ultimately I think specifically with Toronto and Canada, can't remember the stat. Exactly, but it's something like 90% of the Canadian population lives within a hundred miles from the U S border. So although we are a huge country, our populations are pretty densely packed. And I remember about five years ago, you know, there was this thing where they were talking about how overvalued Canadian real estate was, how bubbly it was.
And I really think the, the counterpoints now that are, I think are a little bit clearer, obviously with COVID a little, you know, has changed somewhat, but I think we'll get back. There is immigration and in, in professionals, moving into our cities and generally speaking, like our cities are quite populous and other parts of our country, they are just not areas that majority of people live. I mean, Ontario itself, you go seven, eight hours north in Ontario. There's certain areas that you'd probably still need to take a ho a helicopter to.
So yeah. I couldn't agree more with you that
Speaker 1 (44m 33s): Whether it's not very exciting. Yeah.
Speaker 0 (44m 35s): The weather doesn't get much better. All right, Sandy, we have four questions, little rapid fire we do with every guests at the end of the show. So if you're ready to go, I'll shoot
Speaker 1 (44m 46s): Them at. Yeah, let's do it. All
Speaker 0 (44m 48s): Right. Perfect. All right. First one. What is your view and advice regarding mentorship for people trying to break into the industry or that are already in the industry and want to get to the next level?
Speaker 1 (45m 1s): I joined it. I joined the team when I got into real estate is the best thing I ever did. You got 10 plus years of knowledge in a couple of years, I was with that team all, all based on mentorship and guidance. And, you know, I think the biggest thing is we hang around with is really important in life. And, and, you know, being in an environment that's going to help you grow is, is it's really underrated. It's like it couldn't be more important. And, and, and you know, what comes with that is mentorship and support and guidance and training, et cetera.
And, and you grow into the people you hang around. So, you know, you should audit that circle regularly.
Speaker 0 (45m 39s): What's something that, you know, now that you wish you knew when you first started in real estate
Speaker 1 (45m 48s): In this business, I would say like 50 plus percent of it is just getting the business in the first place. A lot of people forget that, or don't realize that and getting into it. And I didn't either, you know, I didn't realize that that is like, that's like 50 plus percent of it is just getting the business in the first place. So becoming a lead generating machine in some way, shape or form is, is, is really what you need. Like that's the whole business until you, because you don't even have until you get that. So it's a big part of it. It's something worth educating yourself on and learning a lot about,
Speaker 0 (46m 19s): Yeah. Number another good answer. The lead is our business. You feed what? The lead. Okay. So what are some podcasts books or resources that you're listening to right now that listeners should hear about? Obviously we'll talk about your podcasts, but yeah. Feel free to plug whatever you'd like here.
Speaker 1 (46m 38s): Yeah. I'm interested. I brought a change. My life. I've mentioned that one. Yeah. Breakthrough real estate investing podcast. You can go listen to, we've got a hundreds of episodes. Now, the, the book I like recently that I found, maybe I'll look back on it a few years and say, it's changed. My life is not how I really liked that book. Who not how, which is, was the author. And I'm losing my, my thought on that. Who not, how D not be in Jackson. It's the
Speaker 0 (47m 7s): Blue in the yellow book, right.
Speaker 1 (47m 11s): It's doing yellow, Dan Sullivan, Dan Sullivan, Dan Sullivan. And it adds a coauthor. I think he's with someone else, but that changed my life in terms of it might've changed my life. It changed my, a lot of thoughts that I have around, around leverage. And, and also just like, you know, freedom, I guess, different aspects of life and what we're doing this for it. So it's a, it's a great book around leverage for sure.
Speaker 0 (47m 35s): Alrighty. Last one here. First car, make and model.
Speaker 1 (47m 40s): Oh, I had Pontiac grandam had these two, like hood scoops on the front or I'm a, I'm a Denver Broncos fan orange is my favorite color. It was, it was, it was a nice, like, not, not, not neon, but a nice flashy orange.
Speaker 0 (47m 59s): And that's awesome. I know exactly the one you're talking about. I really liked that guard back in the day, my cousin had it, it was laced like wide bodied, pretty beef, your car, then the Sunfire is, are the smaller cars you saw around that time. So that was probably around the Elway and Tarell Davis days.
Speaker 1 (48m 17s): DV Joel Davis was my, it wasn't my man that got me on the Broncos train. They're in the mid nineties. Yeah, that was probably, it shouldn't be a lot of, most people would say that. I say all the way I, it was trial David's for me.
Speaker 0 (48m 31s): Unreal. Well, thanks so much, Sandy, in terms of how people can reach out to you getting contact, whether they wanted more information on the broker gen or on the investing side, or even here locally, if they're looking for properties, selling or buying a site from a quick Google search, what's the best way for people to reach out to you,
Speaker 1 (48m 52s): Instagram and Facebook, easy to find me, just look up my name and or email me, San Diego Mackay, realtor.com is pretty easy. And yeah, definitely. I love to connecting with anyone in the real estate world in, in, in any way, really, especially if you're looking to be in the realtor side, you know, we're always looking to connect with people around that. And I can certainly point people in the right direction if they're looking to build a career in real estate, do a lot of investment stuff. But if you really wanted to actually full-time run a career of any kind in real estate, I'd love to chat with people.
Speaker 0 (49m 25s): Perfect. And just before we wrap up, I want to tell listeners, I think we're okay. We're 70 something episodes. And right now in the reason working capital exists in part is because of the conversations Sandy, you and I had a, what is it now a year and a half ago? And you were just very helpful and, and talking about the details and the setup and everything. So really appreciate that.
Speaker 1 (49m 49s): Yeah. You know, it's, I think we were kind of the first Canadian based podcast to be honest, the invested investor in podcasts, like that actually stayed on for more than like a couple episodes. So that was a, we've been doing that show for seven, almost eight years almost, which is crazy to think. But yeah,
Speaker 0 (50m 10s): When you first started, I was like, I don't even remember listening to podcasts back then. Yeah.
Speaker 1 (50m 17s): That was, that was, that was why we were really early adopters, I guess, in Canadian space and yeah, I guess we're like, I don't really call him the godfathers of that space or something. It's funny to go back if someone's listening and wants to go back on some really, oh gee like investor talk. It's pretty funny to go listen to our early episodes. They're like sold. And so like comical now compared to like the products that, that you and others put out now, it's like we were, we were not very good, but there was some good, good value of getting information.
I think
Speaker 0 (50m 51s): My guest today has been Sandy vacay. Cindy, thanks for being part of working capital.
Speaker 1 (50m 56s): This is fun.
Speaker 0 (51m 6s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.*
Matthew Sullivan is the CEO and Founder of QuantmRE, a company that supports homeowners by helping them unlock some of the equity in their home without taking on more debt. A seasoned entrepreneur, Matthew has a proven track record in real estate innovation through his experiences as Co-Founder of the $50M Secured Real Estate Income Strategies Fund, and as Founder and a President of Crowdventure.com, a real estate crowdfunding company.
In this episode we talked about:
- Matt’s Bio & Crowdfunding Background
- What home equity contracts are and how they work
- How to qualify for home equity contracts
- Releasing equity in your home without taking on more debt
- Getting money now by selling some of the future value in your home
- How to tap into a formerly untapped asset class
- Leveraging equity in your home to get cash with no extra debt
- Mentorship, Resources and Lessons Learned
Useful links:
https://www.linkedin.com/in/mattsullivanco/
https://www.quantmre.com
Transcriptions:
Speaker 0 (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time, or at least in gentlemen, my name's Jessica galley, and you're listening to working capital the real estate podcasts, another special guest today. But before we get there, just wanted to let listeners know we have a website up for we've had our up for a while, but working capital podcast.com.
If you have any questions regarding the show, anything real estate related or anything related to our guests, feel free to reach out there. There's a just asked Jesse section. Now without further ado, I have Matthew Sullivan on the show. Matthew is the CEO and founder of quantum R E a company that solves a real problem for homeowners by helping them access a portion of their home equity without taking on more debt, Matt, how's it going,
Speaker 1 (1m 4s): Jesse? Thanks for having me on.
Speaker 0 (1m 7s): So Matt excited to have you on the show. It's a, you know, very, very unique kind of discussion. We're going to have specific to, you know, the product that you're offering. So maybe before we start with that, what we normally do with guests is have a little bit of a background, you know, for listeners, how you got into real estate judging by the accent. You didn't grow up in salt lake city.
Speaker 1 (1m 29s): Yeah, no, that's right. No, it was a Birmingham, Alabama, actually, there we go. Now I'm originally from the UK, moved over here about eight years, eight years ago. And I've been an entrepreneur all of my life, which literally translated means I have been unable to get a job for most of my life. So congenitally unemployable from the get go started out life as a stockbroker in the late eighties, which was a tremendous fun breaking countries like Hong Kong, Singapore, Malaysia, Indonesia, Philippines, Thailand, you know, when they were all the assay and tigers then moved into stint with a few buddies at a small corporate finance house.
And then really just decided that I really wasn't very good working for anybody else or other that was decided for me. So I decided to become an entrepreneur, got involved in telecoms and then the internet came along and really just, there was this fantastic sort of journey dealing with all things technical and platform based. And finance-based spend a few years working with sir Richard Branson with the Virgin group. And we worked on projects like V2 music and Virgin clothing and Virgin cosmetics.
But w one of the things I never did, but always wanted to do was get involved with real estate. So when I moved over here, about eight years ago, I set up a real estate crowdfunding company. So it was one of the very first crowdfunding companies to come out of the changes in regulation and legislation that was, that was created by the jobs act or the jumpstart, our business startups act that was signed into action by Barack Obama.
And what that act did was it enabled you to publicly solicit for funds for what are essentially private placements say beforehand, you couldn't publicly solicit, or you couldn't advertise private placements, but the jobs act allowed you to publicly advertise your deal or your, your PPM. And that really created, or was the birth of a number of different crowdfunding platforms.
And so that's, that was my baptism by fire into real estate, but it was sort of leveraging everything that I'd learned beforehand about, you know, platforms and technology and regulations and, you know, securities laws. So, you know, it was a, it wasn't a path that was totally untrodden
Speaker 0 (4m 9s): Right on. And by that solicitation, I assume you're referring to, what's known in the states is a regulation. D I think it's correct me if I'm wrong. 5 0 6 B and 5 0 6 C. One of them is only to accredited investors. And then the other one is open advertising. Is that right?
Speaker 1 (4m 25s): If you say five or six, B is actually available to accredited and non-accredited investors, but you have to have a prior significant prior relationship with those people say, you can't generally solicit, so you cannot advertise it five or six C only available to accredited investors. And you have to prove that they're accredited through independent third parties. So you can't just self-certify that you are an accredited investor under five or 60, but you are allowed to advertise your deal or your PPM or your, your offering to, you know, to a wider market.
Speaker 0 (5m 7s): So you move from the space that your, you were currently in prior to real estate, you go into kind of crowd funding, this idea that I guess basically the democratization of private placements, to a certain extent we saw in our industry, a bunch of these crowdfunding companies start up, where do you go from there in, in your career?
Speaker 1 (5m 28s): Oh, I gave him one of the challenges really of trying to start something in a, in a new environment is that it's difficult to get that initial traction. So one of the gaps that I had was, you know, local or US-based real estate knowledge to say it was never my intention really, to do anything other than partner with people in the U S who have real, you know, you're, you know, real estate background. So as very fortunate, meet a couple of guys that I'm still working very closely with today, who are, you know, very successful and profit real estate developers and investors.
So there are, they became our partners. But one of the things that I also came across in the early years about five or six years ago, was this concept, or rather a construct, an agreement that allowed owner occupied properties allowed the owner to access some of their equity without having to borrow money, say it was, it was something that wouldn't have worked a few years ago because the agreement itself was structured in a way that meant that it was either not investible, or it would have created all sorts of potential issues for the homeowner, but I sort of kept a close watch on it, and it was fascinated by it and intrigued by it saw that industry begins to develop in the contracts, begin to develop and decided that this is something that really could be an incredibly large untapped industry.
So it felt like I was at the beginning of mortgage securitization. And so I really wanted to get involved. We set up quantum Ari with the mission to enable homeowners, to unlock their home equity without taking on more debt. And at the same time, creating a marketplace where the paper that is created when you allow a homeowner to access their home equity, where that could be traded and creating liquidity for home equity effectively.
So, so, you know, this, this whole idea of making home equity accessible investible and tradable was, you know, fascinating, intriguing, and it's something that still, you know, is hugely exciting, you know, even today for four years on, yeah.
Speaker 0 (8m 1s): When you say the CMBS feel like you're on the ground level, just reminds me of the big short kind of that scene when they, when they first started realizing they're tradable securities that they could package in terms of, you know, before we get into the nuts and bolts of it. Cause it, it really is one of those things where if you haven't heard of this type of, I don't know if you'd call it an asset of structure before, it's almost too good to be true. People are thinking, okay, how do, how is it possible to unlock equity in my home without taking debt? But before we get into that, can you just talk a little bit about this concept of house rich and cash poor?
Speaker 1 (8m 36s): Well, it's a real problem. And even though it sounds relatively benign for people that have the bulk of their wealth tied up in their home, even though on paper, they may be worth hundreds of thousands of dollars. The only way that they can access that is to go back to the bank and borrow money. Now, particularly with the current economic circumstances that have been, you know, triggered by COVID. And in particular, we're seeing today more and more people that are in the strange position where on paper, you know, they're, they're worth a lot of money, but on a day-to-day basis, they are struggling to find the cash to meet their everyday expenses, expenses, you know, like grocery bills, school fees, that sort of thing.
And so the term house rich cash poor really is sort describes this position where, and there are tens of millions of Americans that are in this position where your, the bulk of your wealth is in a single, concentrated nonfinancial, non cash flowing asset, which is effectively the equity in your home. And the only way, if you don't want to borrow money, the only way, you know, previous to, to, to what we offer is to sell your home. So you're, it's a bit, you know, it's a two-edged sword, it's this, the wealth becomes this, this, you know, the, the sort of necessary evil, why would you want to sell your home?
So that is what we mean by that is it's something that is, and we're seeing this even more with the rampant house price appreciation over the last year or so, you know, that gap is widening, you know, even more,
Speaker 0 (10m 16s): Yeah, fair enough. So in terms of the actual mechanics of it, I believe home equity contracts is, is the, I guess you call it a product. I would, I would say,
Speaker 1 (10m 26s): Yeah, I, you know, in the same way, it's a financial product. Exactly.
Speaker 0 (10m 29s): So this, you know, financial instrument, this product basically run us through it. What is it exactly? And how would it work for, you know, somebody that would be interested that has, you know, maybe a 50, 60, 70% plus equity in, in terms of their, their equity to, to their asset value.
Speaker 1 (10m 50s): Sure. Well, let's, let's start really by, and again, I'm very conscious of what you said earlier, which is that this is too good to be true because that's, that's something that we come across frequently and we can really understand why somebody thinks that. But if we start by saying what, it's not in a home equity agreement or home equity contract, it's an agreement, it's not a loan, so we are not lenders. So it's not a home equity line of credit. It's not a mortgage, it's not any form of debt.
And the easiest way of describing it is if you look in the commercial world, the capital stack of any sort of commercial development comprises a number of different layers. So you've got your senior debt, junior debt, there's mezzanine financing, that's preferred equity, the shared appreciation mortgages, which have a combination of debt and equity, pure equity. So there are different types of funding layers within the typical cake that you get in a, in a, in a commercial real estate transaction, if look at residential real estate, the capital stack there it's, it's primarily debt.
So a few different flavors of debt, you know, there might be a home equity line of credit. There might be a reverse mortgage. There might be a, you know, standard sort of mortgage. There might be a variable rate mortgage, but it's kind of variations of the same thing. So the equity portion of the home, which in, in your example, if you've got 50, 60, 70% equity, that's the majority of the capital stack doesn't have any mechanisms attached to it, to enable other people to invest in that.
So currently from an investor's perspective, you've got a $23 trillion asset class, and that's all of the equity in, in residential homes in the U S that you can't invest in because you can buy some of the debt. Sure. You can go and buy a tape of, of, you know, first position or second position performing a non-performing notes, but how'd you get your hands on the equity in homes that are not for sale. So it's really interesting from an investors perspective, but from the homeowner's perspective, what instrument, the option agreement in its simplest form, it's a transfer of ownership.
So we do not entendres owners. The agreement states that the owner commits to share in some of the parent and future value of home in exchange for cash lump sum today. So the trade is we're investors. We're not lenders as we're not lenders, there's no interest. If there's no interest, there's no monthly payments. So that sort of that's, that's how we don't have that, that issue there, but we do get paid and we do make money on the transaction.
And the way we do that is by sharing in the appreciation when you get to sell your home. And the way we do that, as I said is through this agreement, that really is very similar to an option agreement. So it sits on the side of the ownership structure of the home. It's protected by a lien on title. So that means that when the home is sold and when we go through the SBA process, the lien holders such as us, we get paid before the homeowner gets the balance. But what that enables us to do in exchange for that initial investment is get our investment back together with a return on that investment by way of a share of the appreciation.
Speaker 0 (14m 24s): Yeah, that makes sense. The way, when I first heard you, it's funny, we, we connected, you know, one way, but I also, I remember I was like, these things sound so familiar. I've heard a podcast on this before, and we'll be holed. It was a, it was a podcast you were on. And the way it was easy for me to think about, it was kind of this idea of having a, you know, a player in the juniors that you're basically kind of making an agreement with them that, you know, provided you go pro we're going to take a little bit of a piece of that, your future, you know, future earnings at the point where there's some sort of capital event.
So if I understand it correctly, correctly, you know, say just for, instead of percentages is figures say you have $500,000 of equity. Number one, I assume you, you know, you can take a piece of it. You can T you can have this product for all of the, all of it, and whatever way you go, you, you get this product. And basically you're providing capital to me. There's no interest payment, it's not a debt instrument. So I don't have anything going out. However, if you know, use Toronto as a good example of, we've had a bit of a hockey stick graph in terms of appreciation in our market.
So what you would see in five years from now, if I go to sell this house, it's almost as though there was a lien on the house that you're in, you're in first position that you have, I assume in your agreements, maybe you could talk a little bit more about this. You'll have a, you know, a certain percentage return that that is basically paid out to you, kind of like a waterfall. And then anything above that would be, you know, equity appreciation that I've made on the home. Do I have that right?
Speaker 1 (15m 55s): Yeah. It's we are partners and we share in the appreciation. And what we do when we go into that agreement is we are very specific about what that percentage is. So the agreement is clear and we say, you know, this is the investment, it's an absolute sum. So it's a, it's a number. This is the current value of your home. And we agree on that by using a third party appraisal. So these are people that we don't instruct ourselves.
They're instructed through a third party intermediary. So it's, you know, we try and be as arms length as possible. So we've got the starting point. And we then say that when you sell your home, a fixed percentage of the value of the home goes to us. So effectively, what you're doing is you're selling some of the current value of your home to us or the, or the, the rights to that at a discount. So it's the whole present value, future value calculation.
In other words, money today is worth more the money in the future. So we're going to get our money in the future, but if we're going to do that, then we want some sort of discount to factor in all the various risks that could happen along the way. And that's really what it is, and it's in its simplest form.
Speaker 0 (17m 18s): So if you were to explain it a little bit more to people in my industry on the commercial real estate side, would you, would you start the conversation by saying, think about this as preferred equity? Yeah.
Speaker 1 (17m 29s): It's exactly what it is. It's, it's a preferred equity position where our equity, you know, is paid before your equity. So the definition of preferred equity, we get out our equity first, but it's not debt. So we're always in a sort of junior position, or we're always behind the primary or the secondary lenders. So the debt portion of your home will always take precedence. If you don't have any debt, then obviously we'll be in first position.
But in most cases, we're in, you know, second position we try and avoid being in third or lower.
Speaker 0 (18m 8s): So your subordinate to the debt, if any, but you are senior to the current equity or, or the, you know, which is likely the homeowners.
Speaker 1 (18m 17s): Exactly. But there's also a much more of a partnership element with a debt product. Your capital is always do no matter what the value of the underlying security is. So, you know, the lender will always hope that the security is worth more than the capital. Some should. They have to call the loan in our agreements. The amount that you repay is directly proportionate to the value of the home when you sell it, or when you decide to refinance, if you want to buy us back.
So there is a potential for our investors to get a lower return, or, or if house prices do significantly fall and you sell, we may be in a position where we get back less than we invested so that the other big differences, the repayment is directly correlated with the value of your home when you sell it.
Speaker 0 (19m 14s): So, one of the things that when I started looking into these, what I was curious about is this aspect of, you know, regulatory environment changes regardless, you know, depending on state country, one of the things for us, we found that when we would do say a cash out refinance or a home-ec, let's, let's use the home equity line of credit, because it's a little bit easier. So say you have an ability to take a 300,000 of a home equity line of credit. Now you don't have to tap into it yet, right?
That's the whole point of it is that it's going to be there. Now, what we have found is that from a credit perspective, it will affect your credit because you have the ability, basically the bank knows that you have the ability to access it. So, so I've seen a bit of a shift that people are careful with how much that they take out. I remember in the past, it used to be, get as much as you can have it, sit there, but now it's a burden to a certain extent, from a credit perspective, how does this play into, you know, how banks look at you is if somebody is, you know, getting approved for another mortgage for a different property, how does this show up?
How does the home equity contract, if it does it all?
Speaker 1 (20m 23s): Well, again, that's the thing. It doesn't because it's not debt. So because it's not debt, there's couple of other advantages, one it's effectively your own capital that we have bought from you at a discount. So it's, it's the sale of something that you already own. So there is no debt element to it. So it just does not appear on your credit report as debt, even though we do check your credit report, before we go into the agreements, to make sure that your someone that we'd like to invest alongside when the transaction is completed, it's not a debt transaction.
So your credit score is not affected. It doesn't appear as an additional line item. Now, the benefits of that is that you can use that money to pay off other creditors that are part of your credit score. So if you have existing credit card debt, or if there is some lane that you want to refinance, you can do that because you're not robbing Peter to pay Paul as it were. Now, you're not over leveraging, you're actually reducing your leverage. And again, these are all concepts that psychologically one sort of struggles with because you're always, you know, tuned to think of this as debt, but you're not, you're actually paying off your credit card or your other debt with wealth that you have been able to access from your home equity.
Hmm.
Speaker 0 (21m 50s): Yeah. That makes sense. In, in terms of the, like you mentioned before, you know, call up or basically it's, it's an option. What I'm curious about, you mentioned if, if there was a situation where a market changes now, obviously it's not like shorting a stock. There is an unlimited losses. We don't go to negative numbers in real estate. However, if, if there was a 20 or 30% downturn in a given market, and for whatever reason the owner had to sell, how would that, how would that play out in, in terms of what the payout would be for, for that preferred equity position?
Okay.
Speaker 1 (22m 25s): Th there's a, there's a calculation for the amount for the upside, and there's also a calculation that's agreed for the downside. So in other words, whatever, the percentage that we've agreed at the, at the beginning, that, that standard, the two, and normally with our agreements, the two are the same. There are other companies in our space and they have slight variations. So they'll pay a certain amount or you will pay a certain amount on the upside and the investor will pay a slightly different number on the downside. But those figures are all agreed on the basis that if the property does fall below a certain threshold, the investor is going to get back less than they invested.
You know, there is no recourse to the homeowner. There is no ability for us to set a minimum return because then that starts falling into the purview of being alone. So, you know, you've either gotta be fish or foul in the solar business. So, you know, if it is a risk-based agreement, then we have to take risk.
Speaker 0 (23m 28s): So I, I imagine somewhat similar to syndications or other private placements. It's not a guaranteed return. There's a bit of a preferred return.
Speaker 1 (23m 38s): It is exactly. But what you do is in the underwriting stage, you're careful with where you're investing. We're not investing in properties where we're not likely to see house price appreciation. And there are a number of states where you're not going to see the same level of appreciation. Then you're going to see in California or New York or Florida, for example. So we tend to operate in only a certain number of states. And in addition to that, we're careful about where we invest.
So there's certain minimum house prices and the certain maximum house prices and the ha the maximum house price is sort of counter-intuitive because you would've thought we would want to invest in a $20 million Hollywood mansion. But the problem is when the market starts getting a little uncertain, if you get three appraisals round one, we'll say it's worth 10 million. One was that it's worth 20 and another will say it's worth 30. So you can't price. Those types of houses say, w you know, we stay very much in a sweet spot where price transparency and price discovery is far easier.
So we try and reduce the opportunities for our investors to, to lose money. But again, there has to be risk. Otherwise it's not an investment, but, but, you know, we try and mitigate that risk by using intelligence and underwriting and information and forecasting to, to give us the best chance.
Speaker 0 (25m 2s): Yeah, it makes sense. But Matthew, you know, we always have three appraisals, the, the broker, the buyer and the bank. Yeah, exactly.
Speaker 1 (25m 8s): Yes, yes.
Speaker 0 (25m 9s): That's. So that was basically leading up to my next, my next question. It was more from, from the business standpoint, in terms of market selection, it seems like, you know, one of the challenges we always have as real estate investors is that we want areas that are appreciating from a price perspective where we can force appreciation, but also, you know, the double-edged sword, we don't want cap rates to be compressed. It seems like you're, you're in a position where you can at least focus a little bit more on what are fundamentally a good markets for price appreciation. How do you model that out?
What do you look for in those markets?
Speaker 1 (25m 43s): Well, first of all, the difference between this and other investments is the scalability, because we are investing in homes that are not for sale. So this investment has a number of benefits compared to ownership of real estate. So if we're looking to buy real estate in certain areas with that comes the burden of management, you know, debt servicing, perhaps, you know, tenants, servicing, finding tenants, repairs, et cetera. So, you know what we're doing, doesn't involve any of the burdens associated with home ownership.
So we have a much wider of pitch or a much wider field to look at because we are co-investing in properties that are not for sale. So that's a slightly different, we're a very different dynamic than actually thinking, where are we going to buy? So what we're looking at really is generally over time, we know that, you know, real estate will appreciate in any 10 year period, and it is most likely to outpace inflation the way that the agreement is structured, it builds in a form of structural leverage.
So what that means is even though your house may only appreciate by three or 4% a year, the agreement itself gives the investor a bigger return than the underlying house price appreciation. So we're not looking to get a one for one, the agreements are structured. So we get maybe a two or three X return on what the underlying house price appreciation is. So if your house goes up by 5% and you sell it, we're probably going to make about three times that once we've got our share of the equity back.
So there's we, so we have that non debt leverage that's built in. So you've got an option agreement that has a leveraged return, but we're not using debt. There's a bit of downside protection because we're buying into your property at a discount. So, so there is some protection for the investor. So that gives us the ability to actually look at quite a wide range of real estate, because we're not restricted to just look at property that's for sale. So we can actually go and pick some really prime estate real estate that is owner occupied and could be owner occupied for the next, you know, 20 or 30 years.
Speaker 0 (28m 10s): So if I understand that correctly, say you have a million dollar asset. It goes up in a given period by say, 6%, $60,000, but you have built in an equity position of a hundred thousand dollars or preferred equity. So now that six 60,000 is 60 per 60,000 with the initial investment of a hundred. And that's how that multiplier kind of plays out.
Speaker 1 (28m 32s): Yeah. I mean, the numbers are, if you have a million dollar home and we unlock, we access for you a hundred thousand dollars, that's 10% of the current value of the home. What we will then do is say, when you sell your home, you give us 16% of the value of your home at the time you sell it. So let's say you sold it for 1.1 million. We would get 16% of 1.1 million.
So we would get about 170,000. So our a hundred thousand dollars becomes $170,000. So that's a good return for us now, from your perspective, you know, over a period of years, the re you know, the, the actual returns compress. So it becomes close to the sort of costs that are the average home equity line of credit would be, but that's, that's in the, in the longer term, in the shorter term. However, if you sold your home, that would be quite expensive. So we build in a cap where the most that we can get as a return on our investment is kept each so that if your property does rocket up, and then, you know, the amount that we get is actually kept so that the balance goes to you.
So, but in any case, we are buying some of your current value at a discount, and that serves two purposes. One, it gives the investor some cushion in case the property goes down in value, but secondly, it gives the investor, this sort of structurally leveraged upside. And for you, the homeowner, it's great because you've got access to some of your capital. It's free and clear. So there's no monthly payments, there's no tax implications. And I'll talk about that in a second.
So you don't have to pay income or capital gains tax at the time that you get the capital and you can use that money for what, and if you're paying off credit cards at 30% a year, then you're, you're doing very well. Or if you're investing as a down payment in another property, because that's not debt, then you've suddenly got yourself another, another property in your portfolio.
Speaker 0 (30m 42s): Yeah, I would imagine also no land transfer tax, because like for the, on the investor side, because you're not, you're not purchasing exactly.
Speaker 1 (30m 50s): There's no, no change of ownership, but there's no, no triggers. So from a mortgage perspective, there's no, you know, early settlement due to, you know, sale or transfer. There's no partial transfers. It doesn't trigger property tax reevaluations. It doesn't trigger capital gains tax. Now, the interesting thing is there's obviously a cost of the money. So if we provide you with a hundred thousand dollar investment is going to cost, you let's say $150,000. If you settle a few years time, now that $50,000, which is the cost of the capital, you can use to offset against any capital gains tax liability you may have on that property.
So, in other words, if you were going to, if you had a $500,000 gain, you can reduce that gain by $50,000 now. Yeah.
Speaker 0 (31m 40s): I mean, that's, that's where the first, you know, first thing that comes to mind is too good, too. Good to be true. It's it's like a tales. I wouldn't heads you lose, but
Speaker 1 (31m 50s): Yeah, again, it's just think of it in terms of what, what is the preferred equity structure in a commercial deal? Yep. Same, same thing. So the owner of a commercial property gets to offset the cost of the, in the app to against the capital gains, because it's, it's, there's, there's no magic. All you're doing is you're just using financial structures that are used everyday in the commercial world. You're just using it in the, in residential world. Yeah. It used to it. And that's the thing, isn't it?
There's no difference.
Speaker 0 (32m 22s): Yeah. It, it, you know what I, it really is. And I'm sure this is, this is what made me, whether you'd use the word challenging, but this is the thing, the education piece, where people are so caught up in the idea, especially with residential, anytime I'm taking money out of this house, it has to be attached to some sort of debt structured that where, whereas in the capital gains example, again, even, even myself, I've been in commercial real estate industry industry, my whole career, and the way I think of it, even having to catch myself, oh, that's right. It's a cost of the transaction.
It'll reduce your liability.
Speaker 1 (32m 55s): Exactly. And that's the biggest challenge we have is the psychological attachment. People have to the equity in their homes. The biggest challenge we have, if all the, I'd say the biggest roadblock is for people who don't like the idea of giving away something that they haven't got, you know, so that they're trading the expectation of having future equity. That, and the interesting thing is people look at this in a very narrow focus.
So when you talk to them about the, the future value of their home, excuse me, they see that as absolute. Well, they don't take into account is w what could happen to them and their lives and their job, or, or, you know, healthcare bills, or that they're assuming that everything in five years or 10 years time will be exactly the same as it is today. And their equity will be there for them. So what, after, you know, a bit of conversation, then people begin to start unpacking that stuff and realize that, you know, if I do have a life change, or if my, I do lose my job, then I'm never going to be able to borrow money.
So that equity, you know, I might, I might have might as well have $20 million worth of equity because I can't ever get my hands on it.
Speaker 0 (34m 13s): Yeah, for sure. I mean, it's one of those things, I think as real estate investors, we're a little bit more open to the idea of the, of the fact that if you have a hundred percent of your house paid off, or a hundred percent of an asset income producing asset paid off, it would be looked at as a negative thing from a real estate investors point of view, see your return on equity is going lower.
Speaker 1 (34m 34s): Yeah, exactly. So trying to have that conversation, you can do it, but you have to pick your, your moment because what you end up doing is you're not just talking about your product. You're then embarking on this sort of financial education journey, where you're talking to people about the value of their home. People want to pay their mortgages off because they want to be debt free. But then you say, well, look, you realize that your house that was going up in real terms, 15 or 20% a year is now going up by 3% a year, because you've lost that three to one or four to one leverage.
So there is this such a thing as good debt, if you can't afford the payments and you're getting that leverage effect. Yeah. So sure there is education is that it does lead onto a whole other conversation, but you know, all of it's very positive because you know that there is no gotcha. There's no catch to what we do. The decision is this is what it's going to cost you. This is, this is how we make our return. This is what you get in exchange. You know, what do you think, you know, here, here is everything black and white.
And so you can make very informed decisions about this, which is, which is great. But as I said, it's not, it doesn't suit everybody.
Speaker 0 (35m 50s): Yeah, for sure. I could definitely see it from that psychological barrier, especially, you know, the, the American kind of idea of home ownership is, is sacrosanct. And you kind of toying with that or talking about that. If it's not done, like you said, if you don't pick your pick your place or your spot, I'm curious Matthew, the, the actual investor side of the coin. So when you're, when you're looking for investors to invest in these products, what does that side of the equation look like in terms of how you raise capital or how you source investors and Instructure that side of the, the coin
Speaker 1 (36m 23s): Biggest challenge? Again, this is something that we came across right in the very early stages, four or five, six years ago, you've got a, an asset that potentially doesn't pay off for 30 years. And in the meantime, there's no flow. So it's like, so everybody wants stuff that pays off next year with tons of cashflow. So it's like, you know, well, how do you, how do you go about fixing that problem? And there are investors. So there are, you know, hedge funds and family offices that have capital allocations that are suited to long-term asset backed investments.
So, you know, money comes from those areas, but what we've built on our is an exchange. So our objective is to create a, you know, a system, a marketplace where the paper that's generated when you create a home equity agreement, that return profile that is backed by the lean on real estate. So you've got a real estate asset backed investment with a structurally leveraged return and downside protection on residential real estate in prime areas.
It's a really good investment downside, no cash flow because it's equity based. And potentially you've got a ways a long time before you get the liquidity event. If we can create a marketplace where, where you can sell your interest. So as the underlying value of the property goes up, your return is going to go up because the two are directly linked. So in the same way that there's a marketplace for, you know, life insurance, settlements, and other types of, you know, non-cash fling, you know, securities, we've created a marketplace where you will be able to buy and sell fractions of home equity agreements.
So you can or will be able to build a portfolio of homes or the equity in homes that are not for sale. And you don't have to buy the whole chunk we're using blockchain technologies and the efficiencies that we're partnering with the algorithm protocol. So what we do is we take a home equity agreement. We use these super efficient blockchain technologies to chop it up into little pieces. And the blockchain allows us effectively to keep track of where the ownership is of all of those little pieces at any one time.
So we can use that and we can create this marketplace where those fractions can be bought and sold, that creates more liquidity or liquidity options for the investor. And then that suddenly completes the picture.
Speaker 0 (38m 55s): So in terms of, you know, you have the average investor looks into a home equity contracts wants to go forward with it, ha what's the first step that they would take.
Speaker 1 (39m 5s): This is stuff that w that is in the pipeline. We have a few weeks away from being able to get our first few deals on the platform. So there's a lot of structuring, fair amount of technical work. That's still in the finishing touches. You can go to our website today and register as an investor. You can see what the platform looks like, and it's going to be very familiar. It's very similar to crowdfunding platforms, or, you know, E-Trade or platforms where you see the investment.
You can find out details about what's behind the investment, what the terms of the agreements are, and you can make informed investment decisions. You can't do that yet, but it's going to happen very soon.
Speaker 0 (39m 49s): So the, the markets just generally speaking, I assume, right now, the focus is a U S specific markets in the U S or like you said before, there's, you know, there is cushion in terms of which markets you can look at. And like you said, it's, you're, you're buying houses that aren't for sale or, sorry, you're, you're investing in, in home ownership partnerships with homes that aren't for sale.
Speaker 1 (40m 12s): I think really, for us to move into, I mean, we're active directly in California and indirectly through partners in 18 other states. And that's probably going to be about the number of states, because there are a number of states where you, you have regulatory issues. You've got challenges like in Texas, for example, homestead regulations there make it unattractive for investors, because it's very difficult to, you know, protect the investors if, if something goes wrong with the agreement.
So it's a combination of where is the appreciation going to be? How predictable is that appreciation or depreciation and how liquid, or how, how attractive is that marketplace? And also what's the regulatory, what regulatory hurdles, or would we have to overcome. And again, the us is sorry to be master of the bleeding obvious, but it's a very large place. There are tens of millions of homeowners who have more than 50% equity in their home.
So, you know, th th th th it would just be unfeasible to make even a tiny dent in that available marketplace, you know, in, in our lifetime.
Speaker 0 (41m 32s): Yeah. It's pretty, it's pretty crazy in terms of the actual number. I think you mentioned earlier right now, from an equity point of view, roughly 20, 22.
Speaker 1 (41m 41s): Yeah. Freddie Mac, the, they publish their figures frequently. If you look at the entire residential marketplace, the amount of equity compared to debt is around 20, 23 trillion. That doesn't mean to say that that's available equity. I think the available equity figures around 9 trillion, which is still enough to keep you occupied for a few weeks
Speaker 0 (42m 4s): And not to put you on the spot here, but I know it's always ebbed and flowed in the states in terms of percentage of people that own their homes. You, I think, you know, from the sixties to low seventies to we're we're where are we at right now? Roughly?
Speaker 1 (42m 17s): Yeah. I don't know. Okay. I don't know. I know where to find that information right now. I, again, may I, may I plead the fifth on that
Speaker 0 (42m 29s): And you plead the fifth, it's something I'm always curious about because it's usually in stark contrast to European countries w you know, with, with home ownership percentages, obviously being lower,
Speaker 1 (42m 39s): It's a lot less, I mean, if you read it. Yeah. I remember reading lots of articles, which really it's astonishing how low home-ownership is today compared to where it was maybe in 20, 30 years ago. So, you know, my sort of memory is that it is in decline, which is counter intuitive, but, you know, I think I'll stop digging at that point.
Speaker 0 (43m 1s): Yeah, no, I'll check that out. And yeah, we'll, we'll look that up and put a link to any of the stuff we see. I, I think it peaked, I remember reading a book 10, 15 years ago, where it was talking about kind of the Bush one in that era being over 70%. And I was like, wow, that seems like a high figure if not higher, but I'm right on. I want to be respectful of your time here, Matthew, but we'll, we'll talk a little bit about where people can reach out and link to you, but we have four questions. We ask every guest. So if we change gears, if you're game for that, I'll, I'll hit you with them.
Speaker 1 (43m 34s): Yes. Now I haven't actually prepared for these. So you've actually got me on the spot. So I don't,
Speaker 0 (43m 41s): Oh, they're easy ones. You'll, you'll be fine. You've had a bit of a storied career. You've, you've done different things. If you kind of went back to the beginning of your career, gave yourself advice, you know, what would you, what would you say to a younger Matthew
Speaker 1 (43m 58s): Buy low, sell high, not the other way around you idiot.
Speaker 0 (44m 3s): All right. Take it easy on, on younger Matt in term, in terms of mentorship, you know, obviously you're working with a company, you have team members, what's your view on mentorship for younger people in our industry? I think
Speaker 1 (44m 17s): It's one of those things. The funny thing is you don't realize you need it until you need it until you've, you know, it's one of those things that I wish I had embarked on at a much earlier age, but the headstrong, yeah. Matthew of younger years felt that I should have written a book when I, when I, when I was younger. Cause I knew everything and you know, you don't, and there are, there's such value that people bring its perspective. The key word is perspective.
They may not have specific knowledge about your marketplace and it doesn't matter if they don't and you know, don't ignore them because you think, how could you possibly help me? Because you don't know what the high-speed split-level taper Shang ratio is. It's they bring perspective. They bring experience in things that are very similar. So I am a great believer in mentorship. I wish I had, you know, listen to other people at a much earlier age. And you know, I think I, I learned from other people is my, is, is what I,
Speaker 0 (45m 23s): For sure. I'd like to read that book then, you know what all book odd that there was no citations in it in terms of resources or books you're reading right now. Is there anything you, you kind of have on the go, you could share with listeners? Yeah, no,
Speaker 1 (45m 39s): I don't really read that much. And cause you know, you're constantly sort of where is the time, but, or I'll pick a couple of books up and just read the first few chapters, but there's a book. I can't remember the author it's called something like getting stuff done and I'll, we'll find out what it is, but it's something that I picked up because one of the things that I'm thinking
Speaker 0 (46m 3s): Of getting things done, David Allen,
Speaker 1 (46m 6s): David Allen, that's it. Yeah, exactly, exactly. That it's a brilliant book because for those of you who stay awake on Sunday nights until three in the morning, going through countless lists of stuff, you've got to do, he just explains that that is absolutely the last thing you should be using your brain for your mind is for creativity's for it's for creating things. And if you try and use your brain as some sort of storage mechanism, or you're going to go mad B, you're going to run out of storage capacity very quickly.
And this is not designed to do that. So get a book or some trusted source and write the stuff down that you need to do there. And then you can rely on that and go to sleep thinking. I haven't got to worry about this stuff because I know what I've got to do because it's in my book and then your brain is suddenly unfettered and free of this clutter. And then you can start creating stuff. So, but all of that was it. There's one of these few books that you read that you think, God, this is good shit. This is actually useful.
And so David Allen, you know, you know, my hat goes off to you. So if we're writing something that is incredibly
Speaker 0 (47m 16s): Useful, you know, it's funny, you mentioned reading a couple chapters in a book. I was just talking to a friend about this book. Cause I think they, I think they updated it because a lot of it, I mean he wrote it, he was a pioneer. It was I think at the beginning of Excel. So there w there was a lot of, it was physical storage, storage and filing systems. But the takeaway from that book, what I told my friend, I was like, the biggest takeaway was like, your brain is not for storing things. If you have something amazing idea, whatever it is, get it out of your brain as quickly as possible because that's, you know, once it's in there long enough, you'll lose it and, and then it's gone or potentially gone.
Speaker 1 (47m 53s): And he does. And you just, as I said, you just go mad. Cause you, you keep trying to remember stuff and you just never, you know, you say you're, it's it doesn't do you any good at,
Speaker 0 (48m 2s): Yeah, for sure. Anybody also we'll put a link to that, that book as well. And anybody interested as well, I've found useful is the idea of a brain dump mind map, whatever you want to call it. You know, maybe it's Monday morning, you just write everything. Don't worry about if it's not organized, just get it out of your head. But yeah, we'll, we'll put a link to that. All right. Last question. My favorite softball first car make and model.
Speaker 1 (48m 27s): It was an Austin mini 1000. It was, there's a little story that, cause I was about eight 17, just passed my test and I'd been working at a fruit packing firm to save up the money to buy it. So I bought these cars 200 pounds from this gun, the farm, and I go to at home and I had to didn't even have my driving license at that point. And it was a 1973 yellow mini 1000. And so when I woke up the following morning, ran outside to see my new car at 17 road and there was a flat tire.
And so I got the Jack out of the back and started jacking the car up to, to, to change the wheel. Cause I thought, well, I can do this. And I'm jacking away in Jacqueline way for like, you know, you know, a very long period of time, far longer than it should have been. And then I sort of realized that the Jack has actually gone through the floor because the, the, you know, the whole car is so rusty that it's literally just like, you know, and there was a lump sponge that had been stuffed in the back and painted black to, you know, to pretend there's metal.
So I then realized at that point that, you know, the, the, the world was not full of honorable people, but most importantly, men is of a certain age. We're prone to Russ say, yeah, that was my, I still remembered. I'm traumatized by this.
Speaker 0 (49m 47s): It's amazing. What a memory is. We bring up with that last question. That's that's fantastic. We've never had a mini, I would venture to guess if, if it was of that era, I mean, that car wouldn't even be a leader. I'm thinking 6,998
Speaker 1 (50m 0s): CC
Speaker 0 (50m 1s): 98 CC. All right. I was going to say it was 800 or 900 CC,
Speaker 1 (50m 5s): 60 miles an hour in approximately four weeks.
Speaker 0 (50m 7s): Yeah. Yeah. That's great. All right, Matthew, I appreciate taking the time. It was great to, to kind of dive into these contracts. I found that, you know, it's like, oh, could we talk about one thing for half an hour, 40 minutes? And these ones, I think you really can and need to, to understand the product. So for listeners that want to get more information, if they have other questions work in, they head to,
Speaker 1 (50m 30s): Yeah, the website is quantum Ari, Q U a N T M R e.com. Everything's on there. So we have a calculator where you can see how much equity we can unlock there's details about the investment side. We've got all sorts of eBooks and podcasts and videos and articles say it's a fairly rich site. We've been around for a few years. So, you know, there's quite a library of information that you can, you know, download or, or read or listen to. And also we have a phone number, so there are human beings behind the site.
So if you want to speak to one of us, ask us a question, just, you know, pick up the phone and, you know, feel free.
Speaker 0 (51m 8s): My guest today has been Matthew Sullivan. Matthew, thank you for being part of working capital, Jesse,
Speaker 1 (51m 13s): Thank you for having me. And it was my pleasure.
Speaker 0 (51m 23s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Ashley Wilson is Co-Founder & Co-Owner of Bar Down Investments, and HouseItLook. Bar Down Investments owns and operates large apartment buildings, and offers opportunities for investors who are looking to passively own real estate. HouseItLook flips primarily higher end homes in the suburbs of Philadelphia, Pennsylvania. Prior to Real Estate, Ashley worked in Clinical R&D for GSK, Wyeth, and Sanofi-Aventis.
In this episode we talked about:
- How Ashley got into Real Estate Investing
- Her Experience on Short-time Rentals
- Buying Larger Scale Commercial Properties
- The Deal Ashley is Working Right Now
- Deal Structure and Terms
- Debt and Equity Financing
- Real Estate Funds vs Syndications
- Mentorship, Resources and Lessons Learned
Useful links:
https://www.bardowninvestments.com
https://www.instagram.com/badashinvestor/?hl=en
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, my name is Jesse for galley. I am host of working capital the real estate podcast. My guest today is a special guest that I'm speaking with a little bit later this year.
Her name is Ashley Wilson. She is the co-founder and co-owner of bar down investments and house it look bar down, investments owns and operates, large apartment buildings and offers opportunities for investors who are looking to possibly own real estate. How's it look flips primarily higher end homes in the suburbs of Philadelphia, PA prior to real estate. Ashley worked in clinical R and D for GSK. Why? If I hope I said that, right. And Sanofi-Aventis Ashley, how's it going?
Speaker 1 (60s): Great. Thank you so much for having me, Jesse.
Speaker 0 (1m 2s): My pleasure. You know what? I didn't even give you the last introduction. She is the new owner of a adorable boxer, Harold. So if you hear anything in the background, that's just Harold messing around. But yeah, thanks again, Ashley. I really appreciate it. I'm excited to, to meet up again in person a little bit later this year at BP con, where we're both talking, I believe correct me if I'm wrong. It's October 3rd for anybody that is interested.
Speaker 1 (1m 32s): Yep. First week in October.
Speaker 0 (1m 34s): Perfect. Well actually, why don't, why don't I give it over to you in terms of a little bit of a background of your career, we can talk about, you know, deals right now and a little bit about the market, but before we do, maybe you can give listeners a little bit of a history of how you got into real estate.
Speaker 1 (1m 51s): Absolutely. So as you mentioned, I was working in the pharmaceutical industry and my husband was a professional ice hockey player. So we were both looking for ways to diversify our retirement strategy. We weren't heavy believers in the stock market. We didn't like that. It wasn't an asset backed investment. It didn't have tax advantages. It wasn't, you know, a hedge against inflation. It just there's a lot of different principles we didn't like about it. So we started looking for alternative investments and we stumbled upon real estate.
In fact, we actually stumbled upon bigger pockets, which was the one and only source at that time, about 13 years ago. And we started doing some research and listening to their podcasts at the time and, you know, whatever article that they were publishing. And we figured out that this was the best fit for us. So we started in real estate by house hacking, which is a way in which you can offset your expenses on your primary residence by having someone lease out space.
So it could either be a bedroom or living room, really any sort of space that you can lease out. And the way we did that is we would lease to my husband's teammates. So we had to live somewhere for a season and we basically then were living for free. And my husband's teammates were paying us rent to live in these places. And of course they became, you know, like the party houses because a bunch of guys were living there. So it was, it was a really fun time. And then we transitioned into short-term rentals.
So we started during the off season, we had a property that was located in a tourist area and Hershey, Pennsylvania. So we would short-term rent that property during the off season. And that really turned us on to real estate. I mean, it was nice to have your expenses offset, but once you were able to automate a process of doing these short-term rentals going between us and Canada in the summer between my family and my husband's family, and still being able to collect money, that was pretty intriguing for us.
And it definitely hooked us so shortly after that I left pharma and my husband continued his career, but I ended up partnering with my father and starting a high-end flipping business. So we focus on flipping historic and pretty expensive homes in the suburbs of Philadelphia, Pennsylvania. And then we have done that for the past seven, going on eight years.
And a few years ago, we transitioned into large commercial real estate. So today what we do is we buy 150 200 unit minimum properties. And it's almost like either the Burr strategy on steroids or flipping on steroids. However you want to say it, but it's taking distressed assets and then repositioning them and being able to offer passive investment opportunities for people who may have some other career, but they still also like us wanting to diversify their retirement strategy and have tax advantages.
Speaker 0 (5m 17s): Yeah, that's very cool. It's funny. I was going to ask from the outset, when I saw bar down investments, I was like, who plays hockey here?
Speaker 1 (5m 24s): Exactly. My husband of course came up with the name and the logo, which most people don't get actually is a, you know, it's a sky view of a net and you know, the B and the D is the crease in front of the net. So yeah,
Speaker 0 (5m 41s): So I was a goalie for a lot of years. So that's why we were at, well, the other thing, obviously the apparel company, but that's, that's funny. So was, are either of you Canadian born or were you just playing hockey up there?
Speaker 1 (5m 54s): My husband's Canadian born he's from London, Ontario,
Speaker 0 (5m 58s): Right out, right on out to London. That's great. So you start with a house hacking like a lot of people do and you know, whether that's a basement walkout, a duplex where you're, you know, living in one, renting out the other, covering your expenses, but graduating towards short-term rentals were, was short-term rentals. Was that a stepping stone or did you stay with that for, for some time,
Speaker 1 (6m 21s): That was really just a matter of convenience and how to maximize a system we already had in place because we weren't making any income during the off season. The benefits the players of renting with us is they didn't have to rent a year, lease from someone else they could just rent month to month from us. And then that made it so we could do short-term rentals at the same property during the off season. So it was not something looking back.
I'm surprised that I didn't turn it into, you know, our main business. I think if we had done that, we would have been very successful at doing it. But of course with what's happened with COVID and everything. It's not necessarily a recession resistant asset class, so it probably would have taken me down a different road. And I'm fortunate that I didn't. And I think being in pharma at the time and clinical R and D I was so distracted with my W2 that I didn't see the potential there.
So that was obviously a good and bad thing. Long-term it was a great thing, but short-term, it was probably a bad thing.
Speaker 0 (7m 32s): Yeah. It's funny. You know, when, when the, we first got into lockdowns, it was one thing that I didn't even think about when it came to short-term rentals. Obviously hoteling, first thing you think about is, is vacations people not using them, but yeah, it was one of those things where as we got more property managers or systematized in short-term rentals, I felt like a lot of people moved into them because if you remember the Airbnb, when it first started there, isn't, wasn't really companies that were going to be able to manage this stuff. And that's key for turnover, or you were just, you would have a full-time job and then some, so from there, you, you go into a small step into, you know, a hundred unit plus investment.
So how does that, how does that pathway happened to, to start doing these larger scale commercial properties?
Speaker 1 (8m 18s): I'm a firm believer that you should always lead with value. And I think every single person in this world has value to offer. For me personally, the value that I added to stepping into commercial real estate is my knowledge with construction management. So I grew up with a, an, you know, my father still is my one business partner on the one business, and he's a general contractor and he's had his own business for 40 years. So for me, it was great to have that exposure into construction and be able to see it on both the residential commercial side, and then be able to leverage that skillset in a different capacity.
I think that when you lead with value, as opposed to saying, how can I, how can I partner with you? How can I get into multifamily without saying what value you can provide to someone that is why oftentimes that conversation never gets to the next level? In my particular situation, I was telling everyone I wanted to get into commercial real estate. And it just so happened to have a friend who was already in commercial real estate, which I didn't know, I knew he was in residential, but I wasn't aware that he was also in commercial real estate.
And when I told him that I wanted to get into commercial real estate, and I thought I could add value by leading construction management. His response to me was the timing of this is incredible because I just went under contract with 124 unit property of which there is a $2 million renovation budget. And one of the buildings was burnt to the ground and needs to be rebuilt. And I have no construction knowledge experience. So it was a perfect partnership in the sense that I could use my value to offset a deficit or a pain point that he was having and he was seeking.
So that is how I got into commercial real estate so quickly. And I mean, you can say so quickly, but it was all the years of preparation that gave me that opportunity to be able to exploit. So I think if you just figure out what value you can provide, and it doesn't necessarily have to be real estate related, I think people might be listening and saying, well, what value do I really have to these larger entities?
We'll just ask them, what, what is your major pain point? It might just be as simple as we're terrible on social media. We need someone's managers, social media account, or, you know, we're having issues with accounting or legal, and maybe you're not the solution, but you know, someone who is a solution just by doing an introduction can provide value as well. So I think when you just seek to have a conversation, instead of what can you do for me? What can I do for you?
And flip that script, then I think you can get really far in this business very quickly.
Speaker 0 (11m 22s): Yeah. That's a, it's a great point that you have this, you know, time you've been doing this stuff and it's, we have people on the podcast all the time where it just looks like they, you know, one day they, they bought a 200 unit property where it's, you know, 10, 15 years in the making do another things. I really like what you said about the value. I, because you hear so much and you know, I'm sure you do, I'll get messages saying, you know, I want to get into commercial real estate, you know, w what can I do to help? And it's funny how initially you think, like, I, there's nothing I can do because I'm not in construction, or I know anything about property management, but that's a really good point that about social media or, you know, helping you with accounting.
Because as we scale in real estate, we are creating businesses, right? A large business, you know, a a hundred unit building is a large business. So all of a sudden you have this, these ancillary things that we might not know much about if our background is in real estate and social media might be a perfect example of that, you know, editing videos. Sure. You could hire somebody, but if you have a talent that's tertiary to the real estate business, that's definitely something that, you know, if you want to add value to somebody in your kind of area in real estate, that's definitely an an avenue to do it.
Speaker 1 (12m 34s): Absolutely. I couldn't agree more with you in the, the icing on the cake of that is the consistent followup afterwards, because I think oftentimes people make that initial connection and they reach out and they try to provide value, but then there's no follow-up after that. So I can give you an example out of every time I've ever spoken at an event or conference or anything I always get, and I'm sure you do as well. People who come up afterwards and then they want your contact information, and maybe they send you one or two emails.
But after that, it's crickets. And there is a, there was an event that I spoke at, at my Alma mater. And there was a girl who came up to me as senior. And she said to me, point blank, you know, how do I work for you? And, you know, it was like, well, let's just stay in touch and, you know, keep the conversation going. And after that, she continued to email me consistently for a couple months, keeping the conversation going.
And now, so this was not last may, but the may before, and now we are hiring her. So, you know, it wasn't the right time at that. You know, she, she provided and is going to provide extraordinary value to our company. But at the time that we started talking, it wasn't a great fit then. But her persistence that to me, show me more than anything else, because she was so committed to wanting to learn and wanting, you know, I was actually coaching her, coaching her on the position that ultimately I would want her to be in and she wanted to be in, so it does take time.
But I think when you spend the time, then you get rewarded handsomely. And I am very confident that the relationship that we will have will be long lasting professionally personally, because she just was so dedicated. And that's very rare. I mean, think about, you know, how many hundreds of people send you an initial email and, you know, she's like the needle in the haystack.
Speaker 0 (14m 50s): Yeah. A hundred. I think, you know, there's a lot of, I think, benefits to having a sales background in general, because whether, you know, whether you work for Xerox or you're actually in brokerage and real estate, if you're in this industry long enough, you've taken defeat, you've contacted people. You don't let it bother you. And I know for a lot of people, it's a really challenging thing to do to constantly follow up. But, you know, even myself, not that I'm that great, but even people, I know mentors of mine that have been doing this for 20 years longer than I have.
They're still doing that stuff. Two people at a, at a, just a much higher level. I still reach out to people all the time. And it's even people I've had on this podcast that I should not be on this podcast at all. Like, especially when we first started, it was, you know, follow-up a, follow-up okay. A video, a video call like through video card and say, Hey, listen, I think there's a great market out here. And just like being able to just kind of, don't worry about the, the outcome there, but for sure, I can't imagine, I can't agree with you more on how many times the initial reach out happens, which is great, but no, follow-up, and it's going to be dead because these people are not going to be calling you back.
You have to stay top of mind and that you give a perfect example there, you know, even in Toronto, another one, another thing I like doing just generally in brokerage is that when you do follow up, it is one of the most annoying things for me personally, is when you follow up with, did you get that? Did you receive that note below? And we had arts object on the podcast, he's has a best-selling of cold calling book. And it's like, if you're going to touch that person again through a contact, you better add value there.
So in our market, now we just put a, an opinion of value together for a 30 unit apartment building for, you know, people in the U S in Toronto, 30 unit apartment building is probably still like 10 million USD. We're extremely expensive market, but anyways, I send it out and then it goes quiet for two weeks. And now I'm like, okay, I want to follow up, but I can't follow up with just saying, Hey, how did everything look? So, you know, we said, okay, we're bringing this listing out this. I thought it might be interesting. Just something where if that second contact is happening, give them something, you know, offer some more value.
Speaker 1 (17m 3s): I couldn't agree more. I think when you lead with value, follow-up with value, you're really helping someone permanently ingrained in their brain that you provide value. And it's just a matter of that repetition. And you always want to be around people who provide value because at the end of the day, the people who are successful or either providing small value to the masses or large value to the few, but regardless of how you look at it, it's that they're providing value.
Speaker 0 (17m 41s): Yeah. That, that is a great point. Yeah. I couldn't agree more with that. And, and it's even stuff where, you know, we know the industry, like, especially brokerage, you know, we had one of our competitors, CVRE guy called me for, you know, you just wanted Intel on some building. We have some listing we have, and he's like, before the call, he's like, Hey, did you hear about this comp, this comp, this comp? And he's like, listen, you know, I don't even know it's a quid pro quo. I'm not going to just call you, ask for information, especially, you know, we're competitors, but obviously it's, you know, it's a small industry as you know.
Okay, cool. So I want to get to a, we were talking a little bit before we started recording. You have a deal that's a, that you're actively working on right now, without going into too many of the, of the details. Why don't you tell us a little bit about that deal, how it came to fruition and where you're at?
Speaker 1 (18m 31s): Yeah. So we've been working pretty heavily in the Houston market for a few years now, and I've established really great connections with brokers and even direct to sellers and vendors. And we get deals sourced to us all different ways, but this particular deal is from a broker who only does off-market deals. So this was a situation and it was just extremely fast. I think we got it on a Monday and we were offered.
We offered on a Wednesday morning and the offer was accepted Wednesday. Mid-afternoon it was very, very fast. So this speaks to all of the time that you put into building a relationship, all the things we just talked about, and it also speaks to knowing your market, because once you know your market, it's very easy to make quick offers. And it's easy to make quick golfers on $15,000 houses. And it's easy to make quick offers on hundred million dollar properties, because once you know your market, you know, you know, your numbers, you underwrite the deal and you, you know, it pretty thoroughly.
You have someone go out a local that you have a relationship with because I'm not located in Houston. So how did I be able to ascertain the capital expense budget for this property is because I was able to call on someone very quickly and have them walk the property for me. And we went through it together. So ultimately it was the deal that we put together very quickly. And it's over 400 units in Houston. It's located within 15 minutes of another property that I already owned there.
So,
Speaker 0 (20m 18s): Sorry to interrupt. Just curious in that market right now, are they like one 40, a unit, 140,000, a unit, a hundred were, where are they at right now?
Speaker 1 (20m 26s): It varies. It can be anything from, you know, I mean, it obviously depends on the class. It depends on the submarket, but anywhere from like 80,000 a unit to over 400,000 a unit, I mean, you have such a, a spectrum. It could even be than that, to be honest. But those aren't the deals that I'm looking at,
Speaker 0 (20m 53s): No value add. So maybe in the high, you know, just under a hundred or maybe just over a hundred, something like that,
Speaker 1 (21m 0s): The majority of deals that I look at are over a hundred anywhere from, I would say the average deal I'm looking at is between a hundred to two 30 a door. Gotcha. That's what, that's what I'm looking at. So it's pretty broad, but it also depends on, you know, the sub-market and the value that I see in that property. But yeah, we, we typically like to be in B markets B slash a minus markets.
We don't go after new construction. We, we like to be right under new construction. So we've created a buffer there, but that's typically where we're, where we're seeking
Speaker 0 (21m 52s): The deal. Like you said, Monday, you get it Wednesday, put the offer in, in terms of how you structure your deals. Are we, you know, 45 days for due diligence are, you know, is capital, is capital ready to deploy or do you raise assets specific? Could you talk a little bit about the mechanics of, of, you know, the actual financing?
Speaker 1 (22m 13s): Yeah. So for this particular deal, it's kind of a outlier from what we normally do, because it's an assumption. So with going through,
Speaker 0 (22m 23s): Sorry, assuming the debt for correct. Yup.
Speaker 1 (22m 27s): Yup. So this is a completely different process because you're at the disposal of whatever the original loan was originated under assumption process. So this is typically we've actually hired an assumption consultant there. They only do assumptions and they specialize in it there. My understanding is basically they're the only shop in town and I don't mean locally.
I mean, nationwide did they do every single assumption. If you're hiring a consultant, you're hiring this group. And they have told us with the lender that the original loan is under. It's going to take about 90 days on average to be able to close the loan. So we'll go through a typical DD period, which for us is around 30 days plus or minus.
Sometimes we'll get access agreement while we're structuring the PSA, the official contract, you know, once we're under LOI, other times, we'll just wait until the PSA's signed. It's all property dependent. And then from there, we typically into a financing contingency period. But because this is a, an assumption, it's a completely different beast. So the, the lending approval process is happening in parallel while the DD is going on.
And then continuing of course, for approximately 60 days after the due diligence period is over. So this is a bit longer closing than normal. Typically we'd like to be within a 60 to 75 day close period. And that's also contingent on the loan. If you're going after agency versus bridge or CMBS, you have different loan, origination timeline. So you have to comply with those because otherwise you won't be able to close the deal. If you're using debt on the equity side of your question, we do equity on a deal by deal basis.
Meaning we like to partner equity with the appropriate asset type, meaning we're, we're very familiar with what our different sources of equities appetite is for a particular investment. And if we get, you know, a specific property that matches one source of equity versus another, we will approach that group, whether it's a family office institutional, or if we're syndicating, depending on the deal.
So that's how we structured. It's not a, there's some businesses and it's not, it's not a right or wrong. It's just different ways of doing business, but there are some businesses that structure, every single deal is the same return model. It's the same crop of investors. It's the same deal type. And then there are other businesses that have more fluidity. So the buy box or the properties for which they seek have more variation, the equity, the whole capital stack fluctuates.
So the debt they're using the equity they're using that varies the return models vary. So we're more the latter.
Speaker 0 (25m 50s): So it sounds like, correct me if I'm wrong. The, it sounds like a bit of a hybrid of a fund and a syndication. Whereas you kind of tap into say, you have a return profile for some family office that, you know, whatever it say, it's more conservative, say it's a four or 5% yield or 6% stabilize asset. Whereas one wants a really value add, like you will go out specific to the, to the deal. Is that right? Correct.
Speaker 1 (26m 17s): So for example, there is another deal. We were invest in vinyl with a couple of weeks ago and that deal was a perfect deal for some of our institutional family office folks. So we had approached them about that deal because that penciled perfectly for what they sought for an investment, as opposed to us, you know, going the route, let's say there's pluses and minuses to every source of equity.
So that once again, there's no right or wrong answer, but what we like to do is have a lot of different options because then that allows us to have a lot of different buying criteria options. It allows us to build out our business with diversity as well, because we have a lot of different types of assets within our portfolio too. So that's one of the benefits that we see of course, by being more diversified in terms of the assets for which we seek in the return structures that we offer.
Speaker 0 (27m 24s): So with the, just for the particular pro property in Houston did, at what point do you contact your source of funds? Like once you have it under contract, you'll, you'll tap them and is, is their funds, is it legally committed in the, in that they've signed a subscription agreement already that commits? Or is it, you know, we have this under contract conditional, or, you know, maybe one or two conditions and then you, then you reach out to them.
Speaker 1 (27m 51s): It depends on the deal. So for example, on this particular property, we waited until we had it under LOI to announce that we had something and this deal situates itself better for syndication, as opposed to, I'm not saying that there aren't family offices or institutional funds that would've sought this property, but there are fewer than, than institutional and family offices typically seek more stabilized, performing assets, newer construction, lower risk, lower return, basically, you know, risk is inherent with higher return expectations.
So we were able to yield higher return expectations on this property because it had a higher risk portfolio as well. And once we had it under LOI, we released some details, but not all of the details until our purchase and sale agreement is finalized because if you're in the industry, you know, that the LOI is basically a gentleman's handshake and it's legally not enforceable, but the purchase and sale agreement is. So for due to that reason, you have to keep a lot of things close to the chest with respect to the other deal that I mentioned, where it was more stereotypical than an institutional quality asset, we actually, I get a good, you know, I always establish a good relationship with a broker and figure out where are we in terms of how many other offers am I competing with, you know, from the get-go.
And normally I won't tell an institutional partner at that time when we're submitted an offer, because for those institutional assets, it's typically a three minimum rounds of submission. So you first, originally you have to submit an offer, then it's best in final. Then it's buyer, buyer, seller calls, but oftentimes they'll do two or three rounds of best and final, and then they'll do the buyer calls.
So I just figure out, you know, I'm not figuring, I'm obviously not able to figure out what people are offering, but I'm able to figure out, okay, how many people are best in vinyl and then how many people are with the buyer calls. So once we got to buyer calls, that's when I started having the conversations with the institutional folks, because there's a high probability of getting the property when I'm only competing with four other people on a phone call.
And in that particular situation, it actually came down to us and another buyer and our offer was better all the way around the price point, the terms, everything, the only difference between us and the other buyer was that the seller knew the other buyer personally. So that's why we ended up losing out on that deal. But once we got to the buyer calls, I informed our capital. And it also too, even if you don't get it, a lot of people are like, well, what if we don't get the property?
It's still is another touch point to you. What you were talking about is have an opportunity to have a touch point that whoever you're speaking with then also knows too, that you're constantly working and looking for deals and opportunities for them. If you wait until you get a deal, you might be waiting a year or longer because it's just so difficult in commercial real estate to acquire. So it does provide an opportunity for you to connect.
Again, typically they want to go through your underwriting. So it provides another level of confidence too, because you will be in a situation at some point where you'll need to move fast. And if you've built up this relationship with this institutional partner or family office, and constantly have provided underwriting, they're going to have a level of confidence going into whatever situation you have. That's fast moving with a higher, I guess, confidence level of confidence to know that you right, underwrite a certain way that mirrors what they they want.
So it, it's never a bad idea to share where you're at with these groups.
Speaker 0 (32m 24s): So for the, for the non-institutional, if it's not a family office and you're you find a property, are you going through the typical, you know, I think for, for you, it'd be 5 0 6 B or five succeeds, just that going for the accredited investors that you're looking for. And you're kind of, you're going through that process. And the reason I ask is I'm curious for how you, as a company are compensated, if it's upside with the promote, if it's, you know, you're, you're in there as a limited partner as well.
How do you structure typically?
Speaker 1 (33m 0s): Yeah. So a couple of questions there. The first question with respect to the sec, reg D filing, we file under 5 0 6 C I'm a firm believer. And when I first got started in the industry, only 10% of deals were done with . And I only believe in doing five or six deals. And the reason being is because as you mentioned, five 60 is for accredited investors. And when I first came into the industry, everyone was pushing this whole concept of, well, the people that are going to invest with you most likely are your friends and family.
That is true when you first get started. However, it also puts a ceiling on how many people you have in your network. We're a five or six C doesn't. So that's for starters, because five of 16, you can advertise. The second reason, I prefer five of 16, which to be honest with you is the primary reason that I prefer is that 5 0 6 C allows a third party to verify the accreditation status. It actually requires it in five or six B you as the investor, or you as the investment offering entity are qualifying the person to be of financial capacity, et cetera, to be making an investment.
And I think that creates a bias because at some point that deal might go south let's play worst case scenario. And if someone comes back and says, well, I wasn't fully aware of the risks, or I didn't understand what I was doing, but they qualified me and they allowed me to, but they also to one in need to invest because they were the ones who needed the funding. I think that that is a conflict of interest and it creates liability. I want to eliminate as much liability as possible, which is why I believe Five-O succe limits one's liability because it allows a third party to verify the accreditation status and not the ownership entity.
So that's first and foremost. So we always structure with 5 0 6 C. I'm not going to say we will always in the future because like everything rules change. So maybe something will change in the future and we have a different opinion. But as of today, I will only move forward with five or 60 offerings, because I think it's the safest way to move forward. The question with respect to how is the general partnership compensated first in terms of every deal we ever do, the first investor on any deal is always the general partnership we invest in every single deal we do.
And we also invest alongside of the limited partners. That may seem like a no-brainer, but that is not often the case with some other ownership groups. They'll create another class where the general partnerships investment goes into a separate class and it's treated differently than the limited partner class. A shares are investments always go into the class, a shares alongside every other limited partner. It doesn't get treated any differently.
The general partnership also is compensated because of the fee structures, as you mentioned, and also too, in terms of the splits, our typical deal is anywhere from an 80 20 split favoring, the limited partners with typically a seven or eight pref all the way down to a 60, 40 split with 60 still being to the limited partners. So we, we do have some compensation up front.
It is honestly, it's an industry standard or below the going market rate. We stay on top of, you know, we subscribe to almost everyone's offerings just to see how are people creatively structuring their deals and what our industry rates trending at. So we have our own in term internal barometer of what's fair, and what's been circulating in the market space, but we are not a heavy fee based entity.
We always believe in being aligned with the investor's interests too. So what we, for example, in the last deal, we structured a waterfall because it had huge upside and the waterfall was to show that the general partnership is obviously going to work harder in that waterfall structure, because if we reach certain milestones, then the split changes at those different milestone levels.
So that shows the limited partner. Yes, they're going to be motivated because, you know, once I hit, let's say a 16 IRR and it's goes from a 70, 30 to a 60 40, the general partnership is now receiving more, but I also too have reached my hurdle of 16 IRR. So,
Speaker 0 (38m 2s): Well, yeah, the, you know what, it's on that. I'm curious cause w the deal that we raised capital for recently, we did it that way before, excuse me, before we would have different share classes for GP and LP. And we structured this one because it was a value add, and there was gonna be a lot of legwork. We structured it in a S in the way that we had the general partner would invest. You'd have obviously the general corporation that the partnership that, that physically owns the real estate, but we had basically arm and arm.
We were limited partners as well. So the three sponsors of the deal were limited partners put in the same, at least the minimum that we asked of others. And if, if I, if I hear you correctly, it is, it is an alignment with your other limited partners, but it's also, I think it's also preferential for the general partner to, because you're participating in a pref where depending on the deal structure, oftentimes you get a different share class that you don't participate in the pref.
So I, I don't know if you have any thoughts on that or if I, if I heard you correctly.
Speaker 1 (39m 9s): Yeah, no, I completely agree with you. I think that when you, you co-invest in the LP shares and you participate in the same pref, you're motivated intrinsically for the same reasons that, you know, an investor would want you to be motivated. I think heavily feed ownership, groups, and entities offering groups. I think that's what creates misalignment because they're getting paid before any of the work is really done.
It's a pet peeve of mine. When I see people, you know, basically throw parties when they acquire a property, because yes, it is hard to acquire property, but the work actually starts once you acquire the property. So, and I think a lot of people forget that and they rely so much on appreciation to get the, the sale kicker. And historically, that has happened. But that doesn't mean it'll always happen.
I mean, look at the 2008 real estate crisis, you know, within the U S market, I didn't hit obviously Canada as heavily as it did in, or not even close to what happened in the U S because you have different underwriting systems and banking systems, but ultimately that showed you real estate. Doesn't just continue to appreciate forever. You have ebbs and flows in the cycle and you have to be prepared for when it's not consistently increasing, you know, there is such a term called depreciation, you know, so I think the thing is that when you have alignment as an investor, if you're a passive investor, one of the things you should really seek to understand is, is the number one is the general partnership, putting capital into the deal.
Number two, what is their fee structure? And what are those triggers that are those they're capturing those fees. If it's all front ended, what is the motivation to operate the deal? I think understanding those points really position you better for making wiser investment decisions.
Speaker 0 (41m 28s): Yeah. I think the other thing too, I thought you were going to go there with this, but as a good point, but the celebrating at the, at the acquisition, especially as a sponsor or a GP, it's almost in bad taste because, you know, you're, you're almost like, okay, we got our acquisition fee. We, you know, we, cause there is, there is obviously from that perspective, that's what keeps the lights off. And it is one of the bigger fees that most syndicators and funds have on acquisition. So it's almost like, you know, when you do get the deal, I don't know, maybe just be a little bit more like, all right, let's get to work kind of thing.
Yup.
Speaker 1 (42m 0s): I agree. And we work really hard. I mean, what we do even leading up, even before we even acquire the property, the day we acquire the property, the first week of acquiring the property in the first month, it is honestly running on adrenaline because you have worked so hard to even get the property to close and there's so much work that's involved there. But then after the property closes, I don't know about how other operators work, but I can tell you how we work.
And it is just organized chaos maybe because it is, I mean, there is a rhyme and reason for what we are doing, but it is just super fast paced. And, you know, that's, that's why we work with the property management team that we work with because their tenacity to take over a property and reposition it as quickly as possible is just exceptional. And it's something that I'm very grateful for that we align so well with our property management company.
So I think that's when the real work starts and that can't be forgotten.
Speaker 0 (43m 13s): Yeah, absolutely. Well, actually I think we can definitely say we can do another episode here. I just want to be mindful of the time we've got a kind of wrap up with basically final four questions. We ask every guest. So if you're okay with that, I can kick us off here. Absolutely. So first I'd like listeners to get your thoughts on mentorship. And we talked about it a little bit already.
Speaker 1 (43m 39s): I am a huge believer in mentorship, gurus and running to the back of the room. I'm not a fan of, but mentorship I think is amazing. I think you learn so much through other people. If that person is willing to provide quality education to you, but ultimately you have to pay one way. So it's either with time or monetary. And if you can find a really good mentor and take action from the things that they're telling you to do and telling you to avoid, you can learn very quickly through someone else and be able to propel your journey.
So I'm a huge believer that mentors provide a lot of value. You should have a mentor at whatever level you're at. You were never enough to not have a mentor. Mentors are good too, because even if you know something, just having someone else from an outside point of view, constantly looking, they'll bring things to the forefront of your minds. There is a, a psychology study that was done on physicians, and it was talking about how physicians have to retain so much information and how they are likely to diagnose certain ailments, viruses, diseases, et cetera, based on the things that they have most recently read, not always based off of symptoms and because of that, it speaks to how the human brain works and being in the front of your mind, to be able to recall the information.
So sometimes having a mentor, just to be an extension of your brain, so to speak, and maybe they have some other things that they've recently read or heard, and then they just shine the light back on those things that you've already, you know, put like in a closet somewhere in your brain. And it's hidden in a dark room. They, they can be helpful that way too.
Speaker 0 (45m 47s): Yeah, that's great. I think it's also, it kind of years ago it would be taboo to ha you know, go to talks to somebody, whether it's, you know, a psychologist, a psychiatrist, but we, you know, we have a company that we work with that when they put, or they do venture equity for this, for startups. And when they put a CEO in the CEO role, or when they acquire a company or fund a company, they basically force this person to speak with a mentor, which happens to be a trained psychiatrist. And they will have people that'd be like, no, I won't do it.
And they're like, if you want the capital, this is a requirement of the job. And it's amazing how many times they say they come back and just say, it was one of the best things that they've ever done. So whether you call it, mentor somebody, talk to a friend, just somebody that you're, you're, you're basically getting everything out. And I find our job sometimes, like you said, you could be running on adrenaline. And especially if you don't have a huge team, it's, it's lonely when you're doing a lot of this stuff. If, if you know, like say you're CEO of a company and there's there, aren't, co-founders something like that.
But that's a great point. I will, I'll definitely have to Google that. Do you remember the, where the study came from? If we put a link up,
Speaker 1 (46m 58s): I don't remember where it came from, but it was my undergrad. So I was a psychology major and took neuroscience two. And I obviously did a lot of research on research studies. Exactly.
Speaker 0 (47m 18s): So second question, basically your experience in the industry, you go back in time, you meet a younger Ashley at the outset of your real estate career. What do you tell? What do you tell that?
Speaker 1 (47m 33s): For me personally, I wouldn't change any part of my journey because I am very grateful for everything that, that I've been able to accomplish. But if I was going to tell someone how to do it faster, I would say to partner sooner, take more risks and just go bigger sooner. That's probably what I would tell that person.
Speaker 0 (48m 5s): Yeah. It's amazing how much that comes up on the show. All right. Number three, basically. Sorry, just let me get my bearings here. Resources, anything you're reading right now, podcasts, you're listening to that. You know, it doesn't necessarily have to be about real estate that you think listeners would benefit from
Speaker 1 (48m 25s): I'm reading, who not how, which I've heard amazing things from actually from Brandon brought it up. Brandon Turner from BiggerPockets was talking to me about it the other day. So that is on my reading list right now. I am really into trying to find people that I haven't heard speak before. So I'm trying to find meetups.
When I see a meetup of someone I haven't heard before speak, I'm seeking out people that I think could provide a fresh look. It doesn't matter their experience level that never has mattered to me. In fact, I think newbies probably provide the best value out of everyone that I've heard speak on average. So of course there are some really phenomenal expert speakers. I'm not trying to discount them, but I think people new to real estate have such, you know, like fresh eyes and perspective, and they're not tainted by like, oh, you can't do it that way.
Kind of philosophy. So I love seeing a really innovative ways that people are doing things, but that's what I'm doing currently.
Speaker 0 (49m 43s): Awesome. And listen to this though. My favorite question, first car, make and model. Maybe this was in high school. Maybe this was off at a Colgate. You,
Speaker 1 (49m 53s): I bet you can guess this, but I had a Jeep Wrangler. I grew up in the error of clueless. So hair in the wind blonde hair in the way. And my brother always tells his story that we were driving with a top-down and a cop yelled from his car slowed down, and my brother started laughing and he was like, two cops always just tell you to slow down. Normally they're supposed to pull you over, but yeah, the rules.
Yeah. But I had a Jeep then and I actually have a Jeep Wrangler now as
Speaker 0 (50m 32s): Well. They've come a long way. Yeah,
Speaker 1 (50m 35s): They definitely have. So it's actually my husband's car, but I still steal it from time to time. But it is stick shift. He has a thing for stick shifts and that, that drives me insane.
Speaker 0 (50m 48s): Yeah. I'm surprised they still make that car with stick. Is it still like the long stick goes like right to the floor? Is it, it's not,
Speaker 1 (50m 55s): It's not the long stick version, but it's, it's just very rough to shift gears. And, but he's like no one will ever steal it because how many people can drive stick, shift these days. So that's his philosophy,
Speaker 0 (51m 12s): One guest calling it a millennial security device or something like that
Speaker 1 (51m 17s): Because nobody,
Speaker 0 (51m 19s): Nobody drives stick anymore. Awesome. Okay. Well, aside from BP con later this year, people want to reach out to you. So you on social aside, as I always say, aside from a Google search, so any anywhere you'd want to point them.
Speaker 1 (51m 34s): Yes. So if you're looking to passively invest, you can find more about the opportunity I was talking about@bardowninvestments.com. And then if you want to follow my real estate journey, you can find out more at bad Ash investor on Instagram,
Speaker 0 (51m 51s): I guess today has been Ashley, the Wrangler Wilson, Ashley, thanks for being part of working capital. Thank you so much for having me. Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one.
Take care.
Brandon Turner is an Active Real Estate Investor, Entrepreneur, Writer, and Podcaster. He is a Nationally Recognised Leader in the Real Estate Education Space and Has Taught Millions of People how to Find, Finance, and Manage Real Estate Investments. Brandon is about to Release “The Multifamily Millionaire” Volume 1 and Volume 2
In this episode we talked about:
- Regulations and Lockdown: NYC vs Hawaii
- The process of Underwriting Deals
- Asset Class Comparison
- How Deals are Structured
- Specifics of Mobile Homes
- Scaling a portfolio
- Macroeconomic Trends
- Raising Capital for Private Equity Deals
- Selling the Fund
- “Multifamily Millionaire” book
- The Investment Philosophy of Open Door Capital
Useful links:
https://store.biggerpockets.com/products/the-multifamily-millionaire-volume-i
Transcriptions:
Speaker 0 (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right guys and gals, my name's Jennifer galley, and you're listening to working capital the real estate podcasts. We have a returning guest on the show, Brandon Turner. He was our first guests ever on the podcast.
Brandon holds a lot of titles. He's an investor. He's a, one of those VPs that BiggerPockets, and most recently he is about to release the multifamily millionaire and brand of correct me if I'm wrong. That's volume one and volume two. That
Speaker 1 (49s): Is correct. That's all. That's a great introduction, man. Look well done. Well done.
Speaker 0 (53s): I appreciate it, man. Well, it's good to, it's good to talk to you. It's it's crazy to think that, oh man, what has it been? It's almost 70 episodes now. So a year and yeah, you're in change and change quite some time. You know, nothing's really happened in the world over the last a year and a half. So
Speaker 1 (1m 9s): It's been a pretty, pretty lame couple of years here. Nothing's happened in the world. So I don't really talk about today.
Speaker 0 (1m 14s): Yeah. Real quiet. Well, yeah, listen, thank you. As a, as always for, you know, giving your time here. I know it's always nice to talk to you. Catch up, see what's going on in your world and, and talk real estate. So maybe on, you know, on that note, it has been a urine change. How how's everything been going with you? I guess first and foremost, you know, you, the family, everybody's all good. Yeah. It's been
Speaker 1 (1m 38s): A weird year. I mean, Hawaii was like kind of like, you'd go to the beach. I live in Maui for those who didn't know that, but I go to the beach and it was like empty. Like, you'd be the only one on the beach. And we went from that to now you go to the beach and there's people sitting on you like everywhere you go. So it was such a stark drastic change. So yeah, life has been weird. A real estate stuff has been nuts. I don't remember exactly what I had when I was on last time. But in the last 18 months, roughly we've picked up a, what is it like 10 or 12, large mobile home parks. We have 1700 units now that we bought in the last year.
We have another 1800 under contract right now. So it'll be at 3,500 by the end of this year, which has been wow. Crazy. Yeah. I don't want from zero employees to, I think, 13 now. So it's been a, it's been a growth year and a half. I love the
Speaker 0 (2m 24s): Unbanked up. Just, just pick up, I'm going to pick up some milk after this. That was
Speaker 1 (2m 28s): A milk and some mobile home parks and a couple apartment complexes down in, you know, in, in, in Houston and you know, whatever. Very cool. Cool.
Speaker 0 (2m 36s): So before we jump into that, cause I want to talk, talk about that and you know, some of the details there in, we talked a little bit about the, the lockdown, everything before the show in Hawaii. So you guys are, you know, I didn't even think about it until, you know, it jogged my memory when I was like, oh, I'm talking to Brandon. And that of all the people that come on the show, I kind of compare the, I guess you would say New York state or California to, you know, us north of the border in terms of how extreme they've been. Even though it hasn't been as extreme as our lockdowns, but it sounds like Hawaii was pretty, you know, pretty high up there in terms of the regulations and the lockdown.
Yeah.
Speaker 1 (3m 13s): A similar stuff to what you guys have. Like, they wouldn't let anybody in for a long time, like six months, they just wouldn't let people in the state hardly at all, unless you quarantine for two weeks. And it was pretty, pretty locked down in that way. So nobody really came. And then even like the mat, like we still wear masks everywhere. Pretty much here. We're like the one state left that. I mean, now everybody's wearing masks again, but yeah, that never really went away. I mean, you're outside for awhile. It was like, you had to wear a mask at the beach outside by yourself. That was weird to me all the time. I never, that was weird. Everyone. They're like what? And they were walking around, giving people tickets, if you were sitting on the beach alone without a mask and were like, you had to come over to me.
I mean, I never got one, but you had to come over to people, get in their space, infect them with your disease to give them the ticket that like, what, how, how does this logically make sense? It didn't make sense. But finally they did away with the needing to have a mask on the beach, which was nice. We had
Speaker 0 (4m 2s): A, there was a point definitely in, in Toronto where it was like, if you were outside jogging, there was like the public shaming of like people looking at you. Like what's going on over there. You're walking and jogging.
Speaker 2 (4m 14s): Yeah. Oh yeah. There was, yeah, there was a
Speaker 1 (4m 16s): Lot of that. So after the, you have to wear a mask everywhere, then it went to, you have to wear a mask if you're not exercising. So like there, their stories of people like riding their bike and they stopped for like, they just like stopped the bike from moving into copperheads, runs over and give them a ticket. He was like, come on, I stopped for a second to look at something or whatever. And they, yeah. So you had to pretend like when that happened, you had to pretend you were working all the time if you're outside. So somebody walks by, you're just like, you know, doing jumping jacks or something like I'm exercising, I'm exercising here by myself. Yeah. It was weird.
Speaker 0 (4m 45s): Yeah. Yeah. Well, you know what, at the end of the day, it's, it's one of those things where at least, you know, as it relates to real estate, I am sure you have come across people in our industry that they, they saw, oh one or 2000, 2001 as their badge of honor or oh 8 0 9 as their badge of honor. Or if you go back further, you know, the, the early nineties in, in the real estate market, commercial real estate market in the states and Canada, and it just, you know, this is one of those things, were, it is a technical recession. And it's something that I think it will be a benefit to investors down the road because they will have to have dealt with things that, you know, they had never had to deal with in a lot of markets.
Speaker 1 (5m 23s): Yeah, very much so. I mean like this is when, like it sucks to go through difficult times and insanely difficult as much as it's uncertain times. Right. There's just no certainty, but that also trains us to be better. You know, it makes us better people, better investors, smarter, more nimble, you get caught in this. Like everything's always going to be the way that it is right now. And you start forgetting that the world changes all the time. Like nobody forces anybody. That's why they call them black Swan events. Like they're just, they're so rare and you can't predict them. The only thing you can predict is that there's going to be unpredictable things.
And so when we, instead we change our mindset around unpredictability and say, this is like, this is a life. So how can I be an investor that can handle unpredictability? And how can I be nimble and how can I be liquid and how can I be make this light and have a team? And like those things for us, I will be better investors because of 20, 21 and 2020, not worse.
Speaker 0 (6m 17s): Yeah. I think there at least the way I saw the way people under, under wrote deals or are underwriting deals now, you know, the, the percentage you have in reserves, you know, will be, has been affected by a lot of investors. And I'm talking from, from just, you know, the mom and pop shops to institutional companies that we deal with that they're starting to think a little bit more about, you know, how levered do they want to be and just having outs because they don't want to be in a position where we have, you know, economic situation like we have had over the last year and kind of be, be caught, be caught in the rain there.
Yeah. That's
Speaker 1 (6m 55s): Exactly it. And I think again, yeah, hard times make good people. So it's
Speaker 2 (7m 1s): So positive
Speaker 0 (7m 2s): On your, on your agenda. It sounds, I mean, clearly there was a 3,500 units. You guys have been busy what I'd like to actually for, for listeners that don't know the asset class, you know, we've had people that come up have, come on the show before we get to the apartments. Just the actual moment, mobile home parks, especially for the listeners, you know, half of the listeners are, are, are Canadian half, roughly, half are in the states. And the mobile home park is, it's not a particularly large asset class at all in the Canadian market, but we always have people on and from the states.
And I'd love to just get your, you know, what is it and how were the deal structures in terms of leasing as opposed to ownership and, and maybe how, how you stumbled, stumbled into that virtual. Sure.
Speaker 1 (7m 48s): Yeah. So there's, there's a lot of different types of mobile home parks out there. I mean, there's RV parks and there's like combinations and there's mobile home parks. Where, where the, the, I mean, essentially we're talking mobile home for those who really have never heard of one before. We're talking about these little houses that are typically two, three bedroom, maybe one bedroom, they're typically 10 feet wide, 12 feet wide. They have double-wide 14 foot wide, or they have double wide ones, but they're like shells that you then put little rooms inside of it. And it's typically a cheaper building material to be typically a flat roof. Not all, always there are really popular back in like the fifties.
They, they started getting prevalent here in north America and there's millions of them. Units, not properties of millions of people in America still live in mobile home parks. And in Canada, some do again, they're not as popular, but they are up there and they come across our plate. Occasionally we don't buy them there, but just cause it's not our, we don't, we don't know what we're doing there. So I'm a big believer in having a focus, interrupt
Speaker 0 (8m 43s): You for just one second on that. I'm just curious. Are you, are they predominantly in Eastern Western Canada? Like were where have you seen deals come up? I've
Speaker 1 (8m 51s): Seen him all over the place in Canada. Yeah. I've seen some, I've got someone was to, is that the name? Yeah. So I've seen them there. I've seen some out east, maybe one or two have ever crossed my plate. We don't get them. They're so rare. And they're also, sometimes they're usually more on the RV park side where it's, somebody has a bunch of RVs and maybe they put a bunch of mobile homes on them, but they're not real great in cold weather. They do them. I mean, we buy them in Minnesota. We buy them, whatever, but they just don't work quite as well in, in cold weather.
So I got my first one was in Maine. So it's definitely possible. Maine is the cold north, about as cold and north as you can get in in America. Okay.
Speaker 0 (9m 29s): So we're, we're on the, we're on the mobile home parks where these are the smaller houses, millions of millions of people in the U S are still live in these. What, what kind of, you mentioned there's a, there's different variety of these.
Speaker 1 (9m 43s): Like sometimes the owner will own the land and the homes and they just rent the homes out. That's that that's done. I don't like that model because mobile homes tend to break easier. They're one step. They're like a cross between a car and a half a house. And when we say mobile homes, typically they don't move. I mean, they can move, but it's not like, oh, it's not like an RV or a motor home or whatever you call them. Do you guys call them RVs and RV or motor? So, okay. Yeah. So same terminology. So it's not like that where you just like pick up and drive it. They have to be moved on the trailer. You have to put wheels on them and they require between five and $10,000 to move them.
So they're not, they don't get moved very often, but they are movable. And so sometimes the land, again, the owner will own the land and that, and they'll rent them, but they're usually not very good quality. They break easier. And so I don't like telling them, I'd rather have a tenant who can go and fix his own toilet for, you know, $30 rather than me having to fix a toilet for $400 with a plumber. Because knowing that things are going to break a little more often and there's a little more, you know, they're a little thinner walls and a little bit thinner studs and a little bit thinner, everything a little bit, just not as good quality wise.
It's like a traditional stick built house. So we like to buy them where we own the land and the tenant owns their own house and the tenant, maybe they moved the house in. Maybe it's been there all along. Maybe we buy a house, we move it in and we sell it to a tenant and they buy it and they own it then. And the beauty of that is that they're just paying lot rent. Like they're just paying for the right to have their house on my lot. And typical lot rent is 250, 300 5400, maybe on the high end. I think we have some nicer parks that might be up to like 600, but most of them are usually in the $300 range that they pay for the right to have their property there.
Then they typically pay their own water and sewer bills. It's just like, they own a house, but they have to pay to keep their house somewhere. And it's a relatively low-income way. Like it kind of addresses a low-income problem in America, which there's just not enough housing. In fact, I was looking up some stats today and it's like 30 or 40%. Okay, let me, let me, I'll read it to exactly. It was from the, where is it? One more, the national low income housing coalition. They put out a report and it said that 40 was say 40%, 44% of all workers, 18 to four are low wage workers in America.
So 44% of everyone who works is making a, what they call it a low wage. There's 38 million Americans in poverty. There's 36. So it says for every hundred, extremely low renter households, like poverty households for every hundred of them, there's only 36 affordable properties in America. So in other words, the majority of those people can't afford to live. And so they're having to live multiple people in one house. So this kind of addresses that it's like, Hey, you can, you can live here for 300 bucks a month or maybe 600.
If you're going to pay for the house as well, you're gonna make a payment for the house, which is how we oftentimes will do it. But yeah, so there, it addresses that problem of low-income it creates kind of community feel a lot of mobile home parks have a stigma because there's has been a lot of bad management of mobile home parks has been a lot of violence. You get, when you get low income people, it tends to drive more drama and violence for whatever reason. And so we buy them, we fix them up, we make them nicer and then we make money.
Speaker 0 (12m 55s): So ma maybe walk us through what it would look like. So you have, you're looking at the type that we're, you have somebody that will actually own their unit. Right. And then pay you basically some right to be on that, on that land. Is that right? Yeah.
Speaker 1 (13m 10s): Yeah. So they own their own house. Typically. That's what we want. We don't want to own the house. So yeah, they own the house. They pass through 300 bucks a month that they pay their own water bill. And the cool thing I like about these is that they don't, the cashflow can be very stable because I don't like the water bill. Doesn't go up and down the sewer bill. Like people stay for a long time. Cause it's so expensive to move a home. They don't want to leave. It's their home. They're not gonna leave it on like an apartment where people leave every two years, a mobile home park, they might stay for five or six or seven years on average. And so we get much more predictable, stable cashflow that I like to say is very recession resistant.
And I say that like this, let's say the market crash. We have a big recession and you're a millennial living in Toronto and you're paying $3,200 a month for rent. I don't know what rent is, are five grand per month for rent four grand a month for rent. So let's say your $4,000 a month rent during a recession. You're like, oh, I got to tighten my belt here. I gotta, I gotta say some money. Those $4,000 a month people they're not going to suddenly start paying 1200 bucks a month over in the worst part of town. Right? What are they going to do? They're going to tighten their belt and they're gonna go from 4,000 to 3,500, the 3,500 people.
They're gonna be like, oh yeah, tight times. I'm gonna go down to 3000. And, and everybody, it condenses from the top down, but it's not like the people paying 300 bucks a month are going to go, well, I got to go live under a bridge that they just keep paying it. It can press us from the top down. And so I would be worried about owning a rental with $4,000 a month, rents in a recession, knowing that there's, who's going to rent that in bad times, those people get stuck and you have to drop the rents down to 3000 and Ellison. Their NOI is just in the, in the hole and they're upside down. I like the mobile home parks because it's a much smaller number, but let's say you have average lot rent.
You buy a property or average lot rent is $200 a month, which is not an uncommon thing. And you raise the rent over the next couple of years to $300. You're only raising a 100 bucks, but what did you actually do percentage wise to the NOI? You increased it 50%. Imagine buying an apartment, increasing your, your rent 50%. Like that's a, that's a huge jump that you'd be on the front page of every newspaper for, you know, gentrification and, and kicking out tenants. But we're talking about a hundred dollars can make a 50% difference in your NOI. So it allows for pretty massive growth in an industry where cap rates are the same as they are in apartment complexes.
So if you're buying at a four cap or a five cap, you can do some dramatic increases with value edges by, by raising rent or by infilling putting more units into it. Yeah.
Speaker 0 (15m 39s): I think it speaks to, to the last, whatever the, during COVID a lot of the AAA A-class property that, you know, took the, took the hit, right. That's where it first took off, took it on the chin because you know, you're not, you're not thinking, like you said, of, of doing four or $5,000 rent for a two or three bedroom anymore, you're doing, you know, you're going to break down to be class and then the bees are going to come to see, but you're right. See, doesn't just,
Speaker 2 (16m 2s): You know, they're still around. They're still around. Yeah.
Speaker 0 (16m 4s): So in, you know what, the, the thing for me, conceptually, I've always tried to understand with the, the mobile home parks you're talking about is that when you have an apartment building, say it's a 50 unit apartment building. Part of the strategy is the rent. Clearly the other one is the, how you allocate your capital. As it relates to, you know, say there's equity appreciation. You have a, a capital event you refinance in five years, take that money out. And you know, in, in, you know, play with the equity component, how does it work in mobile home parks when you're taking on, you're taking this kind of rent that they're going to give you because they have the lot, but you technically don't own the, the, the structures.
Do you own the land? Yeah, we
Speaker 1 (16m 46s): Own the land. And so it really works the exact same way. I mean, we, we treat it exactly like you would buy an apartment complex. Like there's really no differences other than the fact that you don't have to send in a plumber to fix the toilet. The tenant takes care of their own. And we still deal with a lot of rehab stuff because we're constantly buying houses. Our strategy is actually not the jack-up rent. Like that's actually some, some companies, this is where mobile home parks get a bad name. They will buy a property where a lot rent is $200. They will then go in and they'll Jack the rent to 500 and they'll say, well, tenant, what are you going to do?
You can't afford to move your house. So screw you. That's what people and like, it's, it's sad. I understand it's capitalism. This is how it works. Right? The, the, the it's business of whatever, but it still hurts. And I don't, I don't like that. What I would rather do is say, Hey, your lot rent is $200 a month. Okay, fine. We're raising at the 2 25 and the next year or two 50 next year, maybe 2 78. So we raise it over time. But what we want to buy is we want to buy a property that's 80% occupied and make it a hundred percent occupied because unlike multifamily, let's say you like, you buy an apartment complex.
And then I buy apartments too. I'm not saying they're bad, but if you go and shop for an apartment right now, and it is 80% occupied, you are likely pain and like cap rate as if it was completely full, because they will assume, oh yeah, you're just going to add those 20 units, you know, 20%. And you'll be fine. So you're paying actually for those units that are empty on a mobile home park. That's typically not the case. If it's an empty lot, it's not included anywhere. Even in the brokers, like the pro forma, it's not included in there. It's just like, yeah, that's not rented.
So we're not including that. So you were literally buying them for the value of a 70% occupied property. And so when we add in those 30 more percent or 24% or whatever, it dramatically increases the value of our property. So now we're combining slow rent raises that keep our tenants like, you know, taking care of them with this idea of infill. And so combining the two together creates a pretty massive increase in NOI, which then allows us to refinance, do the same stuff, take out capital or sell a few years later and take a, you know, property that you bought for 5 million and go ahead and sell it for 10, three years later.
It's like, those are doable things.
Speaker 0 (18m 54s): Yeah. It's like truly you're creative in the, in the sense that you're going to actually bring each, you know, vacancy, whether it's 20 or 30% actually value add dollar for dollar. So of that 3,500 Brandon, the, so that was all in the last year, year and a half. And what percentage of that, or how many units of that are, or if any, are apartment buildings as opposed to mobile, mobile home parks. So the
Speaker 1 (19m 18s): Apartments, the apartments we have, we haven't closed on yet, but it will out of it because 3,500 is the ones that we have under contract and the ones we own. So all we've closed on so far since I, you know, the last two years have been mobile home parks, that's like 1700, the other 1800 out of them. About half of that, is it a park is an apartment. So I think there's three in Colorado and one in Houston that we're buying. So total, maybe 700 units combined of all of that. And so, and I like the apartment stuff too. There's nothing wrong with it. And it's great. And I want to do a lot more of it. In fact, it's way more scalable.
This is why we actually going into it. There are only 50,000 mobile home parks in the entire country or in north America that are left 50,000 of them. And that might sound like a lot, but there's more multi-family in Houston than there are mobile home parks in the country. Yeah. Small number. I
Speaker 0 (20m 3s): Was going to say in the states, I can't remember the latest stats, but it's something like 25 million units in the country or something like a apartment. Cause I think that the actual housing units is like 50 million or something, but the, we were talking with Jay Scott, he was on the podcast a couple months ago, or maybe yeah, maybe a month ago. He, and he was talking about that sweet spot when it comes to multi-family where he's like, you know, the smaller multi families are great. You can find good property management. He's like the big, big stuff, you know, 80 plus a hundred plus is great.
Cause you, you know, you can hire one or two full-time people. You can have a really qualified management and he's like, it's that stuff in the middle. He's like, it's very challenging to have good management.
Speaker 2 (20m 44s): So maybe on that yeah.
Speaker 0 (20m 47s): On that point for, for you scaling. So th th those sound to me, like still pretty expensive markets, Houston and Colorado. Right.
Speaker 1 (20m 56s): They, they are, but there's also, that's where everyone's moving to. And so that's why we, like, we're looking down the road, like where is the macro economic drivers happening? And it's in those cities, like, it's the Nashville, it's the Austin, it's the Houston, it's the Denver. And so if we can find a deal, that's pretty good. I think we'll be able to, I mean, we're not, we're not buying based on appreciation, but I think we've got a really good shot on appreciation because of just the population growth. And the fact does not build in enough in those areas. And so that's why we've kind of focused to the apartment side, like mobile home parks.
We have our criteria for location, but it's not as strict as apartments because like even in a smaller area or an area that's not massively growing, there's always going to be a low-income people. They need a place to live. And so I'm not worried about that on the apartment side though, like I want to make sure that we're about a 500 unit apartment building. I want that area to be going up in value because I need appreciation to play a piece in the growth versus mobile home parks. I don't really need appreciation to play as much of a piece. That's kind of more of a cashflow game and a, and a forced appreciation game.
So, yeah, it's challenging
Speaker 0 (22m 1s): Too. I mean, if you have investors, you know, you, at the end of the day, we, we talked about this last time cashflow is, is crucial and you don't want to just, just bank on appreciation in any way. But the reality is when you have investors and you're showing them some exit cap rate, some, you know, something that influences IRR, you have to, you have to factor that in. And hopefully you're in a, in a market where you can justify that and illustrate that to them.
Speaker 1 (22m 25s): Exactly. Yeah. So if we're, if we're projecting, let's call it 3% per year appreciation. If we're going to say that, like, I would feel comfortable saying that in Houston, I would not feel comfortable saying that in Cleveland. Right? Like, I'd be like, that would be a stretch. And at the end of the day, like we're only as good as our last deal. If we start doing crappy, like, you know, giving, you know, 3% IRR because we, we underwrite a F on the road, underwritten, underwritten by underwrit underwrote eighth, like a 5% per year growth. And really we're in an area that's losing 2% every year.
That's a problem. So that's why we're betting on the better markets. Yeah. You don't want a
Speaker 0 (23m 1s): Hundred unit apartment building in Buffalo with a hockey stick graph for, for appreciation. So what, what is your, you know, call it apartment perfect apartment avatar in terms of unit count, some of the economics, maybe some of those macro economic trends you're talking about. Yeah. I mean,
Speaker 1 (23m 21s): The big, the biggest thing that we look for is the, a we're looking for the population growth. Like we care a lot about that. We care about the, a decent amount of what the landlord tenant laws of the area. We'd like it to be a little bit easier. I don't want to be in California or Hawaii for those reasons. I mean, everything's got a price, right? If you buy a good enough deal, maybe I'd survive California. But I prefer that a unit size, anything over a lots, I mean, a hundred lots or a hundred units, depending on if it's apartment, I don't want the middle, that middle spot.
It's too hard. Right. I want to be able to have staff and to have people, I want a clear path for a forest appreciation. I like value. And I'm not saying I want to buy a completely junk or property. I like to have cash flow today. We call them cash growth deals, one word, cash growth. It means like you get cashflow from year one. I'm not doing development. I'm not doing projects that won't make any money. I want to make money from day one from year one. But I also want a clear path for growth in a value. That's not dependent just upon, let's do 3% per year for appreciation.
Absolutely. Right. So yeah, the property we bought in Houston and they we're buying in Houston right now, there's 530 units, but three of them have been 300 of them have been completely remodeled and are achieving a way, way higher rent. So we have a very clear path, okay. The other 200 or whatever, two 30, we're going to remodel them. And now we can get the same rent that these other 300 are add. So I don't have to guess on, like, I wonder what will happen if I remodel this unit. So we have a very clear path towards growth and it's in a great area. It's got all of their benefits to it, but yeah, and for me right now, bigger is better because we, we can raise money better than most people can because of my position, you know, in the, in the world of BiggerPockets and everything.
So it, it takes less work to buy a 500 unit property than it does to buy a 12 unit property. I don't know why, but it's just the way that it is. And so I would rather buy a big deal since I can afford it, then buy a little deal. It's just way, way more bang for way little effort. Yeah.
Speaker 0 (25m 17s): So the, the Houston market right now, w like, where would you guys be in on a per unit? Is it, are they in the 200,000 per unit range? Are they generally,
Speaker 1 (25m 26s): Yeah, generally in the 200, 220,000 range, we're buying ours at one 18 and still, like, we felt pretty good about that. And again, it's a larger deal, which you can tend to get a little bit lower cost per door, but yeah, we're buying out like one 18. And so I think we got a lot of, a lot of room. Yeah. Growth.
Speaker 0 (25m 41s): Our are at the, at the brokerage house I work with. I think we're on average now Toronto's is just kinda gone insane. We're at 300, 330,000, and those are the big, those are big ones. Those, those aren't like, yeah, it's, it's pretty crazy. But yeah, I mean, that's, that's good to hear that there's still deals like even in, in a good markets in Texas, because I totally share your view on the, the landlord tenant or the regular regulatory framework, because like you were saying before, at the end of the day, there's there's extremes, right.
You don't want to just Jack up somebody's rent three times, but you also don't want to, you know, with rent stabilization in New York rent stabilization. And I believe DC in California, you know, 1.2% a year is it's kind of a joke. And, and like, it's it's to me and I won't, I won't get into it, but it's fairly paternalistic to say that people can con can't contract on their own. You know, it's not it's of like consumer protection laws, everybody, all of a sudden is a little old lady that can't can't help herself, which obviously we've got to look out for those people.
But anyways, the, so these deals, I want to talk a little bit about how you started in terms of the structure of how you you're raising capital for these deals. You mentioned the bigger pockets, because, you know, if these are syndicated or private equity deals, it seems like you're using I guess, 5 0 6 C or are you where you're, you're able to kind of advertise. Maybe you could talk a little bit about that.
Speaker 1 (27m 16s): Yeah. So we got the file of six B and five or six C options. Right. I don't know. Do you guys have those in, in Canada
Speaker 0 (27m 20s): Or call them national instruments, but they're very similar. There's, you know, credit investor or family and friends, all that jazz.
Speaker 1 (27m 27s): Exactly. Yeah. So we, most investors started the 5 0 6 B level in America and they family and friends, they start there. We kind of just started with C because of my position on the podcast and having a big platform. And I got a quarter million followers on Instagram. And so we, we just, I have to be able to advertise. And so we went, we went five with 60. It means we can't take unaccredited money or non-accredited money, but that's okay for now. Maybe we'll figure that out in the future with, they have things called the reg A's, which allow for both, but I probably won't go that route. Was that okay? Was that
Speaker 0 (27m 55s): Kind of the grant Cardone? Like that's the root cause? Cause there was, there was like, I think there was as low as like five grand or 10 grand. Okay. And here's why
Speaker 1 (28m 4s): I don't want to go reggae, but here's the, here's the truth. Like grant Cardone got sued. I don't know if you'd knew he got sued by a guy who put in 10 grand. Like he didn't get sued by the guy that put in a million. He got sued by the guy put in 10 grand. And like, I'm sure that I don't know where the lawsuit ended up. I don't know much about it. Other than that, I heard about it and they probably will settle or did settle. I don't know. But that's the annoying when you bring in uneducated money and unaccredited money, you get the people who are like, well, he said where I was going to make 15% every year. And I only made 3% this year.
And he's like, yeah. I said, IRR, like over time and the it's IRR, like that's where, that's where you get those people. The more money people put into my fund, the less questions I ask, just a phenomenon that I love. And it's the people that put in 30 grand that are asking all the questions and the people that put in the millionaire, like where do I send my money? Yeah. Which is great. You keep sending me emails. Can you stop sending me money? Yeah, exactly. So five. So we did file a six C we on, on the first, I mean on everything we've done has been five or six C's or we did funds for the part.
We do funds for the mobile home parks, because the average price of a mobile home park is three to $4 million. We've steadily increased that because we want larger and larger properties. It's now like right now, our average this quarter, I think is like seven, but there's still smaller deals. And so I don't want to just put plus their mobile home parks with people view as a little riskier. And so I don't think they are, but people view them that way. So if we package multiple ones together, everyone feels better and it's a bigger amount of money and it's less paperwork. So what typically put fi between three and seven parks into one fund, probably average of five.
And for example, our newest, we raised $19 million on fund four. It was a 19 and a half minute. Well, it was a $20 million raise. We shut it off and money has been trickling in the last few days. And we're at 19. I think we're just gonna call it good. Cause that's about what we need to close on the five or six parks we have ready to close. So that's how we do that side.
Speaker 0 (30m 1s): So I'm curious. I was, I was listening to, I can't remember what podcasts now, but it was a, it was talking about the funds and I was, I was explaining it to a colleague of mine that, you know, there's, there's callable capital, you know, there, there is capital where you actually have to, you have it fully invested and then you better have pretty or, you know, they actually give you the money. So you better have pretty good deal flow. If you're going to have money sitting somewhere, how do you structure it in terms like, do you have a commitment that they have to actually give and then it's called.
And then the second question, when you actually have investors that do that, do you have a, a percentage allocation that they make or is it kind of first come first serve?
Speaker 2 (30m 45s): So we
Speaker 1 (30m 46s): Do a little bit of a hybrid, but basically we, we raise all the money to begin with and we just have good deal flow. Yeah. We are very meticulous on our outreach, on our broker relations on our off-market search. We're very detailed and very systematized in it. And so for example, we like, we get 10 point, whatever percent of our offers accepted. We just like, we just get that. We just like, so we're like, okay, so we made 74 offers or whatever it was. Or 76 offers, I think 74 offers. And I'm like that in quarter two and we got seven offers accepted.
And so like, we just know that like, we're pretty, we're pretty like straight when it comes to our funnel and, and we treat it very much like a business. So I feel like our deal flow has been, been pretty predictable as from the beginning. Now there are, there have definitely been moments where we're like, okay, well we got $6 million sitting in an account right now and we don't have any properties. This is like, we're just losing money right now. And like, we're draining, like our investor returns are going to drop a little bit, but it's not as substantial as people might think, like over a five or seven year, time period, if you have money. Yeah. It moves out. If you have money sitting for six months doing nothing, it might drop your IRR by a quarter percent.
Like it's not a, it's not the end of the world that said that hasn't really happened when we just continually, we typically what we want to say hybrid, what we kind of do is we raise in, in chunks based on what we need at the moment. Right. So like, or what we think we're going to get. And so it sounded like we'll have a $20 million fund and then we'll go raise like a bunch when we launch and we'll have five or six or 7 million with trickle in. And then we'll start using that with our buying properties. And then it's like, okay, we're getting kind of low, better put on the gas again. And then we'll go and I'll talk about it on my Instagram and on my podcast.
And all of a sudden more money comes in and then we pull off the gas. And so we can, we can throttle it based on what we kind of need. And that's been really helpful. The downside is that means we're typically raising for blind funds. It means that people that we can't say here's a property. This is what the numbers are. Instead. It's like, this is the team. Trust us. We're going to take this take care of you. And that's a little bit harder sell. So it takes a little longer, but as we will, the track record, and as we get more and more deals, we start going full cycle on.
I think that'll be easier. So we've raised $75 million in the past 13 months or something like that. Yeah. Thanks. Yeah, it's been, it's been crazy, but I think that's just the beginning of what we could do. Cause now, like we're looking at selling our first fund and we're moving into the next. And so like as we get that track record and we say, look, what we did over here, it's going to be easier and easier to be able to have people trust us. And then the apartments a lot easier in terms of like, this is the apartment and those are, those are one-off deals that we can explore.
Speaker 0 (33m 23s): Yeah. The a I'm reading the a hands-off investor. And we had, we had Brian, Brian on the show for, on Burke for anybody that, that wants to look it up. And he, he, he said, you know, you said trust. He's like the fund is the trust vehicle. He's like, that's what the fund is. You know, the building, if it's a syndicated one-off, you can go, you can touch it here it is. But like you said, it's, here's our investment philosophy. Here's our track record. Here's the team trust us. So on that, on that point. So 75 million that's raised for that. And you're talking about now potentially selling the fund.
So the fund, would that be the mobile on a mobile home site?
Speaker 1 (34m 0s): The first one we've done for mobile home parks. So it's our first one was small. It was only five, $5 million. I think total, we raised, maybe it was four. And then we bought, you know, $8 million with the real estate. And so we're looking, or I don't know what it was somewhere in there. And so now we're looking to sell that one. In fact, we should have decided for sure, we're not, we're not a hundred percent committed to it because I think there's still a lot of meat on the bone of a we're only selling it. So we can say, look what we did. We've got a track record. We've gone full cycle now in our, in our first fund. Now we can go to the next level, but I don't really, I'd rather not say, I think we can make more longterm if we don't, but I need the reputation that to grow.
So yeah, I'm the
Speaker 0 (34m 33s): Same way. True real estate guys. No, no, no, no, no. I never saw, so I'm like, I don't
Speaker 1 (34m 37s): Want to sell it. There's so much there. And I think we're, it's such a good point. Yeah. Right now in the market to buy. Yeah. I think we're going to see. Yeah. So when
Speaker 0 (34m 44s): You, the logical buyers for that, so it would be kind of a portfolio sale of whatever assets are rolled up in that fund. And, and then I assume it would be the same down the road for, for the apartments. And on that note, just on exits, you know, when you talk to investors, for instance, you know, stuff that you're purchasing say 20, 21, 20 22, when you talk to investors and I'm sure you get the question, like everybody in our world gets is, you know, what's, what's the exit strategy when, you know, when do we realize a return?
What, you know, what constitutes a capital event, you know, and how did they get the return of capital? What do you, what do you kind of, what do you do with these, these funds on the apartment side now?
Speaker 1 (35m 27s): Yeah, on the apartment side, as a side, typically say five to seven years is our expectation, but I always make the disclaimer. I don't want a thing. I said five years to go to when we sell, I want performance today, state when we sell. So if that means we're going to do it in four years or seven years or nine years or five years, like if you can't be flexible, then we don't want your money. And we're very blunt about that. Like, we want to work with people who are flexible enough because we it's all about managing expectations. If I said five years and then it was six. And then you get a bunch of mad people. But if I said six, they'd be fine.
It's all expectation management there. So kind
Speaker 0 (36m 1s): Of like you were talking, I don't know if it was before the show or at the beginning of the badge of honor of going through certain recessions where some investors won't invest with people, if they haven't gone through, you know, some sort of financial or economic calamity, but it is one of those things with, you know, if you said to investor, I don't want something five years ago that I say, I said in 2015 to dictate and, and you know, COVID happens and now, and now I have to, you know, commit to that. Five-year.
Speaker 1 (36m 27s): Yup. And so I'd rather give, I would rather give myself some flexibility. So on the apartment size and on the mobile home park side, both of those, we say five to seven or we like, we're flexible, be flexible with us and let's just make sure we're getting the maximized return that we can get everyone the most amount of money because that's what matters.
Speaker 0 (36m 44s): That's awesome. All right, Brendan, I want to shift gears, you know, time flies when, when we're chatting and I want to talk a little bit about the book you mentioned, correct me if I'm wrong. August mid August.
Speaker 1 (36m 55s): I think it's mid August, 1918. Something like that comes out. Yeah. I should know that exact date, but it's moved a few times.
Speaker 0 (37m 1s): So yeah, for listeners, a little bit of the backgrounds for the book I know is I assume it's under the BP brand a lot. You guys always have great, great content, great books. I'm sure you got some amazing Amazon stats for all those books, but yeah. Give us a little bit of a background on it.
Speaker 1 (37m 16s): Yeah. So the, the, it started with Brian Murray, who was my partner and opened our capital. We invest in the multifamily together. I was talking about how, like there's no like S like book that we thought could be like the definitive book on just multifamily, residential multifamily, real estate. And so we started talking about, well, maybe we should write one. Maybe we should talk about this. I mean, he's written one on commercial real estate before, and it included apartment stuff, but it was just more on general, large commercial. And then I've written obviously like a bunch of books on residential, but it was, it was very wide. And so we thought, how do we go a mile deep on one topic that's very popular right now is commercial and or sorry, apartments.
And as we did that, we realized we couldn't do that because multi-family when I say multi-family, some people think duplex and some people think 300 unit apartment complex. And that the truth is they are very different, very different, right. Every, and so where do you draw the line? And, and, and at first went, okay, well, four units in smaller is residential and five units or greater as commercial. Okay, well, who's syndicating a five unit property. No one is right. Yes. The financing is a little bit different, but that the game is the same.
If you're buying a three unit or a five unit, or even an eight unit or a 12 unit, it's all kind of the same. So where do you draw the line? And I'm like, I don't, I don't know. But at the same time you could syndicate a duplex if you want it to. And you could have a team that buys duplexes. So it's not unit number. And so we define it as approach. There's two approaches to real estate. There's small, multi-family real estate approach and there's large multifamily approach. And the way the best, I mean, there's a bunch of definitions we've defined here, but the one I like the most is if you know your tenants names, you're probably a small multifamily investor.
If you don't, you're probably large, right. Because if you you're, if you don't know who your tenants are, it means you've got people in place. You've got systems, you've got teams, you're probably raising the money for it. You're probably got quarterly meetings and you're issuing distributions and all that stuff. That's the large game. So we wrote two volumes that are like, I wrote most of the first one with some input from Brian. He wrote most of the second one, some input from me. And so volume one is on small deals, like how to buy that first apartment. I mean, the first, you know, duplex fourplex, eight unit, 20 unit, how to self-manage or find a local property manager.
And then his book is more on like, how do you build a team? How do you syndicate? How do you raise money? What's a mezzanine debt. What does that mean? Like all those things that are on the, on the larger scale. And so we're just launching them together at the same time. Cause most people are probably gonna end up going from book one to book two over the course of their career. So that's, that's the books.
Speaker 0 (39m 42s): That's, that's probably the direction you want to go. And I really, I liked the, the breakdown of that because it kind of gets to the, the, the different markets that we have, you know, like we were just talking before a very expensive markets, whether they're in the states or Canada, when I hear somebody's bought, you know, X amount of units for 5 million, you know, and that gets you, like you're saying before, like a six unit in, in a certain market. And it's like, well, you know, raising $5 million, you could definitely syndicate a $5 million deal. You're raising, you know, whatever it is, you know, a couple million dollars worth of worth of equity.
Whereas, you know, that size unit deal would be like a couple hundred thousand dollars in, in some small markets. So I like that. That's, that's really cool. So the book itself, the, the volumes, it sounds like kind of the progression for each one is the same. Like, are they structured relatively the same? So that they're kind of a companion. Yeah. Pretty
Speaker 1 (40m 34s): Similar. So, you know, you walk through all the basics that you'd get. So how to find, you know, how to, how to build them, how to build a business plan around it. Like what, what are you gonna do? How do we make that real? So I'm a big believer when I write books, I love to make things real for people. So not just theory, but like, let me, let me show you how this plays out in real life. So for example, I have a chapter in there called like, oh, shoot, what's the title of it, basically like financial freedom in five years. I think like that. And it basically walks people through a, let me see if that's actually correct on the title. I know we changed that a little bit. Yeah. Financial freedom in five years. And it walks through a concept that's a little bit complicated, but the idea being a lot of people are overwhelmed by the idea of owning a 20 unit or a 50 unit.
It's like, that's so many units. I'm just getting started. How I do that. I'm like, don't worry about the 50 unit, but it doesn't mean you have to be stuck on single family. So imagine you bought a duplex this year and I walked people through the story. Like you bought a duplex, here's what it makes. Here's how much it brings in. Wow. You're making $300 a month in cashflow. Good job. Like, but that, that first deal is so important for forging your identity. And then next you buy maybe a five unit and then maybe a 10 unit and then maybe a 30 unit and then maybe 50 unit. And so that concept really shows you that in five years you could get to like five, 10, $15,000 a month in passive income and you just scale up slowly.
And so I could tell somebody that, or I could paint it into a picture. So that's an example where I, I did that in and then walk through the chapters, obviously like how to find deals, how to fund them off market on market, how to, how to finance them some creative strategies. I spent a lot of time talking about the different types of multi-family like, you know, like the monster house, which is like, those single family has been converted into like Frankenstein Frankenstein. Exactly. They just add on units here and there. Like how many of us have those? I have a few of them still where they're like, they were not meant to be a multifamily, but they've made them there and I've walked through the pros and cons.
And like, how, like, how do you deal with that? Or the side-by-side like, I love side-by-side duplexes and triplexes and fourplexes. Cause the water meters can be separated usually. So you can shift the water under the tenant, like that little tip, like things like that versus a up and down duplex where the water meters are all pro all the water lines are connected together and it gets really difficult to separate. So there's a lot of like specific about that in, in the books. Yeah.
Speaker 0 (42m 38s): That's very cool. Yeah. It just kind of got me thinking too, like we don't have Costech here. I don't think you're actually allowed to, but, but separately meters is like, it's huge. Right? When if you can get everything where suddenly your expense ratio goes from 50 to 30%.
Speaker 1 (42m 52s): Yeah. Yeah. And, and there are property types that allow for that easier than others and there's rubs and there's all that like that you can throw in there. But yeah. It's like knowing those little intricacies that, that can make or break a multi-family that's, what's kind of the goal. Yeah.
Speaker 0 (43m 4s): Yeah. No, you know what? I think it's not cost sake. Really. It's a ratio. Utility billing is rubs, right? Yeah, yeah, yeah. It's I know there are certain states allow for it to like certain ones. Yeah. So that's cool. Different, different building style and yeah, just a it's funny when you talk about scaling, it's so true. It's so much easier to, or at least, you know, I'm a visual person. So to me, stories are the, the visual words and you can kind of conceptualize it, but it's so true that when you come to somebody that says, Hey, a 30 unit until you do do a 30 or 10 15, whatever it is, it's you don't realize that it's actually less of a headache because then, you know, you can have support.
Whereas you buy that one or two, it's like, it's more of a headache. Cause it's all you. No,
Speaker 1 (43m 50s): I bought, I bought a condo, a single condo here in Maui recently, not one condo has been more work than 3,500 units combined. Like it's insane. It's insane that that's, I'm saying that, but one little condo is more worth than 3,500 units and it doesn't
Speaker 0 (44m 5s): Yeah, 100%. Cause like you're, you're like, what did I do Tuesday? Some reason I was on the phone with a utility company for two hours.
Speaker 1 (44m 11s): Yeah, yeah, exactly what that is. It's constant problems and contractors not showing up. And of course it's not big enough for me. I just have a team to take care of the whole thing. So I just gotta do it. And I'm like, what am I doing? Like, this is stupid.
Speaker 0 (44m 23s): Yeah. And you know, it's w where are you talking about kind of growing to that, you know, you forge your identity to that. I think it's very much like a startup company and a lot of times the CEO or the founder of the company, although talented and we're in, we're in basically integral to having that company become something may not be the best person. Once it's an enterprise, as the manager, you know, where you have more people that may be more system oriented systematized or system oriented, but that's really cool. I, yeah, it sounds good.
So we'll, we'll take a look out for that. And if, you know, we release this after that, we'll put a, put a link up to it. So I just, I want to be respectful of your time, Brandon. I just want to let listeners know for Opendoor capital. And I'm just curious personally, what, you know, what do you tell people that are interested? Want to learn more, want to see what you're up to? And like you said, who is the team and what is the investment philosophy? Where should they head to?
Speaker 1 (45m 20s): Yeah, so we do something kind of different. So what we do is we go to an intersection. If you want to give us money, you have to put it in a briefcase, all cash. You go to intersection, we cross the busy intersection, you dropped the bag, we dropped the cash, you dropped the cash. We give you a little bit of a piece of paper and we're all good. Just no cops, there
Speaker 0 (45m 36s): Must be no, my cousins or something.
Speaker 1 (45m 37s): Exactly. Yeah. You got like tip your hat twice. That's how we notice you. Yep. Yep. That's it. ODC fun.com is our website. We put everything on there. Yeah. ODC fund, which I probably need a new website because now we don't just do funds. So now it's like ODC fun. Maybe we'll be OTC fun. Have fun with ODC
Speaker 0 (45m 57s): GoDaddy page. Exactly.
Speaker 1 (45m 59s): Yep. We have OTC fund. We put a lot of stuff there. I'm, I'm super active on Instagram. And so here's an interesting point for anybody listening to this that wants to eventually raise money is that I once had an investor say to me, the reason I invested in Opendoor capital is because of the way you talk about your wife. And that was such an impactful statement for me because not, not patting myself on my back here, what I'm saying is like, people are not investing in twin Oaks, mobile home park in Ohio, like whatever, like they're not investing in that. They don't know about that. They're investing in my ability to do what I say I'm going to do.
And so you are marketing yourself every second of every day in every interaction that you have in the public. So the way you promote the way you talk about your family on Instagram or on Facebook and the way you comment on other people's stuff, all of that is showing the world, what kind of person you are, can you be trusted? And five years later that people are gonna look back and say, like, I have been following you for years online. And I respect the way you do business, the way that you respond to people or the way that you're kind of the way that you're smart. So anyway, that's a, that's a big thing.
So I knew I try to put my life on Instagram and a lot of ways, which sometimes gets me in a little trouble, but it's good. Like when yeah, it's been, it's been good though.
Speaker 0 (47m 14s): Brandon just say, you know, I I'll pat you on the back, so you don't have to do it. But yeah, like just we've, you know, going back to the first time we spoke on bigger pockets, like, I don't even know now 6, 5, 6, whatever it is now. But yeah, it comes, it comes across authentic. I think a big thing of it too, is I've noticed, you know, much, much smaller scale with myself, the other pieces, they, they can tell how much you love real estate and you, you can't fake that. It's really hard to. So if I look at your page and not number one, it's authentic, I, you know, and say, you're the less, you know, you're more logic and, and you know, less emotion.
What comes across is that you obviously really give a shit about real estate. Because if you didn't, you know, you, you wouldn't talk about it all the time. So I think it's important to, for the principal that you're investing with to love the asset class. Like they, they want to eat, sleep and breathe real estate.
Speaker 1 (48m 9s): Yeah. I totally agree. I have a lot of people say like, yeah, I don't even like real estate. I'm just in it because it makes money. I'm like, well, that's cool. But like, like, man, I love, I love this game. I love every, every piece of it. It's a fun even dealing with nasty contractors. Like I'm like, this is, this is a game and it is a lot of fun to play and it's got real high stakes, but yeah, I'm, I'm, I'm, I'm a lover. So before
Speaker 0 (48m 32s): We, we shut down here, BP con 21, I know it's, you know, fingers crossed everything's going in the right direction. New Orleans, October. Oh my God. Fourth now.
Speaker 1 (48m 46s): Yeah. Fourth, fourth and fifth where there's like a preview Dan. Third, if people want to go to that, I think that those might be sold out though. But anyway, yeah.
Speaker 0 (48m 53s): Some, some pretty, pretty amazing speakers on the, like the center stage. How L rod, I think he's in there. I am speaking. What are you thinking on a I'm on a rental panel. Rental rental real estate, but yeah. Sorry. I was talking to the center stage, like how L rod, but yeah, no, there's a, there's a bunch of really cool speakers. I I've kind of just reading through before we jumped on. So that's really cool. If anybody's interested at all in learning more about this, we were there was it now two years ago, right.
And Nashville, Nashville. That's right. I was like, why were there? I was picturing guitars. I'm like national. Yeah, yeah, yeah, yeah. Yup. Awesome. Awesome,
Speaker 1 (49m 34s): Man. Well, yeah, I'm excited for it. It's gonna be a lot of fun. Hopefully the, hopefully COVID dies down a little so we can have a good time, but we'll see. Absolutely good sign no matter what, but it will be a good time with masks. We'll see. Yeah.
Speaker 0 (49m 44s): A hundred percent. We'll be there. Well, Brandon, thank you so much for being part of working capital. And like I said, when we started really appreciate you, you giving your time and your insight. No,
Speaker 1 (49m 55s): Thank you, man. It's been a ton of fun. So appreciate you. Yeah.
Speaker 0 (50m 5s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Marco Santarelli is an Investor, Author, Inc. 5000 Entrepreneur, and the Founder of Norada Real Estate Investments – a Nationwide Provider of Turnkey Cash-Flow Investment property. His Mission is to help 1 million People Create Wealth and Passive Income and Put Them on the Path to Financial Freedom with Real Estate. He’s also the host of the top-rated podcast – Passive Real Estate Investing.
In this episode we talked about:
- Current State of the Economy
- The Pandemic vs Great Recession
- Property Appreciation
- Valuation
- Importance of Rental Growth
- Inflation
- Mortgage Rates
- Real Estate Outlook 2022
- Mentorship, Resources and Lessons Learned
Useful links:
https://www.noradarealestate.com/marco-santarelli/
https://www.linkedin.com/in/marcosantarelli/
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time.
Jesse (22s): All right, ladies and gentlemen, welcome to working capital the real estate podcast. My name's Jessie for galley and my guest today is Marco Sante. Reli Marco is an investor author, Inc. 1000 entrepreneur and the founder of neurotra real estate investments. The largest nationwide provider of turnkey cashflow, investment properties, and a returning guests. Marco, how's it going?
Marco (44s): It's going great, Jesse. How are you?
Jesse (46s): I'm doing fantastic. You know what, actually, before the show, I forgot to ask you, where are you joining us from today? Southern California. Same base, same spot.
Marco (56s): Yes, but I am a fellow Canadian, so I grew up in Calgary.
Jesse (1m 2s): That's right. That's right. We talked to, we talked a little bit about that last time on the show. Well, it's great to have a fellow Canadian on the show and just a west coast vantage point in the states. How's everything been going a lot is we were just kind of laughing at how long it's been since the last time. Last time we spoke on the podcast.
Marco (1m 20s): Yeah. It felt like two months ago, but really it was about a year ago. So I can't believe how fast time flies. It's just crazy, but I know things, things have been, things have been humming along. I mean, we can talk about the economy in general, but things have been crazy over the last year and I'm sure it's been that way in Canada. You know, COVID kind of put a damper on things for a while, as you know, and I think it drove people a little crazy, not being able to go to the restaurants and do a lot of the things they normally do. And I think people just being cooped up at the house, especially with work, drove some people a little bit stir crazy, and now we're starting to see people come out and, you know, go to establishments and restaurants and, and, and everybody's like crazy busy because people are now wanting to do the things that they haven't been able to do for a long time.
And I think it's the same in Toronto, if not everywhere else.
Jesse (2m 11s): Yeah. I mean the roaring twenties is almost, it's just a, it's a bumper sticker at this point, but yeah, we definitely, I mean, our, our political landscape has been much more similar, I would guess to California then to Florida in terms of how long we were locked down for. And now we are starting to open things up, but yeah, for, for a long time there, we were just kind of shut down and, you know, like I said, we're, we're still kind of finding our way out of it.
Marco (2m 38s): Yeah. Well, I'm glad things are opening up. You know, I, I, I personally believe that a lot of what we saw was had a political agenda and narrative behind it, and it was very much politically motivated or politically based with, you know, narratives behind it that were motivating at all. And, you know, blue believe what you want, go down any rabbit hole you like, but I'm just glad to see this thing moving, moving into or fading into the background because it's not good for a lot of businesses.
Long-term it wouldn't be good for the economy. Certainly hasn't slowed down housing, but housing is being driven by fundamental principles. There's just a lot of reasons why housing has been so incredibly strong and COVID actually believe it or not helped propel that, not, not held it back. So, so anyway, we are where we are, you know, and we just gotta look forward. Now
Jesse (3m 37s): I see you're, it looks like you're joining us from the office today. Has how have the, the regulations been, or I guess the kind of return to work right now in, in your area, are people in the office, are they kind of coming in when they, when need be?
Marco (3m 53s): Well, as far as my company is concerned, my whole team has been remote right from the beginning. I've got, you know, my transaction coordinator in, and my assistant lives in Florida. I'm on the other side, 3000 miles away in California. And my whole team is mostly in California, but they're remote. However, I am in an office environment and I do have other people, you know, in the hall down the hall, it really hasn't affected most people, people for the most part come in when they want. But you know, we work from home. We work from the office and you do what you do, CA California, interestingly enough, California and New York and New Jersey have been probably the most strict in terms of COVID regulations and having, you know, moratoriums and all that kind of stuff, Texas, Florida, the salt water, the Southeast states have been pretty open, open about it, less restrictive and opened up sooner.
And so people were able to go out sooner, get back to work sooner in a work environment, whatnot. At the end of the day, I think, you know, the economy just finds its way and, and people, you know, we try to stay in a capitalistic society and business just finds a way to do business. You know, people want to transact. People want to have Congress and, and, and so people just find a way to do it regardless of what regulations or restrictions they're there, but things are opening up everywhere right now.
So it's, it's a good thing to see. And I, and I hope that's the case for Canada. Cause I know Canada has been even more restrictive than most of the U S you know, you've had these lights, you know, 14 day quarantines and all kinds of crazy stuff going on. Yeah.
Jesse (5m 31s): It's a, it's one of those things where I think, like you said before, it we're moving, it's fading into the back, you know, fingers crossed, but yeah, it has been for sure. I know that, you know, I haven't, haven't read up on the latest, but not too long ago. The ability to come back into the country has been challenging. I've had people on the podcast where, you know, they've had to change, you know, we're coming into Montreal, but we, you know, we, can't not, we couldn't back then, that was only a month ago. So I'm like I said, fingers, I have to talk at the bigger pockets conference in new Orleans, in, in October, which I think it was rescheduled from September.
So I'm hoping everything's all good. We, we are getting the vaccines rolling on their second. You know, everybody's getting the majority of people are getting their second vaccine.
Jesse (6m 14s): So yeah, we'll, we'll see how it
Jesse (6m 16s): Goes. But you know, one distinction, you know, in the midst of all this, and I've talked on the show about it is, you know, we look back at oh 6 0 7, you know, right into oh nine where you had the financial crisis. And one of the key differences aside from like the technical recession was that there wasn't a lot of capital sloshing around and we're in a very different environment right now. Like you said, the, the, the economy seems to find a way, but one big distinction is that even with activity slowing or had slowed down over the last year, there's a lot of capital.
And, you know, as you know, for our industry that keeps the wheels turning.
Marco (6m 55s): Yeah. So the, the, the credit issue back then was that there was too much loose credit and people were getting loans that couldn't qualify otherwise. And, you know, the running joke was, if you could fog a mirror, you could qualify for financing. And so there were all kinds of interesting loan products. In fact, there was financing up to 103% of the purchase price. So not only were you getting a hundred percent financing for the purchase, but you were getting an additional 3% to cover closing costs. So you were literally into deals for zero, zero out of pocket.
And you know, the other running joke at the time was that there was, you know, what they called a, the ninja. Well, there was, I was going to say Nina first assets. And then they came to ninja loans, no income, no assets, no job. Really, if you just had a credit score, you qualified. So, but the problem was, this is, it's not so much that there was loose credit. People were taking advantage of loose credit to speculate. So they were buying real estate thinking there were investors, but they were really just investors in air quotes. And what I mean by that is they were gambling.
They were purely speculating on the market going up and continuing to go up because they saw historically for years prices going up. And this is what a lot of people do. And I find a lot of Canadians sadly do this because all the Canadian markets are so inflated that the mentality is that real estate and investing is buying a property at a price, maybe high and holding it in the hopes that it goes up even higher. And so it's not, it's not even a buy low sell high, it's a buy high hope that it goes up higher and it will be worth something more later in terms of equity or I flip it and I, and I cash out my capital gains.
Well, that's not investing at all. That's speculating investing is when you put in a dollar and you get a dollar 10 back, you know, you have to have cash on cash return. That's, you know, it goes beyond your cap rate with properties. It's what you put in. What am I getting back out every year on top of my investment, you can measure that in terms of cash on cash returns, that's investing the equity that builds with that is your long-term wealth creation. And that's where the wealth comes in from real estate investing. So you need to have all those pillars. You need to have all those, those legs on that stool.
So you have to have the front end cash flow and the cash on cash return. Plus the equity growth over time. They didn't do that back in 2007, 6, 7, 8. In fact, that started back in 2004 and people were just speculating all along, mostly with new construction. And so that created a huge problem where we had all this inventory being built up in at a time when there wasn't enough demand to suck up or absorb all that new inventory coming on. When you compare that to today and what's been happening and over the last 3, 4, 5 years, the fundamentals in the market are completely different.
This is true, pretty much all across the country, in the United States. And to a large degree in Canada where demand outstrips supply, we cannot keep pace to create new household formations each and every year for the demand for the, the demand that's coming out. First time, home buyers, households that are splitting, splitting out from, you know, being one pot or household. Now, you know, people moving out and looking for a rental or a place to buy people moving into the country, you know, net migration into the U S so, and then, you know, the people who've just been holding back plus you've got gen Z and gen Y that are also of age where they're now moving out of the house.
So there's this tremendous demand, and there's not enough supply for it. So th th the dynamics today is different than what happened in oh 6 0 7 0 8, even though credit is still relatively widely available and historically cheap. I mean, we're talking at least in the U S we have 30 year fixed rate mortgages, conventional what we call conventional financing. So you could literally lock in for 30 years at one fixed interest rate, unlike in Canada, where you have to, you know, re re finance every three to five. So we can lock in at 3.3%, 3.5% today and have it for 30 years, super cheap money, super cheap money.
Jesse (11m 6s): Yeah. You know, it's, it's funny. I think we've talked about it before, too on the show where it's the little, the small distant, or not necessarily small, but these distinctions between mortgage products in the U S and Canada, where, when I tell Canadians, or if a Canadian doesn't know that you can do a 30 year fixed product, it's kind of like, wow. But then on the flip side, Americans are always surprised when we say that we can port our mortgages pretty easily from bank to bank for a story from property to property. So, you know, you, you sell a property, you got 90 days, you can move it from TD to CIVC or, you know, from CIVC to Royal bank, whatever, I don't, I, as far as I know, that's not really something that happens in the states where you port, port your mortgage.
Marco (11m 47s): Well, what would the advantage of, of doing that be other than, you know, trying to get a lower interest rate? Well,
Jesse (11m 52s): Because our penalties are so high that if you're in a five-year fixed, and you're trying to say on year two, you sell the place and you're going to incur that penalty. It allows you to not incur the penalty because the mortgage is going to move from one property to the other, but stay with the same with the same financial institution.
Marco (12m 10s): Yeah. I guess my question would be, how often do people actually do that?
Jesse (12m 14s): I did it here because I was in a year, I think 3.7 or something of a five-year fixed term. But yeah, I mean, the other thing too, I guess, is the rates are slightly different. I know our mortgage rates are historically a little bit lower. I know I just secured a five-year fixed for 1.6, one that was about, let's call it three months ago. And I think, you know, what would a, what would a 30 year fixed right now in, in your area? W what, what would you get it at?
Like 3% to two something?
Marco (12m 48s): It depends on your credit, but roughly around three to three and a half percent, but again, keep in mind, you're locking that for 30 years. Yeah. Right. A lot of security there for, if you want it to do an adjustable rate, you can do it like a 3, 5, 7 or 10 year adjustable that then, you know, adjust after that period of time. And then, you know, it's locked for, or, you know, you lock it in for a 3, 5, 7 or 10 year period at a very low rate, no closer to the one point something you're talking about. But then after that, it becomes a variable rate.
The thing with that is you can still take advantage of, you know, a one to 2% interest rate and then refinance it later. If, if, if the rates are a competitive offer, lower enough to refinance it and lock in again, that a lower rate after it, you know, it becomes a variable rate. So there's always ways to play with the, you know, the system and, you know, and, and take advantage of, of the available credit out there. So there's always a strategy. It's just what makes sense today, you know, in a, in a market like you're in, if you're in Vancouver, Toronto, or some of the coastal markets in the U S where property values are very, very high, and you can't get a good cash on cash return today, and your, your play is more equity game, whether it's a value add strategy, or you're looking at, you know, capital gains, because it's, you believe it to be a hot market that will continue for many years to come well, in that scenario, you're not focused on cashflow or cash on cash.
So what you should be doing is lowering your debt service as much as possible by going for the lowest possible rate, because your, your strategy is, is equity growth or, or value add equity growth. And so you need to keep your debt service as low as possible. But if you're, if you're investing in a, in a market, like many of the markets we're in like the Midwest, south, south east, where your focus is both cashflow and equity growth, well, then you're probably better off just locking in a low rate on a 30 year fixed and just not bothering with it ever until you either pay it off.
Or if rates continue to drop, you know, 2, 3, 5 years down the road, you refinance that at that lower rate, or to pull some cash out, some equity out in order to reinvest that equity into more property elsewhere. So you have to look at your overall strategy and that's how you choose the credit, you know, or loan product that makes the most sense for you and that property based on your strategy. Yeah,
Jesse (15m 15s): And I think it was a, I think you did a newsletter or a post one time where you were talking about the four, you know, the four different ways that we make money as investors, you know, appreciation cash flow tax advantages, and then the amortization on your loan or return on equity. But I think you, you definitely hit the nail on the head when it comes to whether their coastal markets in the states, or whether you're in a lot of our Canadian markets, where appreciation is the one thing people look at. And, you know, there's a way to approach that, like you said, with value add, but I think that approach is even you, you need to even be more dialed in as an investor to accurately approach it.
If your play is equity, you know, forced equity. And I think that comes into when you're starting to get into job growth, net migration, populate, population growth, starting to really look at the data when it comes to the fundamental metrics that would make, you know, a property appreciate or in conjunction with that. Like you said, have a value add strategy where you're literally forcing the, the NOI up.
Marco (16m 22s): Yeah. Well, that sounded more like a statement than a question, but you're, but I think you underscore what I was saying, essentially that you, you need to consider what your strategy is and choose your markets, neighborhoods, properties, and the team all based around your investment strategy, what you're trying to do. And of course financing is just one piece of that puzzle that brings it all together. And I mean, if we can dive into any of that, if you want, but, but really that's very much case and, and, and property specific.
So for, for yourself over
Jesse (16m 57s): The last, you know, since we last spoke, are there geographical markets that you have now either shifted towards or continue to invest in? How are you looking at where you're investing and, and the fundamentals of those markets?
Marco (17m 13s): Well, for me personally, I mean, my, my, my, my investment strategy has shifted. I, I was last in the last two years, I've been focused in Missouri and the Northeast, you know, Wisconsin and other, other markets up in the Northeast because it's very conducive to cashflow. I get good cash on cash return. So I can just park a relatively small amount of capital and get good cashflow and good cash on cash return. So for me, and particularly our clients, we're buying properties that range, I know this is going to sound crazy if you sit in there in the, you know, downtown Toronto, but we're talking properties that on the low end, 80 to a hundred thousand on the, on the upper end of this cashflow, you know, spectrum 140, 50, $160,000.
Now we're talking three bedroom, two bath houses here, you know, it's, you know, for where I live, that, that you can't even build a garage, just
Jesse (18m 8s): Say, your parking spot might be 70,000 squat, right? The reality is,
Marco (18m 12s): Is every market is so different. This is why I keep saying until I'm blue in the face, that all real estate is local. Because even if you look at the smaller tertiary markets in Canada, you're going to find the same type of thing. You're going to find houses that range from 100 to $200,000, you know, we're talking single family detached. So you've got to put everything into perspective. All markets are are different and all real estate is local. It's not, there's no such thing as a national housing market. So, you know, so that's one, one investment type, you know, is if you're looking for cashflow, you want stability and just build a portfolio to produce cash on cash returns.
That's where you focus, you know, the a hundred to $200,000 range. More specifically with us, it's like 80 to 160,000. These are single family detached, of course, there's duplexes, triplexes, fourplexes, but that's where a lot of our clients are focused that have that investment strategy. That's what they're trying to build as far as their portfolio. Now, you look at the other side of that spectrum, and there is people who are looking for are focused on more capital growth, meaning they want more appreciation right now than anything else.
So I believe you still have to have positive cashflow or maybe just it's okay to be breaking even I don't particularly like that, but I certainly don't want a lot of properties in my portfolio or your portfolio for that matter to be all cashflow negative, because the question is, how long can you sustain that? And how long do you want to sustain a negative cashflow? Because you're pulling cash out of your pocket, or, you know, out of your savings account to feed the, and float your portfolio. So worst case scenario is you want to be basically break even net net.
And what I mean by that is you're budgeting for vacancy. You're budgeting for maintenance and repairs. You want to budget for the complete operations, ongoing operations of your properties when you budget for that, and you still have a positive cashflow or break even that's okay for a period of time. But if you're focused and your strategy is capital growth, meaning you want appreciation, then you focus on those markets. And right now for us, we're focused in we're in about six Florida markets, two Texas markets peppering throughout the Southeast of the U S, which includes Tennessee, Georgia, Missouri, and then parts of the Northeast, the effect, a greater ring of the Chicago land area.
Those are areas that are experiencing very strong price growth right now. In fact, it's kind of hard not to pick a market in the U S this year and last year, that's not experiencing incredible price growth and that's, and that's being, you know, going full circle. That's being driven primarily because of very, very strong demand and tight supply. I mean, that's just economics 1 0 1, you know, supply and demand. And that that's, that's the issue, but that's been a problem that's been going on for years and has accelerated going forward, where we're into 20, 22 and 2023.
We're expecting to see that price appreciation in many of these markets drop from what we're seeing now is double digit down to single digit. Like, I mean, a healthy single digit, but still single digit. And that, you know, that adds up, but that's the other strategy. So you're either focused on cashflow and cash on cash return, or you're more focused on price appreciation without being a gambler like I was talking about before you don't want to be that speculator. And so I think three quarters of our markets right now are leaning towards price appreciation, just not because we control it and not because we purposely chosen those markets for that reason.
There's other reasons why we choose markets, but they are just appreciating so strongly because they've got, you know, all, all, all the factors stacked up in its favor, as far as, you know, population growth, job growth, et cetera, et cetera, et cetera. So, so it just worked out that way.
Jesse (22m 10s): So from, just from what you said initially there, in terms of the, the net net, say that break even point, and that's going to include, like you said, vacancy allowance, CapEx reserve, just studied curiosity, more a technical question. W what do you typically estimate for your properties to make sure that you have as a CapEx reserve? Do you do it as a percentage of a percentage of the total value of the property or use a different strategy?
Marco (22m 37s): Well, if I understood the question correctly, what I do is for vacancy allowance, I budget for me, my baseline is 5% and 5% for vacancy and 5% for maintenance and repairs. Okay. So I'll always, but, but I'll adjust it depending on, on the condition of the property. Not that I'm buying properties that require work. I don't want deferred maintenance. I'm always buying, you know, like new, if not new, right.
But I'll budget 5%. I'll adjust that up or down, depending on location and the type of property and, and any deferred maintenance, an age, and a few other things, but it'll go anywhere from 4% to 8% for vacancy five is my baseline. And for repairs and maintenance, again, I, I put down 5% and I'll adjust that up or down, depending on the age of certain items, like the mechanicals roof, HVAC, hot water tank, and a few other things.
But, but I, I don't recommend going below 5%. It's okay to budget more. You're just budgeting for what's there. If you're running your numbers on higher numbers, like six, eight, or even 10%, and you're still cashflow positive and things pan out, you're happy with the numbers that you're seeing on your projections. Well, even better. Yeah. Yeah, for
Jesse (23m 58s): Sure. And I mean, sometimes I know in, in some of the markets here that depending on the lender, it might be a requirement of them that, you know, you have to have X amount as part of the, as part of the loan in terms of, you know, when you get an inspection done, these things need to happen within 12 months, sign this, and, you know, otherwise you're not going to get approved for the loan. Just a further question on, on the underwriting process, when you do go into these markets, you know, you have to put some sort of estimate for, for, you know, price appreciation to be able to kind of walk that out to a end price, to, to have a reversion in your model.
How do you approach that when you're, when you're giving investors potential returns on, on an investment?
Marco (24m 41s): Well, there's two ways to do that. I don't like making appreciation projections because we, you know, you, you and I have no control over that. And it's exactly that it's, you're making the assumption. So there's two ways to do that. You, you can use a number between four and 6% as a longterm average. So you can just say over the course of, you know, multiple real estate cycles or over the course of 10, 20 years in a particular market, that it will over time average out to four to 6%.
And one of the reasons why you choose that number, you know, a four to 6% is because what you're trying to do is match that up with, with the real rate of inflation, regardless of what the government's tell you, which is 99% of the time, it's just pure lies. You know, you want to base it on the real rate of inflation, which hovers around four to 6% in terms of real rates. So if you, if you project that out, you'll find that often that matches long-term historical averages for real estate.
And as a side note, it's not that real estate prices are going up. It's that the current, the value of the currency is going down, our, our money is being inflated away, essentially what it really comes down to. Yeah, but if you want to be more specific about your projections, what you can do is look at historical growth rates within a particular market, weighing it more towards the near term than the long term, like far, far back historically. So it's what you might call an ex financial moving average.
But if you look at what the market has been doing over the last 2, 4, 6, and eight years, that's probably more representative of what that market will continue to do for the next, you know, five to 10 years. But, but I think it's safe to be in the, in a range of three to 8% with probably four or 5% being a safe, fair expectation of appreciation over a longterm average.
And again, it's, it's number one, that's based on the real rate of inflation, which in a perfect world, if everything was a constant, that's typically what you would see happen with real estate prices. However, the reason you don't see that always being four or 5%, why sometimes you see it a lot higher, even double vision. Sometimes you see it, you know, effectively zero or coming down, comes down to economics 1 0 1 supply and demand. That's the biggest driver of prices in the short term and locally is, is market supply and demand.
But if those things were constant and never changed, real estate prices would change based on inflation. Yeah.
Jesse (27m 27s): And I guess probably just a different version of that is, you know, w w we'll oftentimes look at the net opera or the rental growth, as opposed to the, the asset growth and capitalize, you know, with a larger apartments would capitalizing the, the NOI rather than the price. So for instance, if three, if your rent is growing at three, 4% or whatever that historic average is that you include the reversion, the big question is which cap rate do you use on the end? And, you know, that's, that's where it's more art than science, I think.
Marco (27m 58s): Yeah. So you actually bring up a very good point because what I've been talking about applies to residential real estate, generally speaking one to four unit properties, because they are, they are valued and appraised based on market comparables. And so you're looking at, you know, what, what supply and demand is dictating prices to be in a particular area. And that's how you determine market value. However, it's slightly different when you talk about commercial properties, like what you're dealing with, you know, because the pricing is based on the net operating income of a property and the cap rate capitalization rate in local area.
And that's how you determine the market value. So it's based more upon income than it is on sales comparables. However, there is a relationship and a correlation between the two, because if prices are going up in an area because of supply and demand, that's going to continue to push rents up. And as rents go up, your, your, your income goes up, your net operating income goes up and therefore the value of that, you know, the assessed value or the appraised value of that property goes up as well.
So it may be a legging number, but if property values are going up sooner or later, rents are going to go up sooner or later, you're going to push your rents up in your S in your seven unit property or whatever you have, and that increases your NOI. And as long as you're, you know, expenses and utilities, aren't going up faster than, you know, the rates you raise your rents, your property values will go up too.
Jesse (29m 30s): Yeah, that makes sense. I mean, even for our office properties, you know, if you're triple net leases, then yeah. It's NOI is really the big, the big aspect of what we capitalize. I want to get your thoughts. You touched on it briefly there, you know, I don't know what you guys are up to now in the states five or 6 trillion in terms of stimulus spending, but I'd want to get your thoughts on the environment that we're in as like from an inflation point of view, what your thoughts are on number one, the amount of money that's, that's been put into the economy and, and what you think the effects of that are, and just your general outlook on the direction that let's, let's say let's, let's talk U S centric first, and, and yeah.
What, where do you see, where do you see this going over the next short term, short to mid term?
Marco (30m 20s): Well, it's, it's, it's a little frightening to think of where this could go, you know, last year in the U S they, you know, they passed the cares act, and that was a $2.2 trillion injection of capital into the, you know, into the system and the economy. And, you know, that went all over the place, you know, went to businesses through a, you know, a paycheck protection program. You guys have something similar in Canada, it was injected into directly to the hands of, of individuals and consumers. So it went right down to, you know, into the economy right down to, you know, the consumer, what they did with, it was another question, you know, a lot of it was probably, you know, stashed away into savings.
So it never actually flowed into the economy. It was just hoarded, but a lot of it was just blown. I'm sure there was a lot of people who went to Vegas. In fact, I just came back from Vegas and it's just amazing to see I'll, I'll say an air quotes, the types of people that are in some of the higher end resorts, like the Venetian, the wind and whatnot. It's like, okay, dude, I know you can't afford the rooms here, so where'd you get the cash, right. So that's kind of scary, but, you know, that was like a $2.2 trillion injection.
And then following that there was an extension to the cares act, which was another 0.9 trillion. So in almost a full trillion dollars. And then, you know, we had more recently the American rescue plan, which is another $1.9 trillion. So all in all, we've had 5 trillion, which is 500, 5,000 billion dollars of, you know, you know, just creative from nothing currency that was pumped into the economy here.
And, you know, if that wasn't a $5 trillion, wasn't enough, you know, they're already talking about the American jobs plan, which is another $2.7 trillion. And then who knows, I mean, there's also talk about this infrastructure bill, another infrastructure bill, that's going to be between two and 3 trillion. So if you add all that up, you know, we're approaching $10 trillion in addition to the existing debts and obligations that were already there, you know, that had built up over the last a hundred years, most of which has been built up over the last 10 to 15 years.
So it's just an insane amount of capital that has been currency has been, you know, created out of thin air pumped into the, the U S economy. Most of it's staying within the U S not floating, you know, internationally, you know, through foreign aid and whatnot. So what does that, you know, what does that mean? Well, you know, without, without jimmying around with the system, ultimately it's going to lead to inflation and lots of it, and we're already seeing it. We've already seen it over the last year, especially with energy, healthcare, food, education, and whatnot.
You know, some food prices have gone up literally 20 to 22% over the last 12 months, you know, meats and whatnot. So we're, we're seeing it all over the place and that's going to continue, you know, the wall street journal did a survey not too long ago. Very recently. I think it was in March, it was published in may and they interviewed or surveyed a whole bunch of economists. And they asked them the question, you know, what do you expect these latest rounds of stimulus will do if, you know, the ones that have passed, plus the ones that are coming, if it passes as far as U S inflation goes and how that will impact us over the next six months to three years.
And really they were just trying to see, you know, do you think inflation is going to be below 2%, about 2% or over 2% without being specific about the number and a whopping 81% of those people who surveyed said that it's going to be higher than 2%. And we already know that the real rate of inflation has been four to five to 6% annually. In some cases it's been double digits. Like I was saying, you know, with food items, it's, it's been an upward of 20% or more. So this is not helping the housing sector.
I mean, it isn't, it isn't, it's, it's certainly helping in the sense of you being an investor and being invested in real estate, because it's helping you, you know, in terms of price and you know, your debt. But if you're trying to get into the market, or if you're a homeowner or a ranch or trying to get into the market, or if it's your first home or you're trying to move up, you know, that that's, that's becoming sticker shock. Yeah. So, so are we going to expect to see more inflation? Yes. We've seen lots of it and we're going to probably see a lot more of it over the next, you know, three years.
Jesse (34m 57s): Yeah. It's, it's really hard to, to get a kind of sense of the numbers. It's almost when you, like, when you're talking about the, you know, the, you're talking about the universe in terms of like the magnitude of these numbers, once you start getting into the trillions, I saw a really, I think, think it status does that basically tracks the, the package, the stimulus package by country. And I think, I think the states were around 26 or 20, 26 or 27% of GDP sounds about right.
And we, we haven't been that far off either. I think we, we're not, we're not at that level, but yeah, I think for us, it's, it's over a hundred billion now with the much smaller economy, but I mean, at the end of the day, it's really part of the reason that we like real estate at, at the very least to try to hedge inflation to a certain extent. But I think, I think what people need to understand too, is that just because you're in real estate, it's not the hedge, like you said before, the value of your dollars are slowly going down.
If we let this kind of continue,
Marco (36m 5s): It is. And that's the beautiful thing about real estate is it's it's, it is, it is a hedge against inflation. I mean, you, you win on multiple levels, you know, as property values go up. It's, it's really not that the value is increasing. You know, the intrinsic value stays exactly the same, but, but what you call value is actually not value going up. It's price going up, price is going up because the dollar is being devalued. So it needs more, you need more of those dollars to buy the same, same piece of property with that intrinsic value.
So the value today is the same as the value was yesterday. And it will be the same value as it is tomorrow. It's producing the same value. But the price for that is what's changing because of the currency being, you know, denom, debased. So that's how it's an inflation hedge, but where you really win as a real estate investor is, is if you have, let's say a hundred thousand dollars in debt on that property today. Well guess what that debt next year is going to be worth $95,000.
Nothing has changed other than the value of the debt has gone down. And now you're paying the same monthly payments a year from now, as you are paying today. So you're paying off that debt with cheaper and cheaper dollars. So that $500 mortgage payment today, you know, in five years or 10 years from now is going to be a Starbucks coffee. So, you know, your, your, your, your dad is being evaporated away in your favor.
And so, and that's great because your tenant is actually paying it off. Your tenants are paying it off. So that's the beautiful thing about inflation. Is it eats away at your debts and, and no mortgage that I know, no mortgage loan that I know I actually has a clause in it where it adjusts for inflation where every year it goes up 5% because inflation has gone up, it doesn't happen. So,
Jesse (38m 1s): Yeah. Yeah. It's one of those things where, like you just said it very few industries where you can, you can download that expense to your customer, or at least, you know, pass on that cost to your customer, that costs have increased inflation. And, and we, we obviously try to do that on the commercial side with, with, you know, increases and the same thing on the residential. Yeah. So Marco, I want to be cognizant of the time here coming up to the end here and want you to leave us on a, on a positive note. So in terms of how you're looking at the next, the next while for yourself and rata, are there, you know, the areas you touched geographically, but are there opportunities that you're looking at that, you know, you're really, really excited about?
What's, what's going on in your world over the next, the next little while?
Marco (38m 48s): Well, I'll give you a big picture and a small picture answer to your question. So, so right now we're seeing, you know, all big picture stuff, economic growth, being a strong and consistent as it's been an improvement since you know, where we were a year ago, which was kind of early stages of COVID all the leading economic indicators are very bullish, very strong. So we expect things to continue economically speaking to hum along and be strong. You know, unemployment is coming down, you know, jobs.
There's a lot of jobs out there. In fact, a lot of people are having a hard time hiring people, even with bonuses. McDonald's, there's a, McDonald's, that's offering $18 an hour as a starting wage. So, wow. So, you know, there's a little bit of demand for, for employment right now. When you see that kind of sign affordability, I still pretty darn good, you know, in terms of, of purchasing hard assets like real estate and, and, you know, cars and whatnot.
So affordability, although it's, you know, getting weaker, it's dropping slowly, it's still there. And that's mostly driven because of very competitive interest rates. Consumer behavior has been very consistent. I mean, people are still spending money and buying shoes and this and that. So, you know, that that really hasn't changed much, much the, you know, the existing home market is healthy. We need more supply, but demand is strong. Same thing with the new home market demand is strong. We need more supply it's coming, but not as fast as we need it.
And housing supply is good, but there's room for improvement there at a more granular level. I'm very bullish on real estate. Very optimistic. In fact, I'm, I'm in the middle of a transaction right now. I'm refinancing some properties and we have a lot of investors coming to us from the U S Canada and other places, looking to invest in the markets that we operate in because they can get the cashflow that can get the price growth. They have the tax benefits, they have the leverage, you know, th th th they have all the benefits working in their favor.
You know, when people are thinking, you know what, we've had a really strong bull run for the last 3, 4, 5 years. You know, maybe it's too later. I missed the boat. Well, no, it's never too late. You know, when people ask me, you know, when's the best time to get involved in real estate. And I always say right now, because look, you can't go back in time. You can't, you know, go back to a place at a time where you missed out, but there's always a, there's always an opportunity. It's not a question of when to invest in real estate.
It's always a question of where am I investing in real estate? And this is why we operate in, you know, 20 to 25 markets at any given time. It's because there's different things happening in different places around the country. And there's always opportunity. It's just a question of where are you in that local real estate cycle and, and the overall economic cycle to take advantage of what's going on. So you have investment capital. You want to put it to work. You want to generate income. You want price growth over time. You want the tax benefits, and you want to borrow other people's money in order to make those acquisitions all that's going on all the time.
It's just a matter of where, not so much when. And so I'm, I'm always bullish, but I'm very bullish today because we just have a lot of things stacked in our favor with low interest rates, strong demand, lack of supply, continued growth, a strong economy, and we've got last but not least. And I can go on about this, but I think I'm making my point pretty damn clear right now, you know, we've got this thing going on, that I call shadow demand. So we talked about, you know, lack of supply and strong demand.
Well, I'll make the demand part of the equation, even worse, if you will. Right now, we have a situation where the percentage of people that are ages 18 to 29 years old, essentially what we call young adults, it's been the highest. It is the highest right now that it has been over the last hundred years. So right now, 52% of young adults, people that are between the ages of 18 and 29 years old are still living with their parents for one reason or another. Well, guess what? They're not going to stay home forever.
You know, they're, they're adults, and they're going to be looking for a place to go to move out to typically rent, but ultimately buy. And so where are these people going to go? I mean, there is a lot of this shadow demand, pent up demand for people looking for, or will be looking for rentals. Well, guess what, if you own property, good quality property, and good neighborhoods that you can make available to these people. You're on the winning side of that equation because you're going to get maximum rent and that will continue to increase as the years go on.
So it's a good time to be buying real estate,
Jesse (43m 39s): Right. I guess that's as positive as we're going to get here. Marco, you've obviously answered the questions on the previous podcast. So why don't we just ask you one question here before we wrap up and we can tell people how to connect any resources, podcasts, or books that, that you're into right now that you'd like to recommend to, to our listeners.
Marco (44m 1s): That's a funny question. I'm actually rereading not my first time, of course, or maybe my second time, but I'm rereading the 20th anniversary edition of Robert Kiyosaki's rich dad, poor dad. And part of the reason why I'm actually rereading it is because I'm going through it with my daughter. I figured a good time to review it. Right. But it's been a long time since I first read it. How has it aged? It doesn't change. No, the fundamentals, you know, the principles stay the same, but I think it's, it's kind of like, you know, reading some, one of many books, like, you know, think and grow rich or many of those other fundamental foundational books to reread it once a year or once every two years, you know, just as a refresher.
So I guess it, you know, it's not a new book, it's an older book, but I'll, I would recommend that one just because you know, it doesn't, it doesn't age. It's, it's still the number one personal finance book out there. So yeah, that, that, that would be definitely a book to read resources. There's tons of resources. I mean, there's obviously there's your podcast and show, you know, not to toot my own horn, but you know, there's my podcast, the passive real estate investing podcast. And of course the website where we post everything from the show is passive real estate investing.com.
What else can I recommend? You know, I went to Amazon the other day and I did a search for real estate and there's like zillions of books. It's crazy. You know, there's no excuse not to spend 10 bucks for a damn book. Right. Get rich, get rich dad and then get, you know, cashflow quadrant three of those two. And you'll, you'll, you'll be mentally set. Yeah.
Jesse (45m 44s): There's no, excuse. You know, I mean, it's 20, 21. You don't even need to read anymore. You just need to sit, but no, I appreciate it. We'll put a, we'll put that in the, in the show notes. And I can't say, I can't say enough good things about, about your podcast. It's always informative. You know, it's something where I constantly come back to, there's probably two or three podcasts in our, in the real estate space that I always come back to. And thank you. Yeah. And it's always great. Aside from that, Marco is there, if people want to learn a little bit more about neurotra or want to reach out to you, anything specifically, we can pop in the show notes to make that easy.
Marco (46m 23s): Well, I'm going to be updating my free guide. It's like a 37 page primer on real estate. It covers a lot of stuff I talked about today and more so I'm going to juice it up a little bit, but it's called the ultimate guide to passive real estate investing. And it's just a free download on our websites. The two websites we have, I would start there. And, you know, and then of course, you know, the other resources we talked about, like your, your podcasts and the books and everything else. So I would encourage that. And also I, this is the year where I'm releasing the passive real estate investing book, and I'll be making that available for free.
You know, you can get the paper back for a couple bucks just for the shipping, but if you want to download it, it'll be just a hundred percent free. And so if you download that guide, you'll get an email notification. When the book is released to, to go get, grab a copy of that as well. So if you're interested in that, just download the guide from one of our two websites at passive real estate, investing.com or our, our mothership website@noradarealestate.com.
Jesse (47m 28s): My returning guest today has been Marco Centre, Ellie Marco, thanks for being part of working capital,
Marco (47m 35s): Jesse. I appreciate you having me back on your show. It's been a lot of fun.
Jesse (47m 46s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.
Brian Beaulieu has served as CEO and Chief Economist of ITR EconomicsTM since 1987, where he Researches the Use of Business Cycle Analysis and Economic Forecasting as Tools for Improving profitability. Brian has shared his Highly Valued Research Results via Presentations, Workshops, and Seminars in Numerous Countries to Hundreds of thousands of Business Owners and Executives for the last 38 years.
In this episode we talked about:
- Brian`s Background
- Economic Outlook for 2021- 2022
- Interest Rates
- Inflation
- The Federal Reserve
- Modern Monetary Theory
- Austrian Economy Overview
- The Real Estate Prospective
- Bulding Manufactured Housing
- Safety of the US dollar
- The Overview of Real Estate Opportunities
- Mentorship, Resources and Lessons Learned
Useful links:
https://www.itreconomics.com/brian-beaulieu
brian@itreconomics.com
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesse Fragale. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Welcome to working capital the real estate podcast. My name is Jesse for galley and my guest today is Brian Ballou. Brian has served as CEO and chief economists of ITR economics since 1987, where you research is the use of business cycle analysis and economic forecasting as tools for improving profitability.
Brian has shared his highly valued research results with via presentations, workshops, and seminars in numerous countries to hundreds of thousands of business owners and executives for the last 38 years. And Brian and I will be speaking in October in new Orleans for the bigger pockets conference, BP con Brian, how's it going?
Brian (1m 1s): It's going pretty well. Just me. How about you?
Jesse (1m 4s): I'm doing great. Doing great. You know, we're kind of, we're in a good spot right now in Toronto. Weather-wise Italy's moving to the final and in the Euro. So,
Brian (1m 15s): You know, everything's everything's okay.
Jesse (1m 21s): So we've talked a little bit before the show. You're joining us from New Hampshire today. Brian, is that, is that home for you?
Brian (1m 29s): No, home is Marco island. We summer up here in New Hampshire and here we are right on. Yeah.
Jesse (1m 36s): Well, I'm very excited to have you on the show as listeners know, I'm a bit, a bit, I'm a bit of a economics geek and I love looking at real estate through the lens of, of macro and micro trends, you know, when it comes to investing and, and ultimately forecasting where we think real estate is going to go. And another thing we talked about before the show as a little bit of a template for how we go through our conversation, you know, with real estate, as the backdrop, but economics as, as kind of the tool we use.
But before we do that for listeners and for myself, Brian, if you could give a little bit of a background of yourself, you know, how you got in the industry and, and how your career has has gone. Over the years,
Brian (2m 22s): I started off in the private sector, working in Boston, in the financial department of gray bar. Then I went to work for the government for three years, and then 1982 came to ITR economics. And I bought the place in 1987. So it's not a very long resumes, just one big long gap or stretch here. It it's been a great rundown. It's been, it's been amazing.
Jesse (2m 51s): And was your, your background originally was in economics or did that, did that evolve over, over the career?
Brian (3m 1s): I started college as an accounting major and realized that looking for that perfect balance or drive me crazy, I need something where it close enough is good enough. And that was economics. So I have a, I have a dual major of econ and finance with a minor in accounting
Jesse (3m 16s): Right on. And so for the, the conversation, you know, you're going to be giving this talk in, in new Orleans in October. I'd love to basically take a step back of where we're at today in terms of the lockdowns, the impact of the last 18 months on the general economy and real estate. And just wanted to get your thoughts, you know, from an economic sort of an economists point of view, what's your take on the last 18 months? And you know, how are we sitting today as a, as an economy, whether that's, you know, in north America or, you know, or the European markets
Brian (3m 54s): We are sitting on on this rock that is heading ever higher coming out of something that not none of us have ever experienced before. And hopefully it will never experience again. And the governments of the world decided that what they needed to do in order to get the economy going again, once they allowed people to move about was dumped an unimaginable amount of money into the various and century economies when all they really needed to do was simply maybe that first round is stimulus to let people out of their homes and the economy would be coming back.
But it's coming back with nitrous oxide added to the fuel tank now, which is stretching our supply chains. We have trucking shortages, we have cargo ships stacked on the east coast and the west coast. China's dealing with the Delta variant now, and that's shut down part of going down province and therefore some shipping activity guys shut down for a couple of weeks. So we're, we're clearly going to be contending with the supply chain issues and pricing issues to the rest of this year.
But we see in 2022, the rate of growth in north America and in Europe dissipates to a more normal pace. And that would allow this, the supply chains much needed time to get caught up to the demand. So over the course of 22, a lot of those stresses what we ameliorated really, and the world will seem much more sane at that particular time. We'll understand normal economic relationships much better as we get through 22 and on into 23 and 23 looks to be a good solid year of rise also.
So from a real estate lens perspective, we're bullish on all aspects. So multi-family most aspects of commercial real estate in general, coming back nicely as we go through 22, 23 office is going to obviously experienced some difficulties because of COVID backer and the, the moving away from these urban areas.
It's, it's, it's amazing to us actually that the millennials, and if you stop me if I'm digressing, but we all assume that millennials who are going to be so different than the gen X-ers and the baby boomers, but come to find out that behaving an awful lot, like gen X-ers and a somewhat like baby boomers in terms of then moving out into suburbia now, and they're buying homes and they're getting powers. We never thought they would have cars. Right. But yeah, they have cars. There's an 80% penetration of automobile ownership amongst millennials, which is the highest we've seen since the seventies.
It was a matter of fact. So there, again, all the, all the things that we used to pine for also. So I recently I mentioned that is because I find that incredibly encouraging in terms of seeing that normalcy, that rubble, that we're all striving for, at least we don't have to worry about that curve ball coming at us. Right. So yes, that the platform is going to change the commercial real estate landscape, but the fundamentals of the demand pull from the population, at least that looks to be rock solid.
And that that's really fantastic.
Jesse (7m 28s): Yeah. I'd love to Del delve into the different verticals in, in commercial real estate and residential. And just before we do, I'd like to get your take on, you know, whether it's the, you know, I can't remember the emergency plan that we had in, in Canada for, you know, whether it was 79 billion, whatever it was. And then you, you know, conversely or in addition a us had the cares act. And I think now, I don't know if you guys are up to four or $5 trillion in terms of actual stimulus six, ah, well, a nice round number at six.
Yeah. What's your, what's your take on, on this, this level of stimulus because you know, the oh 8 0 9, it was supposed to be, you know, QE was net, it was supposed to be an emergency lever. We would never see it again until, you know, we're in a global pan denim mix. So what's your view on that? How are we going to deal with, with these, this level of, of stimulus injected into the economy?
Brian (8m 26s): That's the trillion dollar question, right? Next trillion, 6 trillion. And then there's like Canadian billions on top of that. Yeah. You said you saw it in Canada, just like we did in the us, all that liquidity stimulated, retail sales activity, it stimulated housing, single family housing activity primarily to a very high degree. So the question now becomes is the resulting price inflation, be it in homes or commodities to make all this stuff, is that trenchant or is it here to stay?
That's one question and then the follow on question has to be, will the central bankers of the world decide they need to sterilize some of this activity, pull it back in, in other words, and will they do that quickly because they fear inflation, will they do it very slowly, mid that's? That's part of why we see some dangers on the horizon, in the financial markets, and by the way, we'll get there not compensation I'm sure.
But I think the after, well, I'd already mentioned that we see real estate doing well in the near term. We see it as an outperforming asset class through the rest of this decade. So investors in this real estate space, be it multifamily or other types of commercial real estate, I think they're in for a very good ride and likely to significantly outpaced stock market returns, seriously outpaced any bond market returns that could possibly get it's going to be the go-to investment place for this decade.
Jesse (10m 14s): Yeah. It's w I was talking with somebody last week on the podcast, and we were talking about the difference between where we're living right now in this, you know, technical recession and where we were in oh 8 0 9, where now we're in a position where there's a lot of credit. There's a lot of capital out in the market back then there wasn't. So it seems that the real estate, like you're saying is being buoyed by the fact that there is a lot of capital out there. And I mean, we just see it on, you know, anecdotally on the brokerage side that our capital markets teams have, have been having record record months over the last a year, year and a half.
And it just looks like there's a lot of capital with the caveat that, you know, on the leasing side, on the retail side, definitely, you know, where they've had the most challenge by far.
Brian (11m 1s): Well, and it's in real estate, it's always just location, right? I mean, here in the states, if you broker a deal or you're involved in a deal in Nashville or Dallas or Austin, you're going to have a much different experience than if you're trying to do that deal in Chicago or West Virginia someplace, or even New York, the geographic location driven by demographics and tax environment are extremely important.
Jesse (11m 31s): Yeah. In terms of this conversation, it's, it's funny, you have very smart people on both sides that, that seem to take a very different views from the interest rate inflation debate and, and you know what, it's, it's hard to figure out where you, where you really stand on it, where, you know, one school of thought is that there is no place, you know, aside from a future with more inflation, as a result of the amount of stimulus. And then, you know, you hear people push back on that and basically say that it's not stimulus in the Milton Friedman sense that, you know, you, you have, you have money going into the economy and no matter what that's going to cause inflation as a result of it being dumped into the economy, it's, it's like in oh eight, seem to sit on balance sheets.
Wasn't, didn't have a tremendous amount of velocity, but based on the last few months, the numbers seem to indicate that we are starting to increase from an inflationary standpoint. W how do you read that
Brian (12m 35s): It's a complex issue, but how we read it is similar to how the federal reserve and the bond market is reading the situation. If you look at the bond market, which is amazingly prescient about the future in terms of inflation, at least 18 months out, they're not at the least bit concerned about systemic inflation. They think that this supply chain driven price increase and the asset price bubbles that were experiments in are not real inflation sustained compounding inflation.
That's likely to come beginning in the mid to second half of this decade, based on all the patient buyers that have been let logs that have been laid in place by all of this Fiat currency and excess liquidity out there in the marketplace, which is not the state that we're not going to. You know, housing is a, is an asset price bubble. It's going to be some correction in housing, but it's not going to be like the 2006 through 2009 correction because the credit markets dried up at that particular time.
And as you just said, that isn't going to be going on right now. There's no indication that it's going to be going on right now. The credit markets are very well lubricated. And if you look at the extent of leverage that the consumers have engaged in Dubai, these homes, it's much more moderate than what we saw back in 2005, 2006. So it's not going to be that sort of replay, even though these prices are going up, we're just going to see a normal business cycle correction and some of these prices.
And then they're going to just rise again through the end of this decade. This is, this is a really tour's decade dream come true. As far as we're concerned, largely driven in the final analysis by the us dollar being pushed into an extended declining trend because of all the deficit spending that the U S Congress is engaged in so that, you know, a lot of people are going to lose, but the real estate markets are going to win.
Jesse (14m 41s): So from the, from the real estate vantage point is, is the lesson here to re you know, reallocate or, or readjust the portfolio to have more alternative assets in the way of real estate as a, you know, as number one, like you said, just the fundamentals are good, but number two, as a potential inflation hedge,
Brian (15m 1s): Absolutely. I mean, you, you interpreted my meanderings perfectly well. Yes. And we've been encouraging people to take some of the risk out of the stock market and redeployed into different asset classes in particular different assets buckets within the real real estate sector.
Jesse (15m 22s): So your, your economics are for, for the U S what, what, if anything, are your recommendations for the next, you know, let's say the short-term for the U S yeah. For the U S
Brian (15m 37s): My recommendations to kind of investor. Yeah, no. I
Jesse (15m 41s): Mean, from a, from a federal reserve standpoint, is it, is it stay the course kind of targeting 2%?
Brian (15m 49s): Oh, our federal reserve doesn't care about 2% anymore. Under chairman Powell, they've adopted a new system where they look at average rolling inflation. So they're going to accept inflation out of the CPI core inflation running three, three, and a half percent for a couple of years before they worry about it, because they see it as balancing out those years where it was running below 2% so that they no longer get excited about three, three and a half percent core inflation.
And that's one of the reasons why we think they're telling the truth when they say interest rates that they influence are going to stay down on the deck through the rest of this year and on into 2022, because if inflation does subside as the indication suggests, and that would be CPI inflation, then they're going to sit on these low interest rates until they see more concerted indications of that, a rising trend in inflation. You know, they're already making some adjustments and we behind the scenes, when you, it's one thing to keep interest rates on the deck, right?
But when you look at the repo activity that the federal reserve has been embarked on the last several weeks, it was running a trillion dollar repo activity, trying to reign in some of this extra money, if you will, but that they have so many different levers at their disposal. The thing that worries me most about this federal reserve is chairman Powell first.
And he stated it. He says this, the federal reserve can't possibly do too much to stimulate the economy. Hm. He's not the least bit worried about inflation. And I think if you had, if you could pin them down, he'd tell you that is in the modern monetary theory camp when it comes to how to, to control the political and economic environment going forward. And that, that scares me, I'm waiting for the next year.
Jesse (17m 56s): No, I was going to say, so we, we D we've talked about a modern monetary theory MMT on the show before we had a bond trade local bond trader here who now kind of manages a portfolio and fund. And it seems to be that there's this stark difference between this Austrian school of economics and an MMT. And I think both of them kind of make a caricature of the other where M you know, the Austrian city MMTs will just they'll spend it.
There is no limit to possible spending because they're in a different paradigm. You can't look at the U S government or the, or the Canadian as a household, because they can borrow the reserve currency. What's your view on, on kind of the differences between those two camps and maybe as a backdrop, you could, you could talk a little bit about the business cycle and you know how that relates.
Brian (18m 50s): Oh, okay. You know, your stuff first I'm in that Ostrin camp. Okay. MMT folks though, like Larry Summers say, you know, they can engage in depth at spending to the fullest extent until real interest rates rise about 2%, and then they need to cut back on that deficit spending problem is you think the politicians have the political will to cut back on the deficit spending.
We have seen zero inclination of their ability to do that, except for a brief period where there was sequenced ration going on for three years. But ever since the early 1980s, we've been on this spending binge, and I'll send out, we're gonna, we're gonna find discipline because it's real interest rates go up to 2%. So I cry foul on that assumption. And the other major assumption that they make is we can get away with it here in the U S because U S is the dominant world reserve currency, right?
Problem with that is the Chinese beat us to it, having a digitized currency. And they're selling that very effectively as it means of making trade easier with China. And you start in 2019 end of 2019, a $54 billion deal done between China and Pakistan and Pakistan, as part of that deal, drop the dollar as their second formal currency. And they adopted the yawn.
Okay. And then they're doing this with other Turkey has adopted the Chinese currency in place of the U S dollar. All of those are chipping away at the solvency or that immutability of the U S dollar, right? Because I have no life. I watch world reserves and the Russians have dumped the dollar. I mean, they made no bones about it. They sit and the dollar is no longer any part of their rainy day funds.
They replaced it with a 50 50 mix of the Euro and the Chinese currency. It had nothing to do with the, with the dollar. All of those are indications that you cannot afford to assume that we will always be the dominant currency and therefore a few engage in deficit spending. And assuming we can rack up as much debt as we want, because we are that dollar, that's a huge risk that you're playing with the economy, given these little pebbles that are already rolling down the hill.
Jesse (21m 35s): So from the vantage point, like I th I'm partial to Austrian economics as well. And at least in so far as you know, I I've, when I was younger Hayak and Friedman, I mean, he's more of a monetarist, but the idea that there is no free lunch, this idea that, you know, you could run an economy in oh 8 0 9 and, you know, just completely bail everybody out. I think most Austrians would have said that at that point, the states and other countries affected really needed the, the medicine there, whereas other, you know, other people said, no, they, they definitely needed the bailout.
So it, it kind of, it's interesting to see that paradigm now where MMT has become this thing where for either political party, it seems like a, an ability to just here's the scientific rationale for me to spend.
Brian (22m 26s): Exactly. And you're absolutely right. It is not confined to one party or the other. They both engage in the same rhetoric and premium is all about when you're on the growth side of the business cycle, you're supposed to run your government at a surplus so that you have the ability to run it at a devastating when it's needed. Right. They don't get that. I mean, it's always deficit spending with them. So, you know, they say that following Friedman's prescription, but if they are not, and when, you know, Friedman's famous saying and long run, we're all dead.
You know, where that came from is that Keynes or Friedman in the long run. Okay. Yeah, you're right. He asked where's this all going to end all this spending that you're advocating the government do. And you said even it didn't matter in the long run the world that is sort of just like a massive cop-out at that time. Right. Pretty nihilistic view there. Well, it's
Jesse (23m 27s): Actually a w one thing that's a pretty funny too, is I think it was, it had to be in the eighties, early nineties, a Friedman was with a bunch of lawmakers and they were S the Republicans were saying, you know, aren't you worried about all the deficit spending and, you know, the interest payments alone for the debt. And his answer was actually pretty funny. He, well, you know, the interest payments that we make means that there's a portion of cash that the government can't utilize for its own for its own ideas and own. As soon as like, at least we're paying the interest payments and it's out of your hands.
So I think it really comes down to just a view of, of whether you think the economy is more, at least in my point of view, in my opinion, more like a, a biological organism that, you know, goes too far, comes back and kind of ebbs and flows. We can't just be on this constant upward trend, just, you know, forever.
Brian (24m 24s): Well, yeah, business cycles are here and they don't always lead to recession, but they lead to, if they're not, you know, you celebrate, then you decelerate. And sometimes the deceleration gets you into a period of recession. Sometimes it doesn't depends on the circumstances, but I'll be it's because there are these structural imbalances that develop in the economy and you need to adjust those imbalances. And sometimes the adjustments lead to a recession because they're allowed to go on too far, being an Austrian inclination.
The heavy heavy-handed government is not always welcome, you know, but go back to 2008, 2009, I was advocating, let the banks fail, you know, let the stock shareholders take it on the chin. Instead of the taxpayer, they were being too big to fail. Right? So now the banks are back to their messy ways in so many different categories. Okay. So if you're too big to fail, cough up more money going into the federal reserves who can bail your butts out next step, you know, I'll banks have the small banks pay a greater portion of their cash to the federal reserve.
Then the large banks shouldn't be the other way around. If you're too big to fail patient more insurance here, buddy, if you expect me to bail you out, next thing we created a fantastic moral hazard. Every time we'd be on them. When we bailed out Chrysler, we created the same moral hazard. Yeah. That's where you get more and more weaknesses inherent to the system view. You know what I mean? Yeah.
Jesse (26m 0s): I mean, moral hazard is exactly what it's going to say. I've always loved the, the Hyatt quote. The curious task of economics is to demonstrate to man how little he knows about what he, what he imagines. He can design. And I think it's just, it's this MMT in can be something that if, if used as a, as a club or a justification can be a little dangerous, like you said, once, once you get an allotment or you get an ability to tax, you usually don't give it away. So emergencies, economic emergencies, any pandemics, I, I feel like a lot of things are gonna come out of this that are going to stick around for a long time.
I want to talk a little bit about the real estate perspective. So, you know, you, you mentioned business cycles. How do you view real estate? The real well, first of all, do you believe that the business cycle and real estate cycle are those pretty much in sync typically? And how do you break down real estate? When, when looking through the lens of a business cycles?
Brian (27m 3s): Well, we have our residential real estate as a leading indicator, generally followed, not a couple of quarters later, if I multifamily all else being equal. And then the caboose on that whole train would be most aspects of commercial real estate. And that typically is a lagging indicator. In fact, it's generally about 25 months after housing reaches a low that overall non-risk construction will reach a cyclical level.
So that's quite a gap. So you can play that to your advantage at the high though, I mean, an ITR were concerned about a business cycle decline occurring in 2026. Okay. But it won't be 26 for non res because they'll lag that their problems will come more on 27. So there's always ample warning in the non-residential market when things are about to go awry. Now, whether people pay attention to that or not, it's a different store.
Jesse (28m 2s): And in that, in that residential side, are you including a multifamily housing multi-residential as one bucket?
Brian (28m 10s): No. A single family being the leader followed a couple of quarters later by multifamily housing starts.
Jesse (28m 18s): Yeah, it's fascinating. And then down the line, whether it's industrial office retail as lagging indicators for those, and w what's what's the, you know, what, what determines or w what's the cause of, of those commercial verticals lagging even, even from office to say office to industrial, for example,
Brian (28m 41s): The lag occurs at high because contracts have been signed and a construction has begun, and most of it will get completed. All those, some of it, you just button up and wait for the cycle to turn around again. But that's why it lags at the high it lags at the low, because oftentimes the commercial, I mean, the, the credit markets simply aren't there to facilitate the recovery. That's not a problem this time round, but then there's the trepidation of sinking that much money mean we're not talking small projects with Dr.
Mote, really large projects thinking that much money. And one thing, I think that you've talked about verticals. I'm, I'm excited about what it's going to be going on in manufacturing, building construction in the states because of onshoring and near sourcing phenomena. Canada's not getting nearly as much of that action as we thought they were going to, we looked at how north America breaks down and the us is getting the vast majority of that onshoring activity followed by Canada.
And then Mexico, I thought that Mexico would be getting more activity, but there's something going on. And this scares people about fender Mexico. You know what,
Jesse (29m 57s): It's a, it's funny on the manufactured housing piece, we actually had a, a local gentlemen on the show. It was a private equity, real estate, private equity. And he was from Toronto. And we were talking about manufactured housing as we've done on the show multiple times. And I said, well, let me guess, you're not buying in Canada. He's like no Atlanta. So it just like, I don't think, I can't think of, of a, a, an area of that. There's a significant investment in manufactured housing up here. I don't know if it's a cultural thing or if it's, you know, something else, but yeah, we don't, we just don't see that type of type of building.
Brian (30m 34s): Oh yeah. I mean, I can understand that. I talked it up to culture. Yeah. Yeah.
Jesse (30m 40s): We'll put it up to culture. And when you, when you look at manufactured housing, the what, what is the relationship with onshoring that you see between between the two?
Brian (30m 52s): Oh, we're going to be shortening supply chain. So we're going to actually be building new manufacturing centers. Yeah. Building right. That's cyclical. And that's going to get boosted by, but we're going to need affordable housing for the people working in those facilities. Right. And those manufactured homes, very good homes. And they're affordable compared to the old fashion, you know, stick and nail approach.
Jesse (31m 24s): Yeah. And it's, it's, I think that's, we're going to see that, you know, regardless of which country you live, I think the reality with real estate is that we've talked about this quite a bit in the industry of, you know, just the repurposing of assets, you know, hotels potentially into multi-family, you know, older shopping malls into, you know, distribution centers. I'm sure that creative destruct destruction is poised to happen over the next few years.
Brian (31m 52s): I I'm a huge fan of that lens that you just referred to in a creative destruction. My man, Joe. Yeah. Yeah. So many people get distressed distressed that the, the destruction side that they failed to see it creation side that occurs at the same time. And it is inevitable that more jobs are created by the creation side of that than by the destruction side lost jobs.
But that was future jobs. They don't, they don't vote. And that's why sometimes the, that process gets retarded or inhibited by the politicians because they hear the loud noises of the people that are on the losing side of the equation. Yeah.
Jesse (32m 39s): I couldn't agree more, I think, and you know, I'm going to lose listeners here, but that's a reference to Joseph Schumpeter coined the phrase creative destruction, but it really is the, the horse to the buggy, to the car, you know, it's something had to be destroyed in a paradigm to create something that from his lens was, was much, had much more utility and value. And I think the other thing too, is he was one of the few economists that are one of the first economists that, you know, there's a reason that in microeconomics, there's a blurb on entrepreneurship.
Whereas, you know, now there's chapters in whole courses on entrepreneurship from an economics lens. So I think it's, it's really important to look at it that way.
Brian (33m 18s): She was my hero and still is in college. I would say, Debo tell you, but he wrote so. Yeah.
Jesse (33m 26s): And, and he was, he was, I think he was also a, what was it? The, whatever the chief economist was for, like he was a in government as well. And then I think moved into a professorship role, but continued to do a lot of work and publish. So now that we've lost half the half the
Brian (33m 46s): Lesson, what, what I'd
Jesse (33m 50s): Like to actually talk to you about just had it in my notes, as well as I wanted to get your, your take, you kind of mentioned a little bit about the, the U S dollar for, just for listeners, regardless of where you're at. W what is the importance of where the dollar is at and what the impact has been over the last a year, year and a half?
Brian (34m 12s): Well, the impact of the let's start with that last part. The last, the impact of it last year, year and a half has been a flight to safety, which has bolstered the dollar longer than it normally would have been the pandemic clearly distorted that trend. And even now with the concerns about the Delta variant, we see that the dollar is gaining some buoyancy that it really doesn't warrant. There's a very clear relationship between deficit spending and the trend B not the day to day or the week to week, but the extended trend in the direction of the dollar.
And by the same token, there's a very strong relationship between the U S dollar and oil prices, because oil is the nominated in dollars, right? So the weakening dollar means higher oil prices going forward this decade, which is good for Canada. When I, when I saw that relationship, I said, yeah, okay, here we go. It's going to make some folks happy. I don't know about you. Tell me if this has happened to Canada, but this is what's happening here in the U S banks lending to the oil and gas industry, because they're not reading enough, they're balancing their portfolios to be politically green.
Jesse (35m 27s): Well, listen, I think at the end of the day, all, all businesses are ESG is environmental, social and governance is becoming a bigger and bigger component of, of how they invest. And I think it was, it was JP Morgan that was saying that they, I think they took the stride of not investing in certain type of industry, fossil fuel industry. I'm a cynical guy by nature. So I know, you know, there's been some pundits that have said, you know, that's the reality of them getting loans from, from Europe at extremely preferential rates, if you're a green quote unquote green company.
I honestly, I wouldn't, I wouldn't know if it's yes. If, if that is happening here at once, surprise me, especially given, you know, our political posture typically. But yeah, I I'm sure if it's happening. It's definitely to the chagrin of Western Canada, because I mean, that's, they, they were hit pretty hard even before the pandemic, at least, you know, in Calgary, the office, you know, office spaces, my and buildings is kind of the world I live in and you know, that they had been hurt years prior to this.
So, yeah, I think it's, it's a trend that is, is just something that is happening, which I, I compare it to organic food and, you know, hopefully it don't catch flack for this. I I'm sure there's even my company ESG is important. I think organic labeling was originally a positive thing. They wanted to, you know, have things that were grown properly ethically, but then it kind of moved into a, you know, just an ability to basically put a number on or check a box.
And I, unfortunately, I, I feel like that's where we're going with with ESG and from an investor standpoint, but I could be wrong. I hope I'm wrong.
Brian (37m 17s): History would suggest that you're probably right about that. Yeah. But
Jesse (37m 21s): Like you said, it, you know, it's, it's not just a, you know, economics, there's there, there's the shift. The pendulum will swing the other way. If it goes too far in one direction, and people are saying, you know, listen, is, is there actual science behind this? Because, you know, I know Tesla, I haven't checked recently, but I know they had a very low ESG score. And that was, you know, the, you would think that they are, you know, some of the, the trailblazers in terms of businesses in the world, but yeah, so it wouldn't surprise me if it's happening. I take it.
You're saying it's happening in the states that they're just not investing unless you are meeting probably a certain threshold of a green.
Brian (37m 60s): Yeah. And when we look at oil production right now, it's only in the Permian basin, Permian basin that we're seeing some increase, the middle small guys are starved for cash because of the down term that just trying to repair their balance sheets, they don't have the liquidity and they don't have the access to the credit to really start opening up a lot of their, their activity again. Then that's going to be a higher oil prices also, which is going to make the move toward the electric vehicles seem all that smarter.
Right. So,
Jesse (38m 32s): Yeah. Yeah, absolutely. Well, I didn't, Puerto Rico is probably good, a good test case for that. I mean, I think there was a congressional hearing on putting basically converting them from coal and fossil fuels. And I, and I always come from the opinion, it's very easy for us, us, you know, privileged rich countries to say, you know, to other countries that, you know, you gotta, you gotta go green where, you know, part of the reason we built wealth was cheap, renewable, reliable energy. So I, I'm always a little torn on, on that, but I digress.
So Brian listened, we're, we're coming close to the end and I want to be mindful of your time. So just, why don't you take us on a positive note? I think I have an idea of the answer to this, but what do you think are, is one of maybe one or two of the biggest opportunities you see going forward, whether it's short term or long term, I'll leave that leave that
Brian (39m 27s): I think multifamily is a huge opportunity. I think storage given us another huge upside market and a distribution, warehousing logistics, all the real estate involvement that is, that's got so much upside to it. That that that's where I would be moving some of my assets reallocating into that space over really overweighting that space within the portfolio.
Jesse (39m 55s): Perfect. Well, I'm sure listeners would love to hear that. Cause we got a lot of multifamily investors. There's four questions. We ask every guests kind of a rapid four. If you are ready, I can lob those at you, Brian. I'm ready. All right. What's something, you know, now in your career that you wish you knew when you first started out.
Brian (40m 19s): I wish I knew when it first started out that the smartest thing I could do was hire people that were smarter than me. And once I learned to do that, things got a whole lot better.
Jesse (40m 30s): I agree more on that. That's perfect. In terms of mentorship for younger people, getting the industry, whether it's real estate or even in your space, what's your view on mentorship and, and what would you say to them?
Brian (40m 46s): Oh my gosh, mentorship is probably the best training exercise you can have. We have a mentorship program in our company because you can't, it accelerates the learning curve. It makes those people that much more productive. They feel much more comfortable, happy. And when they're happy and productive, your retention rates go sky high. So it's a win-win the company is more efficient. People are more happy and mentorship is it's serious. And I'm amazed.
Sorry, question number two. Yeah.
Jesse (41m 23s): Cut out there for a sec. We'll we'll edit that out there, but I think we got everything. Yep. So question number three. Is there a resource or book that you could recommend to listeners that, you know, maybe you're you're reading now or, or you've read in the past?
Brian (41m 43s): Yeah, I'm going to recommend to it. Matter of fact, that both sitting here, my desk one is a book that my brother and I wrote called prosperity in the age of decline. I think it does a great job of putting the economics of the 2020s and 2030s into a correct perspective for people to prosper. And I just finished this Jessie called full faith and credit by Alan Axel rod. And it is extremely well done in terms of deficit spending, how we got here and what it potentially means going forward.
It's not a very thick book, but it was very, well-written both faith and credit by Alan Axelrod.
Jesse (42m 29s): Perfect. We'll definitely, we'll definitely put some links in the show notes for that prosperity. I feel like I have seen that book before, or maybe just seeing, seeing your name on it. Last question, our, our lobbed, the ball first car make and model
Brian (42m 49s): Really. Oh my gosh. That wouldn't say a word Maverick. Oh, I'm going way back. Right. And I repainted it to midnight blue metallic, and I just rode that thing until the engine sees the one day.
Jesse (43m 7s): That's amazing. You know what we like when we get a, you know, 40, 30, 5, 40 and older, you get the cooler cars, but you can pop that down. That Ford Maverick beside my dad's. I think his first car was a Ford Fairlane. Unfortunately I saw it on paper, but that's great, Brian, for, for those that want to reach out to you, what would you know aside from, I always say Google search. What would be the best way to, to connect,
Brian (43m 35s): Go to a ITR economics.com or brian@itreconomics.com. So like Gary economics is the website. You can email me brian@itreconomics.com.
Jesse (43m 51s): My bet. My guest today has been Brian Ballou. Brian, thanks for being part of working capital. It's been a pleasure. Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one.
Take care.
Bader Elkhatib is a Vice President at CentreCourt. Prior to joining CentreCourt, Bader worked as an Investment Associate for Tricon Capital Group, a Real Estate Private Equity firm, and prior to that he worked as an Analyst in Investment Banking at CIBC Capital Markets.
In this episode we talked about:
- Bader`s background
- Bader`s first Real Estate deal
- The Transition from Tricorn Capital Group to CentreCourt
- Bader’s Investment Philosophy
- Land Assembly
- Real Estate Development
- Replacement of Rental Housing
- 2021-2022 Real Estate Prospectives and Opportunities
- Mentorship, Resources and Lessons Learned
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, welcome to working capital my name's Jesse for galleon today, I have better Elica deed. He is vice president at center court. Prior to joining center court batter worked as an investment associate for Tricon capital group, a real estate, private equity firm.
And prior to that, he worked as an analyst and investment banking at CIVC capital markets. And today we're talking all things, acquisition, all things development better. How's it going?
Bader (47s): No complaints. It's a 38 degrees outside and then my basement is good.
Jesse (52s): Yeah, I was going to say, I just, I totally forgot today. We have Italy versus Spain. Hopefully by the time I'm listening to this, we have one and have advanced to the finals, but yeah, it's, it is quite hot in, in Toronto. Right now. It is close to 40 or feels like 40.
Bader (1m 9s): Well, I'm sorry to keep you on the, on the line in that. How have you known him? He was playing Spain. I think we would have moved the call.
Jesse (1m 15s): No sweat. I'm one eye is looking to the, to the screen here, but no, thank you so much for coming on. Really appreciate you taking the time. I thought listeners would get a lot out of somebody from your background in real estate. And talk a little bit about development, how, you know, center court, underwrites assets, and just kind of your general path in, in the real estate industry. So on that note, maybe where we could start is a little bit about your background.
I mentioned Tricon CIVC for listeners. Give a little bit of a background and how you got into this, this world of real estate.
Bader (1m 54s): Yeah, so it's, I mean, pretty interesting story. I guess I, my graduated, I thought I was going to be in the tech space. I thought that was going to be, you know, where I'd find my path. And to that end, I, I kicked off my career in tech investment banking. So I was covering, you know, Roger's tell us a bunch of data centers, a lot of small tech companies back when it wasn't really sexy in two thousand ten thousand eleven. And it was, it was a great time. I did a ton of really interesting work, but the one deal that kind of really got me excited was the data center deal.
And I, I kind of saw that as an intersection between kind of real estate and technology, it was tangible, it made, it made real money at the time. So you could follow the cash flow that really kinda stuck out to me as a potential angle. But the more I kind of dug into what I was really interested in, it was really on the resi side. So I said to myself, well, look, people are making careers out of real estate. You can work in real estate finance. There's so many different ways to look at it. And, and through, through that, got introduced to tri Kahn.
Who's a real estate, private equity firm focused exclusively on residential real estate at the time, primarily in the U S. And I said, well, I would love to learn what the more with the us. I felt like I was just in Toronto at the time, and I kinda wanted to expand my horizons. It was residential, it was Toronto based a really young entrepreneurial team, a good track record. And I found a home there and I w I was there for, you know, just over four years, did a lot of really exciting work. But one of the pieces that I wasn't getting was the development piece.
Like, you know, we would invest in development projects and we would, you know, see a lot of the work, but as a Canadian based investor with porches in the U S it's very difficult to have that boots on the ground experience. So I decided I need to kind of learn the trade if you will. And I started embarking on a journey to find the, the right development group here locally to really take me in and take a bet on me. Cause I had different development experience and I found a home at center court. So I've been within our court now for four years.
And today I lead our land acquisition program. So, you know, really looking at every deal that comes through the door and seeing fits without and within our box. And that's how I spent the vast majority of time.
Jesse (4m 14s): Right on. And before we kind of moved to center court, I'm curious the, the type of deals you mentioned, residential, but the type of deals you're doing at Tricon, maybe you could talk a little bit about that, where they kind of vanilla where they, you know, a little bit more complex. How, how did that, how did that go
Bader (4m 32s): Very complex? You know, I remember the very first deal I did. I, I, my, my biggest tri con was a land development deal. So people think high is complicated, but this was like a, you know, a few hundred acre site in North Carolina. Yeah. So a brand new market, a time for, Tricon definitely a brand new market for me, you're talking about buying like a wood. What is law area putting in, you know, road sanitary, sewer, water, building like a highway off ramp and then selling, you know, blue top loss, the builders, or going vertical yourself.
So, you know, just the sheer size scope, like it's like a 10, 15 year deal, the market risk associated with that. Like, it was just a very complicated process. That was a lot of the work that I did there. The other bucket of work was, you know, probably a bit easier to wrap your head around. It was manufactured housing, it's the land lease communities. So we, we had a portfolio of manufactured housing communities primarily in Arizona, in California. So that was a bit easier to kind of, again, execute on wrap your head around cash, flowing assets, you know, easy value, add programs that are executable while we're on the risk curve.
For sure. And so that's how I spent most of my time. Certainly not plain vanilla. I wish I saw a couple of plain vanilla deals when I was there, but just tremendous learning opportunity on very complicated things.
Jesse (6m 5s): Yeah. That's, we've had people on the show for a manufactured housing and it's definitely has its intricacies, you know, when it comes to whether it's it's owned, whether it's land lease. So it sounds like it was predominantly Landlease that you were dealing with there.
Bader (6m 20s): Yeah. So I try Collin. One of the things that we did, and this was super exciting, you know, we ended up really basically taking $50 million of balance sheet capital in the first instance and, and using that to feed a manufactured housing portfolio, we, we found the right GP partner based out of Chicago to kind of lead those efforts on the ground. And what we were doing was we were buying, you know, call it one-off assets in the, you know, three to three and a half star category, good bones, or just really needed some, some significant TLC.
And we would effectively go in and do the value add program, rebase that try to effectively bring it from like an 85, you know, 88% occupancy up to that 95, 97, 90 8%, and really repositioned the entire park. That was the whole business plan. But if you can imagine, like effectively involves us flying down to, you know, Arizona jumping in like an SUV and you're cruising down, you know, like various parts, like I'm not talking Scottsdale fucking like Glendale and, and other areas.
And once we're parks, friended meet owners, like it's that traditional door knocking and trying to find opportunities. And if that's the way we built a portfolio of 14 assets where we own all the land, the tenants actually own the channel is what we call it, which is the house. They lease the land from you, it's all triple mess. And basically what you're trying to do is optimize right by building a portfolio, you know, spread the management costs, do the value, add program five and cap rate compression, grow the NOI, and then sell it off to another institutional, you know, owner who may not want to do that heavy lifting.
And, and we did that. We actually ended up selling it to Blackstone.
Jesse (7m 58s): Yeah, very cool. So pretty much a turnkey getting it to the point of turnkey and models, basically model, suite it for them and hand it over. And you said it was sold to Blackstone. Yes. Right on. And they, they had a fairly large play into single family. You know, everybody was trying to figure out how do you scale single family? And I think it was something like 38,000 or 40,000 units at the time. And I think they, I think they IPO the company or the company that they created. I totally forget the name. But do you recall?
Bader (8m 28s): I think the American, I think as American homes for rent, if I remember correctly, I think that was it there's. Yeah. Let's the single family rental, like Tricom was super active in that when I joined, it was like a big bet that was may coming out of the, the 2010 recession. And that business has continued to grow. I remember at the time there's a bunch of people who just couldn't figure it out. They couldn't understand how you could manage so properties, but you know, here we are 10 years later and it's a, I'll call it an institutional asset class with, you know, real, you know, pension players looking to grow the portfolio.
And, you know, we recently heard about a company here in Canada, who's going to try and do something similar. So it's super exciting. I like the whole time I tried it on was very innovative. I didn't work on single family rental, but just being around the folks who were working on it, you know, you just, don't, you, you start to appreciate the thesis and yeah. There's risks to it, but yeah, there's always risks.
Jesse (9m 32s): Yeah. Very cool. I think the one I was talking to the invitation homes, which I believe I, yeah, I believe IPO. Okay. Very cool. So you go from, from Tricon down to, or over to a center court, what's that transition like and what do you start working on once you, once you make that transition?
Bader (9m 50s): Yes. You know what? It was a, I think it's a big bet on my part, right. At the time, like I had a, I had a great thing going on for me, a Tricon, but I was really inspired by the founders of center court. You know, like working with guys like Andrew Hoffman, Jemez, Veronica, Steven, Bellevue, like everybody just has tremendous respect for them. I had tremendous respect to them and, you know, Centrepoint was still maybe five or six years old at a time and just had a great track record despite, you know, a relatively short tenure. So I knew they were on the right track.
And candidly, when I first met with Hermes to, you know, just pick his brain, we, we had a mutual connection and I said to him, Hey, this is what I'm looking for. I'm looking for developer that has these types of characteristics and you know, where do you think I should go? Like, who do you think I should talk to you, but you can't just stay away from, you know, like just kinda give me some guidance because all my work was in the U S and you know, after a few meetings, he just said, I, you know, I, I meet Andrew.
And at the time Ford was not hiring, you know, they had, they had a solid team, they were growing, but they weren't really looking for someone, but he said, Hey, like, you're a great talent. You have the right outlook on, on the world. And it aligns well with the way we see things. So if you're, if you're willing to make a bet on us effectively, when we can bet on you, so we're going to join, you won't really have a, you know, fully based roles. So I kind of did a bunch of everything when I first joined.
And then, you know, as the business grew, I grew, but the very first thing I did was a sales and marketing on our venting west project, which is a building over in Liberty village. So I took a deep dive into, you know, designing suites and coming up with the name and figuring out how to market it to brokers and, you know, our investor buyers. And that was the very first thing I did. And from there things quickly evolved and started doing more acquisition work, which is kind of more of my comfort zone.
And we ended up raising a, a, a large $250 million dedicated fund. So we have permanent capital and more of a call it a, a direct mandate to put that capital in play. And, and, and through that, and some heavy lifting, I eventually transitioned over to acquisitions.
Jesse (12m 14s): Very cool. So the, the fund itself, it was that, was that something that they, they created as a committed capital fund? Was it something that they created in a private REIT structure? What were the mechanics of that?
Bader (12m 27s): Yeah, it was, it was committed capital fund. So prior to that, you know, we were raising capital from ultra high net worth families on an as needed basis. When we had an opportunity that we felt was worthwhile, we'd bring it to our investors. And we had a very small group of very loyal investors. And, you know, what we saw in the marketplace was w w was really two or three different dynamics. One was, you'll just getting done a whole lot faster than ever before. Right. So that multitasking of doing your diligence, raising your capital, I mean, we were doing it, but it put a lot of pressure on the team.
We also had a great track record. So we thought, how can we leverage that track record into something more? So I think really, I know we just saw a lot of opportunity in the marketplace. So it was really those three things that sets ourselves. Let's just raise a committed fund where we know we have the money in the bank. We know we have this mandate and we know there's opportunities out there. It's just gonna help us execute better, you know, enhance the machine if you will. And it, it certainly did. So right now, you know, it's been three years, we're about halfway through that fun.
And, you know, we're, I'm super happy to report that things have worked out, you know, kind of exactly as, as we anticipated. I'm not exactly, but, you know, in the larger scheme of things, pretty, pretty close.
Jesse (13m 48s): So with that mandate, what type of, what type of latitude or what type of range of investments were part of the investment philosophy when, you know, you have investors initially coming in and saying, you know, these are the returns we're looking for. These are the asset classes that we're looking at. What did that look like?
Bader (14m 6s): Yeah, no, it's a good question. So, you know, for us, we try to be very, I think we try to have a narrow focus. So we're only doing high rise, residential condo for sale, right? So we don't have a mandate to do, you know, commercial or retail or industrial it's, it's, it's, it's one asset class in terms of market. You know, we, our bread and butter is the downtown core, but we had the latitude to go out to the greater Toronto area. So for, you know, for us, that's really the outer 4, 1 6 and 9 0 5.
That's what I would consider it to be kind of our, our playground right now. And in terms of, I guess, you know, scale and deal structure, really for us, it's 280,000 square feet or more of GSA. So we're looking for, you know, higher density stuff. It doesn't need to be a vertical tower. It can be, you know, a mid rise, but certainly high density. And last but not least, we have a lot of latitude in terms of what we can buy. So I can go out and buy a, you know, a Plaza. If I think that's positive can be converted into a high rise development.
We could buy a whole piece of a, of an assembly site, right. And assembled over time, the rest of the remaining properties, we can buy a fully zone site and just, you know, put a right to range of production. So, you know, we look at a lot of different opportunities in, in varying stages of, of the on-call there development life cycle,
Jesse (15m 30s): Right on. So, so that's kind of where I was going with that, where you would, you know, potentially you're buying something that is a different asset class today with the intention to take it to high rise, residential condo sale. Maybe you could talk a little bit. We, we, you know, on the, on the show, we've had people on that have been condo centric or had that similar type of mandate with their investors, but not so much a discussion of land assembly and how investors look at land assembly, because I can tell you from the point of view of the brokerage side, even on the investor side, you know, land assembly, it's definitely an art.
And for someone like myself, that doesn't see a lot of it aside from having investors in brokerage, say, I want this, I want this. It almost looks pretty random until you see something actually come together. So how do you approach that? Maybe, maybe you could dive into that a little bit.
Bader (16m 25s): Yeah, look, it, it's not easy. It can definitely look random. I think what I always tell people who are trying to pursue land assemblies. Like if you think of like the, the area, like call it, like the spectrum of risk w land assemblies highest, highest risk, right? Like you're, you're taking a bet on a piece of dirt that you need to buy your neighbors out at a basis. That's going to make sense. So you gotta think things through rezoning, like if it's the longest life cycle and most complicated piece of the, of the puzzle, but there's a approach.
I always say, I talked to a lot of young call it young brokers or, or, you know, peers. It's like, you know, like, what's the best way of doing this. And, you know, we often trade notes and then I'm one thing I can say is know where to look. Right. And it sounds easy when I say that to you, but the reality is do your homework, right? Like don't just start looking at, you know, four corners of being, well, there's a tower over there. That's the site next to, it must be a tower site, but it's far more complicated than that. I, I often find people just make that assumption.
You really have to understand. So if you're working in Toronto, the city Toronto official plan, the secondary plan, the site specific policies, the tall building guidelines, or mid-rise building guidelines, you know, you're really have to be plugged in to what, you know, the, the planning policy says is achievable. I think that is step one is to have that deep kind of Intel. And then step two is to kind of like, you know, you're kind of layering these things on top of each other to figure out, okay, I'm going to put them through this filter.
Where can I, like, what areas am I allowed to develop in? And then you'd have to go through it and say, well, okay, this area is clearly development sites, but I have to buy 16 peaks, like jumped people out. Is that something I'm going to spend my time and energy doing? It might be if you have the patients and the capital and the very long-term orientation, but realistically, I think most people will shy away from that. So then you're trying to find the sites that have, you know, call it two or three different land parcels. And then you're trying to make sure, well, has somebody already planted a flag there, right?
Like if another developer's already on the block, well, I'm just not gonna get into, you know, a back and forth about who's who's decided is and buying them out potentially. So you might want to find a block where there isn't someone already kind of taking claim, or we're doing that heavy lifting. And then it's about trying to figure what is the landlord then? And oftentimes this is the part you get tripped up, tripped up on because you can find the site. It makes sense. You know, you can get, you know, 200,000 square feet of density.
It all makes sense. But then you have a landowner who has, you know, very healthy expectations. And then you're like, okay, well, is it worth the ongoing negotiation? Do I approach somebody else on the block? And then you got to figure out the art versus the science. So it's, it can be very complicated, but, you know, knowing where to look, be persistent and be transparent. Like, I, I get a lot of guys who and girls who always say, well, you know, I'm going in. They don't know I'm a developer.
Like these yields are just too complicated, just be Frank. Like if you're in to develop, just say, I'm a developer because your diligence and your risk is so different than potentially somebody just buying it for commercial use that you have to make the vendor aware of that. So you can actually successfully closing the transaction and, and, and cover your downside. I always say, cover your downside. So that transparency is pretty, pretty critical. If you're gonna ask why, why do you want to put a bunch of holes in my, in my back, you know, lot, if, if you're buying this for just, you know, retail, you, so eventually the cat comes out of the bag.
I mean,
Jesse (20m 10s): Is that my guess, is that as a result of, you know, the expectation that an owner is going to be like, we want a development bonus as part of this deal, or we want, you know, some premium. And I feel like at the end of the day, it's going to be really hard to go in and not just say like this, this is what we're doing. We're developing.
Bader (20m 28s): Yeah. It's like, you know what? I, I won't discount that. I think, you know, once in a blue moon you'll find a site for young native development value. You're not paying for development value. You're not paying the full amount, but in a city like Toronto, I, unfortunately my belief is like, it's opposite. The people who have zero development value believes had development value. So it's the, you know, like the, the starting point is my woman, my retail, you know, building is worth, you know, $200 a square foot of a GSA on zone, even though like it's never going to be a development site.
That's kind of the, you know, the, the challenge is like, I actually find, I hear this from my, my friends kind of on the retail side. They say, everybody just thinks of developments. I can't even, you know, I haven't managed to go out and buy a 3000 square foot commercial building for one of my private investors. And I can't get one because everybody I talked to, you know, wants to sell it at like a two town development site. Yeah.
Jesse (21m 27s): And it's just like one of those things where it's like, well, if it's not a development site, it's not for sale. And we'll, we'll just hang on in from your experience when you are looking at these development sites. I mean, I feel like a big part of what you're talking about is, is the reason that the risk mitigation is in place income, where you can find something that might be a longer term play. Number one, is, is that how you look at it? And the second question, I'm curious if you make a distinction between properties that are, you know, have decent buildings on them, but it's really not highest and best use versus properties that are pretty much, you know, close as close as you can get in Toronto to dirt.
Bader (22m 6s): You know what, I don't really make that distinction all too often. I think what, what comes into play is existing use, for sure. Like I have no problem tearing down a four story building versus a two story building it's really w what's Lee's use and, and there's implications to it, right? So if you have an office building that has more than 10,000 square feet in certain areas of the city, I have to replace one for one that call it loss office space in my future development. So that has an implication on your land value. So I look at it from that lens, you know, certainly like, you know, whether or not it's a scale of the building.
Yes. It will have some implication to, you know, the demo costs or, or potentially other factors of the process. But oftentimes I'm, I'm more concerned about what is the existing use. If it's, if it's residential, it becomes very problematic. That's the, like, that's the hard part, because now you're negotiating with a bunch of different tenants to try to get them out. And then you have to replace the existing space in your new building. And the, the process of the city is just far more complicated.
You, you know, when you have to offer the opportunity to get residents to come back in the future, if now I have a rental component potentially in a condo building, so it's just a different use. There's a lot more complications. And, and that space just to put in perspective is a work, you know, call it 40 cents on the dollar of what a typical condo would sell for in the building. So it's quite diluted, which is candidly, why you often see, you know, some medium-sized rental buildings not being redeveloped, even though there's great context for it.
It's just very, it's very difficult if the numbers work.
Jesse (23m 50s): So on that point for those that you might not be aware of, like we have, we have listeners south of the 49th parallel north. I tried to tell people, you know, what we deal with specifically in, in Ontario in terms of landlord, tenant, board stuff, just residential regulations, when it comes to actually, you know, taking down a, say, mid or low rise apartment building, what are the, you know, w w what do you have to replace there in terms of replacement of rental units?
And maybe you could go into a little bit more detail on, on that.
Bader (24m 27s): Yeah, absolutely. So, and this is very call it city of Toronto specific. So every municipality will have their own rule that you have to be considerate of, but, okay. So
Jesse (24m 40s): In terms of, maybe you could talk a little bit more about that, the residential replacement. So for those that don't know, you know, Toronto, Toronto is pretty, pretty tenant friendly environment from a regulatory standpoint. What exactly, when you look at a, an apartment building that you need to tear down in order to build, what is that, what are the implications of that and what technically do you need to do as a developer?
Bader (25m 5s): Yeah, so it's, it's quite complicated. So the very first thing he had to keep in mind is, you know, every municipality has slightly different rules. So what might be like, I'm going to talk about Toronto because that's where most of our businesses, but Mississauga might have something slightly different bond will have something different. So I'm always read up and don't take what I'm saying right now at face value. But in Toronto specific specifically, I should say, we'll always look and see how many residential units there are. So the rule is that there's six or more residential units.
You have to replace them one for one in your future development. So both by unit type unit saw and unit size. So we all tend to know that, you know, older units typically have a larger three averages. You know, you're seeing these like two beds that are 1200 square feet. So you have to be very cognizant of the area and the unit type, and then the rent that are being charged, because once you actually go through the redevelopment process, what you'll have is no rental replacement units.
So let's say you have 60 units in your building. You'll actually have 50 units in the building, the same size and similar layouts at your development. Upon completion, you have to offer the tenants who were, you know, effectively relocated during the construction periods, operating to move back into the building. And the rents that are charged at that time are the same rents that were charged prior to the construction taking place. So, as you can imagine, you're in this condominium building, let's say the, you know, the average one bedroom rents are $1,800 a unit for a, you know, 500 and ish square foot unit.
Now you might have a one bedroom in the rental replacement portion of the building, which is going to be 800 square feet and renting out for now $1,300. So, you know, it's very, you know, call it value destructive, which is why you often see some buildings do have rental replacement. We've done several developments where, you know, we've, we've had to include some call it affordable housing or rental, but there's, you know, call it a tipping point.
If you have a building, like let's say, you know, a building where 25 to 30% of the building is going to be rental replacement. The economics of that deal tend to skew in a, in a way that don't make it really feasible. And, you know, it's one of those things where you're often looking at opportunities and you're thinking to yourself, well, there's a, a four story building here. Why doesn't this get redeveloped into a, you know, a 35 story tower, and oftentimes with the value that is lost, or the implications of that rental replacement in the future development don't really add up.
It becomes an N call it a deal doesn't really pencil out with very uneconomical. So I'm sure that will change over time, right there. Like it's always worth revisiting the math, but I was in the city for the last several years. The math hasn't really penciled out where you could replace a large quantum of units. And in
Jesse (28m 18s): Terms of the, I mean, Toronto specifically in terms of the actual replacement geography, you know, whether it's site or you can cause we've seen clients where they have gotten away with being able to replace it on a different site. Is that something that you see and is that kind of where you see potentially rental replacement going?
Bader (28m 37s): Yeah. You know what it's, that is a very unique way of addressing the challenge, right. I would say oftentimes when I've seen it done, you know, quote unquote offsite really has to be a, maybe one of two ways. They, you have to be a really significant gift. So let's say for instance, you know, you you're replacing six units, but instead of replacing them six units onsite, you're willing to do 10 units offsite in a standalone building or something, you know, I could, I I've seen that happen.
And, you know, it's, it, it, it certainly exists. It's just a different challenge right now, as a developer, I have to find this other replacement site to put these 10 units in, and that's a whole nother work stream and challenge on its own, but certainly doable. The other one I've seen where it's significant. So, you know, let's say you're demolishing 50 townhomes that are all rental. Well, you might actually need a very large site. I've seen, you know, someone build a, a six or eight story, you know, rental replacement building, where it's just a building where, you know, all those units are consolidated into, you know, a mid-rise built form, which, you know, might make sense depending on the project.
So I certainly seen unique angles to solving the problem, but it's not without challenge because now oftentimes what you'll see in those agreements is those units have to be, have to be delivered first. So you're front ending calls with that cash flow or your front ending, like your time and energy to solve that problem right off the bat. So certainly not impossible. There's a lot of different ways to like, again, approach the challenge, but it's, it's complicated.
Don't underestimate that, you know, I find a lot of people just typically say, okay, I'll figure it out. This is one you might want to sign that.
Jesse (30m 29s): Yeah, for sure. So Bever, let's talk a little bit about 20, 21 and beyond in terms of what you're, what you're looking at, where you're seeing opportunity, you know, what's next for center court, you know, from a real estate perspective. And given obviously with the, with the fact that we've gone through quite a tumultuous last 12 to 18 months, just as an industry. And I mean, as, as a world, but yeah. What are your, what are your thoughts on the outlook?
Bader (30m 59s): You know, I, I sound like a book, a broken record, cause I feel a lot of my colleagues in the community will say this, but we're very optimistic about condo and high rise development here in the city. You know, Centre court, we sold four buildings, all the downtown core or the past, you know, 15 ish months. And we launched our 55 Mercer project right before COVID in February, 2020.
We launched our 1 99 church project. You know, we're coming out of the first lockdown in, in July of 2020. We launched our eight, well, we project, you know, right. When can we have lockdown again in February of this year? And then prime are last on the heels of that. And we're gearing up for one or two more launches this year. So we're clearly, you know, big believers in the condo market here in Toronto.
We believe that two things it's still off the traunch is still the most desirable city in our, in our opinion in north America to live in, if not, it's not globally, we just have so much going for us. There's clearly a housing shortage. There's a, you know, a problem with affordability in this city and condominiums tend to be on the more affordable end of the range relative to, you know, the town, their single family home.
So, and then just, you know, more scientifically the spread between a condo a, in a home has never been wider right now. So in terms of price point, which tells us that there's, you know, upward momentum and pricing for condominiums and, and, and certainly demands. So all in all, you know, we're, we're very, as a competence and an optimistic about the future. And to that end, you know, we have, we're launching new projects and we're acquiring more sites. You know, we're constantly looking sites.
We haven't stopped. You know, there was a bit of a brief pause, I would say, obviously in new call it March, April, may of 2020, when, and we just, we had no idea what was going to happen here locally or in the world, but the market has found its footing. And since that time, we've, we've been very confident and, and continue to kind of operations. As I wouldn't say I was normal, but you know, operations as close to normal as one would expect, given the backdrop of COVID.
Jesse (33m 33s): And with that as the backdrop, in terms of capital markets, do you see this, you know, environment continuing over the next few years? I mean, we've, I mean, I don't know how many times I've said historically low over the last 10 years, but we've, we're in an environment where they're very different to oh 7 0 8 where there was an issue, but there was also a credit issue. There's a recession in conjunction with lack of credit. Whereas right now we're, you know, we're in a very similar type of macro economic state, except that there seems to be the opposite.
There's a glut of credit.
Bader (34m 9s): Yeah. I think the biggest thing that differentiates, you know, call it COVID from the recession. And I think you'll forget what the, you know, the, the great recession, but mostly because of Canada, you can look them up a bit on escaped, but you know, if you take a step back, there is just never the quantitative stimulant, right? Like, yes, the credit of the available is one thing, but the wage support subsidies the effectively, the banks just stepping up and working with business owners and, and, and operators, right.
To make sure that they don't repossess your, her, your business or your site or your home or whatever, like that's unprecedented, right? So the level of cooperation and stimulus in the marketplace has never been seen before. And I think that is, you know, I think it's absolutely the right thing to do, but it's certainly giving people the confidence to continue as business as usual. That's the whole point of these programs. And then when you have that, and then in the property market, ultra low interest rates, you have consumers who I would say are pretty highly qualified.
Like there's a lot of, you know, folks who, who do have significant down payments who have good income, who are working, who don't, who have been working from home. Haven't we been spending have either paid down debt and, and a rage to deploy that capital, whether it's, you know, in residential or other markets. So there's kind of this trifecta, which is kind of Lea. And then there's just the aspirations of whether it's home ownership or putting money to work. And in real estate, which has kind of been a bit of a bright spot in, in all of this.
So you'll all these things I think have led to a very healthy, real estate market, particularly on the resi side. And, and I think, I don't think that's going to change. I think again, people get interest rates are probably going to edge up right over time and that's going to change the equation slightly, but, you know, overall, you know, it might not be as buoyant as it is today, but I still think we're going to be looking at a very healthy market, you know, whether it's the next one, two or three years, for sure.
Jesse (36m 25s): Awesome. All right. Well, we're just coming to the end here and before we, if people want to get more information on center court and reach out before we get there for questions, we ask every guest kind of a rapid fire. If you're good to go, I'll toss them at ya. All right. Something, you know, now that you wish you knew at the beginning of your career,
Bader (36m 51s): You're not going to become a, an expert in two to three years to be more patient, more like out about 10 to 15, and you're just always continue learning. So if you think, you know it all at two or three years, you don't keep your head down, work hard, read a lot, figure out who actually knows what they're talking about and listen to them. And it wasn't to people who don't know what they're talking about. And maybe take a couple of notes from that too.
Jesse (37m 15s): It's weighted average. All right. The I'm sorry. Next question. In terms of mentorship, younger people in our industry, specifically, what are number one, what's your view of men mentorship, and you know, what would you tell somebody coming into this industry?
Bader (37m 31s): Mentorship is critical. I know it can be awkward, right? How do I find a mentor? It gets, it's kind of weird, but I, you know, I have two mentors that, you know, have been my mentors now for maybe five or six years. And I don't think they know they're my mentors. I don't think it's a formal arrangement, but they're people I use as a sounding board before making major decisions are people who I listened to and, and, you know, maybe track their career path and, and, you know, have candid conversations about what has gone, right.
And what's gone wrong and you know, what I'm happy about or unhappy about. And I think if you find the right person, they can be that sounding board and, and have that north star that keeps you candidly on, on track because it's so easy to, you know, find yourself off the, off in left field. If you, if you don't have someone to talk to and share your thoughts and your ideas with so definitely don't underestimate it. And biggest thing is I know it's, again, it's very odd. It's hard to find a mentor. You're not going to find a mentor, maybe your first job or your second job.
It might take a bit of time, but you'll know when, when that person's there and, and jump on the opportunity, don't be shy
Jesse (38m 41s): Right. On what resources are you kind of reading or listening to right now that you'd recommend to the listeners?
Bader (38m 50s): You know what, so we have a newborn, so I haven't read anything I have to call in the last five months. Yeah. I don't know on that stuff. How to keep your baby alive, what I've been reading, but the one book that I would recommend is am I being too subtle? Bye bye. Sam Sao. Yeah. I don't know if you've read it Jesse, but yeah, I think it's a fantastic book. You know, it's all about importance of reputation, you know, margin of safety, having skin in the game.
It's, it's written kind of my, you know, I'm like, I call it Bible, but like everything I, I believe is in that book. And I, I recently re-read it, you know, over Christmas break and I think it's a good read and we're picking up
Jesse (39m 38s): The funny thing too, is for those of that know Sam Zell, I was actually surprised the audio book had his voice on it. So if you like that raspy voice, there's five hours of it. Awesome, man, last question. There's our layup. First car make and model
Bader (39m 56s): My first car, make and model. Oh, Volkswagen Jetta VR, six block, black leather interior smashed to the ground. I had two 12 inch subwoofers in the back. It was, it was my, honestly I regrets on the park. It was my favorite. It was, I bought it. I worked, I worked so many odd jobs to pay for that car and I kept it until I was 21.
And I sold it to the kid across the street for like a, a handshake. And I regret it. It's like my, it was my favorite car. Yeah. It
Jesse (40m 35s): Was always that in high school, the VR six two, it was always that unattainable. I'm just picturing like a hot wheels. Blacked-out tint windows. Awesome, man. That's great. Yeah, listen, I really appreciate it. I thought we could probably talk for another hour here for, for listeners for those that want more information on center court and see what you're up to. We can put some stuff in the show notes here. Just point me in the right direction.
Bader (41m 1s): Yeah, absolutely. Absolutely. I'll I'll shoot that over to you, Jesse. Okay.
Jesse (41m 5s): Sounds good. Well, I appreciate you coming on and yeah, we'll look forward to doing this again, maybe six months or a little bit closer to the end of the year where we can kind of check in and see how everything's going.
Bader (41m 19s): Terrific. Well, look, I appreciate it. Hopefully I haven't checked hopefully Italy one and absolutely I'll take you up on that offer. We can spend for something in for December.
Jesse (41m 30s): My guest today has been blabber from center court Bauer. Thanks for being of working capital. Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.
Scott Trench is the CEO and President of BiggerPockets. Scott has Dedicated his Career to Helping ordinary Americans Build Wealth in Part through Real Estate Investing. Since joining BiggerPockets in 2014, Scott has Authored the Bestselling Wealth-building book “Set for Life” and joined Mindy Jensen as Co-host of the BiggerPockets Money Podcast.
In this episode we talked about:
- Founding a tiny Startup called BiggerPockets
- Scott’s first real estate purchase
- Scott’s Professional Development
- The Evolution of Scott’s Investing Career 2014-2021
- Partnerships
- Publishing with BiggerPockets
- Life as the CEO
- The Money Podcast
- 2021-2022 Outlook
- Mentorship, Resources and Lessons Learned
Useful links:
https://www.biggerpockets.com/users/scotttrench
Instagram @scott_trench
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies gentlemen, welcome to working capital the real estate podcast. I'm Jennifer galley and my special guest today. As usual as Scott trench, Scott trench is the CEO and president of bigger pockets.
Scott has dedicated his career to helping ordinary Americans build wealth in part through real estate investing. Since joining BiggerPockets in 2014, Scott has authored the bestselling wealth building book set for life and joined Mindy Jensen as cohost of the bigger pockets, money podcast, Scott, how's it going? Hey,
Scott (52s): It's going great. Thanks for having me.
Jesse (54s): Yeah, my pleasure to have you good to finally connect. I don't know if, if you were at BP con last, was it now two years ago when we were in Austin, Texas, where are you at that event?
Scott (1m 5s): I was at, well, I, I w we had one in Nashville, Tennessee. That was that. Yeah, it was, I was at that one
Jesse (1m 11s): Nashville. Now I'm mixing them up. I was in Austin for another real estate thing. Yeah, absolutely. It was a national first thing I did. I got off the plane. Just see you guy holding a guitar. I'm like, I'm in Nashville.
Scott (1m 21s): Yeah. I went to school there and it's a wonderful city, you know, maybe might've influenced that as the choice for the, the conference back then, but awesome.
Jesse (1m 30s): So, yeah, I guess I probably would have crossed paths with you at that point, but I didn't realize that you were with the organization for, for such a long time in 2014. So back then, how did, how did you get your start with, with that organization?
Scott (1m 45s): Yeah, so I joined BiggerPockets, well, I started my career as a financial analyst at a fortune 500 company, and immediately decided I wanted to become financially free rather than climb the corporate ladder. And so I found a company called BiggerPockets and their podcasts and started listening to it and thinking about real estate investing and early retirement, the fire movements. And so I kind of combined the two spent as little as I possibly could and bought a house hack one year out of college after saving up my, my funds and simultaneously, you know, I started my career in August, 2013 by August, 2014.
I was simultaneously under contract on my first duplex and a new employee at a tiny startup called BiggerPockets as the director of operations. I'm working alongside Brandon Turner and Josh dork and the founder
Jesse (2m 32s): Right on. So you were basically you're in school in a, was it a Vanderbilt? A university? I think last time I checked this online. Yep. Go doors. There you go. And so you buy your first property. Tell us that. Tell us that story. What was, what was your first foray into, into real estate investing?
Scott (2m 50s): Sure. It was a duplex in a, the Northeast corner of Denver called Cole Clayton, and it was a up and coming area and I bought a duplex for $240,000 needed some work, rented out each, each unit and, or rent out. The other unit lived in half, had a roommate. And that was kind of the start to my career. I put down 5%, $12,000 as a, as the down payment. Other side rented for like 1150 mortgage was 15, 50 roommate, five 50 in rent. So I'm barely breaking even, maybe it's paying a little bit to live, but certainly a lot better than paying rent.
Jesse (3m 26s): Yeah, absolutely. It's not a, it's funny, it's very similar to, to my first investment and it was 248,000, something like that, but it was a somewhat similar to a host hack. I just saw a bunch of guys in, in college that were basically buying properties and renting out to us. And I was like, what's going on? I'm missing something here. So in terms of, in terms of how you progressed through real estate and just in general with the bigger pockets show, so you're in there, you start in bigger pockets at that time. Yeah. I mean, was, it was bigger pockets, the impetus for you to invest in real estate or did invest in investing in real estate, uncover bigger pockets for you?
Scott (4m 4s): I was a fan of the idea of real estate. So when I started my career in 2013 in August, and I wanted to invest in real estate, it probably around December of that year, January. So six months after I started working, I just ran into a very simple problem, which is I didn't have the down payment. So I just needed a few more months. And so I was listening to BiggerPockets while saving up that down payment for that first duplex house hack. And in the process, I was, I drank the Kool-Aid. I joined the cult, whatever you want to call it and became a huge fan. That's when I met Josh Dworkin through kind of a networking thing in, in, in Denver is a guy I was meeting to take to lunch, a local real estate event.
Josh and Brandon on the podcast told me, go meet local real estate investors in your local market. And that's how you can get into this. So I did, and I took one of them and I joined a, an entrepreneur group, a mastermind at seven o'clock on Thursday mornings and took each one of the guys in that mastermind group out to lunch. One of them happened to work in the same co-working space as Josh Orkin. And so I was like, oh my God, you're my hero. You changed my life. I'm doing all this stuff. I'm going to get my first house, like by the end of the year, which I did.
And that's how I met him. And he paid that turned into a job interview after me, pestering him a few more times,
Jesse (5m 16s): Right on. So I mean, a bunch of our listeners have either, you know, members of bigger pockets or have seen the community online for context. Cause I remember it back then. It is not anywhere near what it is today. What was that like being part of, part of that at such an early stage in its development?
Scott (5m 38s): Well, well, for me, what was it like being at an early stage? I mean, you did everything right? So we were, I was, I was learning as much as I possibly could about operations, about growth hacking, which is, you know, internet marketing, as much as I could about real estate investing. I was trying to as much time as I could in the forums and meeting people, meeting users, posting, building my own portfolio, all that kind of stuff. So I mean, my days would be, I would bike in to save money, of course, you know, show up at around eight and then work until five or six and then Josh would go home and then I would be allowed to write for the blog and my after hours.
So that was my day for a lot of these weeks is doing that kind of stuff. And, and you just learn everything. And gradually, I think I'm just kind of the type of person who's going to stick my hand up and volunteer for every opportunity, even if it kind of begins to get a little overwhelming. And so gradually I kind of did more and more of the work that maybe some other folks didn't want to do, like managing, you know, teams and, you know, dealing with the problems and the finances and the, you know, data and those kinds of things. And so I began to take over more and more of an operations capacity over time, but yeah, the early days were just really fun, lots of creative ideas, you just thought of something and did it, you know, created a lot of problems of like, we have all these little ideas that we thought of 15 years ago or seven years ago now, and they're not really well-maintained anymore.
We've got other parts of the site that exploded like the podcast and those kinds of things. And so there's a whole bunch of history here. I think that was created then. And, and, and in the time proceeding my arrival to the company. So it was, I think it was just really exciting, but there was a sentiment like this is inevitably going to be huge, this, this deck, because we're helping people and it's a cult. And, you know, you can see how much value that people are getting from this and their net worth and their wealth and their freedom is just constantly evolving. And we've got so many success stories and so many people who are doing all the right things and everyone's debating all of the, the nuances of this and really intelligent and exciting way that is just, you don't see anywhere else.
And so that was, you know, that, that was, I think the sentiment or how I felt at the time about it at least.
Jesse (7m 53s): Yeah. It's really cool to hear that, that feeling just the, you know, this is going to be something big for me. I had somebody on the podcast a few weeks ago and for myself, just based in Toronto, I would say about 60% of the listeners are US-based the balance. I would say the majority of the balance are, are Canadians. And then, you know, a few over the pond here and there, but somebody was on the show talking about resources. And I was like, you know, if you're not using the, you know, key words, Canada, us cross border, like just things like that, where you can actually get into articles where people are talking about something so specific to what you're talking about, that you, anywhere else on the internet, even if you type in Reddit or forums, you don't get that same level of granularity that you do with bigger pockets.
Scott (8m 37s): Yeah. I think that's what makes the company special is as you get this nuance, there, there are people making money in every type of real estate and directly disagreeing with each other about the right way to make that, that money. Should you allow pets in your enter and your rentals? Heck no. Heck yes. Right. Like AB I only, I only read the pets. Yeah. Yeah. Like the pet, you know, I bought the I'm on the side of definitely allow the pets that increases your applicant pool and you get way more qualified applicants for that. But, but you know that that's a nuance that's debated heavily on a lot of these things, right.
The 1% rule, you know, like all of these different topics are, I think you can get that nuance and you can get it locally, which I think is pretty cool.
Jesse (9m 17s): Hmm. So how was it for you from, you know, 2014 up till today? So you're, you're doing operations, you're, you're kind of dealing with this real estate startup. What is your investing career looking at? Looking like during that time and, and how was that navigating, you know, the day job with, with investing as well?
Scott (9m 37s): Yeah, so I, I took a little bit different approach than say, Brandon did, Brandon Vernon is now doing incredible stuff with these, these mobile home parks and all that kind of stuff. But at the time he was buying kind of like 40, $50,000 units in rural Washington and that kind of stuff. And that was how he was building his portfolio. And, you know, the properties I'm purchasing here in Denver, one unit might be $300,000, right. And so it's a completely different price point and different type of investing. And so my, my activity set with real estate investing has been much less intense than maybe some other investors or maybe like Brandon Turner's, for example, because I've been buying, you know, about a duplex, then I got another duplex.
Then I got a quad Plex. Now I'm buying my fourth property in seven years, which is another duplex. And the asset value across this is going to be close to like $3 million across those 10 units. And, you know, that's, there's a different appreciation, potential and rent inflation and that kind of stuff that's been going on. And my goal, my philosophy is I'm going to buy slow and steady once every year, once every 18 months, that kind of range and just pile up the portfolio over 50 years and through the ups and downs of the market, I think I'm going to benefit from Denver rent and price appreciation in a way that will really carry a lot of my portfolio.
So it's a little bit more of a passive approach. It's not a get rich quick, but it has produced incredible results for me so far with us. And, you know, really allows me to spend most of my attention on my job here at BiggerPockets. So I also invest in some syndications and I dumped a lot of money into index funds. So I've got rentals, index funds, BiggerPockets, you got the portfolio there.
Jesse (11m 23s): So for, for investing, I mean, that's not dissimilar to, you've heard, probably heard this on the podcast or in the forums where everything right now, every market that's a downtown market is incredibly hot and it's very hard to, to break in to different markets in terms of the way you're investing. It sounds like you're basically, you're not jumping on anything. If you find something that makes sense and it works, then you'll potentially invest in it in terms of how you're purchasing these, that you mentioned, you invest in some syndications, but for your core real estate, is that stuff that you typically do on your own, you partner with, what does that look like?
Scott (11m 57s): Yeah, so I, I partner on those deals with a business partner here in Denver and we kind of, it's a, it's a great relationship. We've been friends for a long time and we kind of both jointly manage things as we're, as we're able to, we have a property manager as well now with that. And yeah, I mean, we just kind of handle those problems as they come up right. On
Jesse (12m 18s): One thing I've, I've at least seen just having people on the podcast where, you know, I've mentioned either before or after the show, we'll mention bigger pockets. And if they're larger podcasts, you know, I've had people be like, you know, I, I don't want to mention them. They're they're competitive hours. So, and if the first time I'd be like, first time, I felt like our community I've always felt it's been extremely inclusive, but the reason I bring it up is I'm curious to task you. What, what do you, what have been some of the challenges that you've had as you grow as you grew from a smaller company to a pretty dominant real estate company in your space?
I, you, you know, the metrics probably better than anybody, but just at the level you're at would have been some of the biggest challenges getting to the space that you're at or, or while you're here.
Scott (13m 2s): I think it's really defining who we are and who we want to be when you grow up as a business, I think is really the big challenge. I think we've done a really good job of, of building I think a great brand. I think we've got, I think we've genuinely helped. A lot of people get started and build their, their, their real estate portfolios and all that kind of stuff. And I think it's, it's, what's, what's next here. How do we more formalize this and professionalize it? Because I think what you get with bigger pockets is a choose your own adventure free for all deep dive into the world of real estate investing.
And that's great for a lot of people, but it's maybe not what some people want where they want more of like a here's what to do. You know, here are the options you pick one, here are the pros and cons and, and go with it. Right. And I think that there's a big market of people out there. Like what, what does the user of bigger pockets do? Right? What they do is they spend 500 hours, literally listening to podcasts, reading books, engaging in our forums and Facebook groups following that are our hosts and guests and bigger pockets on Instagram, joining, you know, joining the community.
And then, and then a moment comes when you want to buy real estate. Okay. I'm ready to put that investment of hundreds of hours of work into actually transacting on my first, your next property with that. And I think that's the challenge is, is that is not for everyone. There's a certain component of, of folks out there who like that and want to do that. But that, that in-depth dive, I think is not really for as many people. And, and so how do we kind of help those people invest in something more passive or succeed without having to commit to that huge learning curve there that I think it, I think it does take to be a successful, you know, owner operator of a real estate business.
Jesse (14m 59s): Yeah, for sure. It's almost like multiple funnels. Like, you know, where, where is it, like you said, choose your own adventure. Because I think with one of the things I've always admired about brand and with the podcast with Josh and Brandon and something I've tried to do with this podcast is, you know, somebody says a term and you don't necessarily know, like you said, host hacking early, and then you kind of described it where, you know, somebody says something that your listener base may not know that he would always be very quick to be like, okay, this, can you define that? And that's great.
But to a certain extent, once you get to a point where there's a level of sophistication that you're talking about, you know, I don't know, like a waterfall structures for limited partnerships, it'd be very challenging to have that podcast or that show with having to explain every single thing. So I can only imagine for bigger pockets that, you know, multiply that by X and in that, that complexity. Yeah.
Scott (15m 52s): Well that, yeah, that's, that's the big challenge, right? And so how do you, you know, on, if you come to the BiggerPockets website, I can, I can create an experience there based on your information that drives you towards those goals. But the challenge is that the website is like one tiny corner of the bigger pockets experience, right? Because it's no bigger or smaller and a lot of ways than our podcast, our YouTube channel, our Facebook groups, our Instagram, you know, other parts of the book publishing business, you know, it's, and so that's one corner of the, the BP universe.
And so what we've decided to do is to begin building what we call sub brands of bigger pockets. And so that's where we have bigger pockets, money, and real estate rookie. And we're hoping to launch one more over the course of 20, 21. I'm still debating a couple of things, but I think there's a place for more advanced investors. And what, what the current approach has done is the personal finance piece and the rookie piece allow our core real estate, the bigger pockets, real estate podcast, to go a little bit more advanced and move away from that to a certain extent and get into some of that bigger business mindset there.
So in our new investors, our rookies can really learn about, you know, what cashflow is and how to analyze the deal and the basics of that on the rookie podcast. And so that's kind of been the idea. We think there's still yet another level of advanced discussion that could be had in another corner. So that that's kind of the highest level framework. We see a world where if you come into bigger pockets, you join in there in the real estate rookie universe. And that's how you get your first deal. And you're surrounded by peers, but led by experts with that, with, with our, our hosts and guests and those types of types of things.
And then over time, you move into the business building phase or the, the investing phase on our core, bigger pockets platform. And then maybe at a future date, you move into a advanced situation. Maybe if you're a professional flipper or professional syndicator, or you're an accredited investor and invest passively, there's a place to learn how to, how to do that and that all y'all and make sure that you're, you're doing a good job with the money and all that kind of stuff.
Jesse (18m 2s): Yeah. That's a great point. You mentioned the, the book publishing side of it. I I've always wanted to ask, you know, one of the members of the team, how did that, how did that start? Because you, you you've kind of teamed up with, with subject matter experts. And the first time I ever saw that, I don't, I can't remember which, you know, which individual it was, but, you know, it was bigger pockets as, as part of, so is that first of all, how did that, how did that begin? And secondly, is the, is it self-published or published by bigger pockets?
Like the entity bigger pockets?
Scott (18m 34s): Well, mechanically we have a wholly owned LLC called BiggerPockets publishing. So it's published by BiggerPockets publishing. So how did the book business come about? I think it, before I got to bigger pockets, Jay Scott had written the book on flipping houses and the book on estimating rehab costs. And, you know, I think it would be fair to say that I really pushed the publishing side of the business as a big opportunity for us with this brand and published the book on investing in real estate with no money down next.
And everyone was debating what we should write next. And I was like, how about the book on rental property investing that one? Right. And so, so we have a, a long standing tradition now of launching books, largely with very obvious titles, I could call them SEO titles. That was not, I don't know if that was the intent at first, but we were just like the fuck that rental property investor let's look at flipping houses, the book and estimating rehab costs, book and investing in real estate with no one looking low money down, buy rehab, rent, refinance, repeat, you know, and so that's, that's kind of our fleet there that has kind of transformed over time.
We found that people love the books. We have a really high, and, you know, you can judge whether your product is doing well in the mind of the consumer by what's called an NPS score. So that's a net promoter score, and you can think of this more or less along the lines of a star rating on Amazon, five stars. People love it. Four stars. People are neutral three and below people are detractors. And our books really, really seem to have high ratings, high NPS scores among the, among our customers with that. Because I think that they're a low cost way to really digest a lot of information.
And I think our publishing team is super consistent about finding a, a true expert. Somebody, you know, we'll talk about Jay Scott here. I know you just, you just interviewed him right before me, I think earlier today, actually. Right. You know, Jay, I can't gush enough about Jay Jay's. Jay Scott joined BiggerPockets. I don't know, 15 years ago, 16 years ago, he posted 17, 18,000 times to our forums over the course of that period, he completed 150 fix and flip projects, right? Maybe the guy is playing some underhanded game with no way.
Jay Scott is a genuine human who's proved his reputation over and over and over again, who has debated the nuance of every point. That every problem that you can conceivably come up with across 17,000 online discussions, God only knows how many other discussions he's had with people on an individual basis. And the guy can write, and he runs a successful business and has a track record for it. What, how can you find a better author than that? And that I think is a reflection on Jay Scott's character and expertise, but also a reflection of the power of BiggerPockets is we can find that person who is not just, you know, a recent just came out of nowhere, kind of person who, who knows what's gonna happen.
We can find people who have really embraced our values and, you know, seen success and like to help people and understand the problems that folks. And they're the ones who are kind of writing a lot of our, our books and content. So that's been a really powerful draw for us. People who are interviewing people day in and day out in the podcast. You get to know the challenges of that.
Jesse (21m 45s): No know Scott, it might be the long con with, with Jay.
Scott (21m 48s): Yeah, that's right. Well, if he doesn't listen to this, sorry, Jay.
Jesse (21m 53s): It was funny. He, he mentioned because we said we were talking about BB cotton, Nashville. The, so I, you know, I thought I assumed it was the official first one. And he's like, nah, it was the officially was, I spoke at the one in 2012 when there was four of us. But yeah, it was like, I don't know where there was one back then. So, you know, one thing I like, I'm curious, I think anybody in our space is curious that there gets a point where you put out content and you're trying to figure out if there is a way to monetize this content. And you know, one thing for me, I've been really fortunate to be a contributor for bigger pockets on the commercial real estate side.
I learned so much just, you know, doing, even though I live in the space of commercial real estate, I learned so much by putting that information out there. And I'll tell you the first time you have, you know, 70,000 views on something, and you're looking at comments, you start sharpening your pencil really quickly and try to make sure you know, what you're talking about. So it's been really beneficial from that point of view. But when you start putting out content and you start trying to figure out where is the monetization, and I find with, you know, we're not selling a product, we're not selling a, you know, mugs where you see a lot of people in our space go the coaching route or go into the, you know, substantative relationship.
And then they invest eventually with, with the company, is that, are you trying to fire on all cylinders? Are you trying to, are you picking certain avenues? And just on the idea of coaching will, will bigger pockets grow to a point where it's kind of like a rich dad, poor dad, where you have a brand, you have somebody that has, you know, drunk the Kool-Aid and they are, you know, the, the evangelists for BiggerPockets.
Scott (23m 30s): You know, I think, I think you begin to lose competitive advantage if you move in that direction. Right? So here's how I think about, you know, because one of my jobs is to make money for the, for our shareholders, right? That's, that's a goal for every CEO, right? With here's how I think about it. The moment that we deliver value to our customer is the moment that they transact on an investment property that they believe and have good reason to believe is likely to advance their financial position.
And my, my belief is that our business, we are in the business of helping people dive in, but then ultimately take action in buying real estate and they need to do it healthfully. As part of that transaction, there are four stakeholders who make a lot of money. One is the real estate agent. The second is the lender. The third is the insurance provider and the fourth is the property manager. And these are the people, the core four that, you know, a lot of investors need, right?
I guess a contractor instead of the insurance broker, but I will get to contractors later. I believe that it is very hard to find an investor friendly real estate agent right now. W where do you go to look for that? And I think we've got a lot of agents who would love to do business with BiggerPockets investors and a lot of investors who do not want a referral from their mom or their brother or their best friend. They want an investor friendly real estate agent. So I think, you know, what, what we've built and we've already launched in 10 markets and things are off to the races with this is a marketplace that you can go to biggerpockets.com/agents and find really high quality investor friendly agents.
Many of whom have grown up through bigger pockets and post a million times on our forums. Many of whom we've, you know, there's, there's more folks that are entering the game and trying to prove themselves as investor-friendly agents. And we can match folks with that. And I think that's a really big opportunity for us, if we can help people connect, get ready. And when they're ready after the time that they spend to, to, to, to learn about this, actually move down the steps toward the transaction and connect with an agent and a lender and that kind of stuff.
I think there'll be plenty of opportunity to make money in that process. As long as we do a good job, making sure that you're actually getting a good professional with that
Jesse (25m 47s): On that note, because you know, my world is in commercial brokerage, those type of realtors or agents that you're connecting, are they in the commercial space and more in the single family multifamily, where do they, where do they lie on the, in that world?
Scott (26m 4s): Well, I think you bring up a good point, the bigger pockets we, you know, the, the market that we're most heavily concentrated, we have a forum and community that can talk about every conceivable aspect of real estate investing. But I would say the majority of our users are going to be folks that are buying single families, duplexes, triplexes, and quads, a minority 10% have a great discussion about buying larger properties with, with those types of things. But the majority of our, of our users are doing that.
And 90% of single family rental properties in this country are owned by investors with 10 or fewer units. And 50% are owned by investors with just one or two units. So that is really kind of like the user of bigger pockets. Now, the folks that you interact with and you have on your podcast completely different profile than the average investor, right. But the, the typical person is, is fitting the description that I'm I'm describing here. The guy who likes to talk about real estate all day long is going to have a different profile than that, right. Is that that's where the voltage is more prominent anyways.
So what were you asking about?
Jesse (27m 12s): Basically, it sounds like that is the space it's it's the, the singles to quads is where you're connecting those types of agents where we're now for me, the reason I asked that is because when I was younger or sorry, earlier in my career, when I was in single family or student rental, it was really challenging finding the, see the link between residential broker commercial broker, and then in the middle there there's this investor centric broker that will do deals like you're discussing.
Scott (27m 41s): Yes. And we think that's the opportunity for us to in the next, you know, year or so to really solve a lot of problems. I would love to also do a marketplace for the more serious commercial brokers who are brokering apartment complexes. But I think we got to bite off one thing at a time as a business and, and concentrate our focus on the biggest challenge facing the majority of our users, which I think is transacting on single family, duplex, triplex quadplex long-term rental investments.
And one of the biggest things we can do to help them with that is help them find an investor friendly agent instead of an agent where they're going to have to figure out and drive all that process.
Jesse (28m 19s): Yeah. Well, I mean, you would have the data there. So I mean, if that, if that is the majority of, of the individuals, that just, that makes sense. And I think like from, I think there's a misnomer, or there's just a misunderstanding of, it's not the commercial brokers, aren't, don't want to do deals with, with a variety of different people. It's it's that ultimately, without getting into the granularity of it, it's the, the fee split or the, the commission split structure is just it's, it's, it's in such a way that doing deals less than 5 million, 3 million, it just, it becomes something where it's, you can't wait.
It literally is a waste of time that you can't spend your time doing that. And that's why they're, you know, there is a great place. I know in most major markets between 1 million and $5 million deals, that is a really great spot that I think a lot of agents aren't capturing and are starting to make that their niche of, of what they focus in.
Scott (29m 14s): And I'll bring you down just one more level from there, a single family rental home costs the same as a single family home, right. More or less than that. But, but the, the, the realtors and the agents, the local agents who are helping investors do that, do not understand things like the 1% rule or a cash and cash return, or the fact that, Hey, I care if it's a good school district, but that's like a fourth or fifth or seventh bullet point for me after the rent to price ratio that this property can command the longterm.
Other long-term factors around appreciation, whether it has amenities that are going to be that the tenants are going to like whether I can convert that office into another bedroom, those types of things. That is the level. Those are the, the, the more, I guess, accessible things that we're, we're, we're building, we're building a marketplace for investors to meet agents who can help them transact on residential real estate. 1, 2, 3, and four unit properties, probably in most cases, less than a million dollars, but in some cases they'll get, they'll get to that, that value
Jesse (30m 21s): Right on, well, we can talk in new Orleans, we can talk about some ideas to get those commercial and monetize those commercial brokers. I think from that point of view, it's really going to be on the listing side. Everybody has a buyer listings are where it's at. I want to be respectful of your, of your time here. I'm really curious to know about how you spun off the original podcast to the money podcasts. I I've, I've listened only admittedly to a few episodes, but it seems like there was a pivot to basically get the ideas of that were already ingrained in the initial podcast, financial freedom, money, personal finance, and move it in that direction.
Can you talk a little bit about how that process took place?
Scott (31m 2s): Yeah, sure. So, so the mission of bigger pockets and emission I share is how you enable financial freedom for as many people as possible as early in life as possible, because that is how you unlock human potential. And my belief is that there's a lot of people who want to invest in real estate, but just don't have a financial position capable of responsibly sustaining real estate investment. And this can be anybody from having debt and needing to rebuild their position to we've had millionaires on the podcast who have no wealth outside of their primary residence and their retirement accounts, $10,000 in cash and nothing else.
And they're not in position to invest either. And so the point of the money show is to help folks move toward financial freedom and a financial position, a strategy with their money that allows them to make on a repeated basis investments in assets like real estate and other businesses on a regular basis with that. So it's a, it's a very different bent on personal finance with that. And we've talked, we talked a lot of people, we have two major SEG well, so that's the reason for the show is to, is to really bring in the personal finance aspect of this and say, here's how real estate investors build a position capable of sustaining real estate investment investing and how they move toward financial freedom with that as part of their portfolio.
Jesse (32m 21s): Yeah, it's a, you mentioned it earlier. It seems like there is that there is that real estate avatar that you do enough of these podcasts where you're listening to, you're listening to a lot of the same stuff. You're reading books like crazy. You're, you're digesting as much information as you can, but you start seeing the same, even on YouTube, you start seeing the same pop up. And then you're like, you know, I didn't expect BiggerPockets have this guest on. I saw him in some totally different, you know, field or, or podcasts, but it seems like there is that a specific individual that, you know, multiple Venn diagrams, I think we all share.
Scott (32m 55s): Yeah. I mean, like right now, bigger pockets is a real estate investing platform, right? That's our, that's our core focus, but in 20 years, maybe that begins to shift gradually over time because the goal is financial freedom right now is financial freedom through real estate. But how do you just make that more accessible to more people? Cause that's, that's how you unlock. Like I said, human potential in ways that you can't predict those people who become millionaires in their thirties or forties, go on to start businesses, change the world, all that kind of stuff. And real estate is the nominal tool for a lot of people, but especially people making between 50 and $200,000 a year, when you make less than that, you can't really get to the starting point in real estate responsible.
You're going to take, you're going to take some big risks, you know, likely unless you, unless you're a really good saver for example, and you can make much more than that. You're probably not going to put in the 500 hours that I articulated before, because you'd be better spent just earning that money and dumping it into something more passive for like, you know, a syndication or something rather than buying the, the, the duplex. So you've got that sweet spot, but there's a whole bunch of opportunities for lots of billions of folks in that category who don't want to do real estate and other folks out there who want to achieve financial freedom through other means.
Jesse (34m 7s): Yeah, no, that's a really good point. The a 50 to 200 interesting to think about it that way for the future here, we're going to come up to a few questions. We ask every guest, but before we do Scott 20 21, 20 22, I think we talked a little bit before the show. It's been a insane last 18 months, it's it hasn't been easy for a lot of individuals, a lot of companies from a positive note, what do you see for opportunities down the line? You know, what is 20 21, 20 22 look like for yourself and the team?
Scott (34m 41s): Oh, for myself and the team. I think we're going to, I think we're going to be able to really create a world-class network of investor-friendly real estate agents, and maybe also investor-friendly lenders who understand the different types of loan products that you need for a duplex triplex or single family rental investment, those types of folks. I think we'll be able to build that those marketplaces. I think we are going to, I try to launch another podcast perhaps in that syndication space.
I want to let the team beat me up on that. We're not sure if we're actually going to do that quite yet, but that's, that's something that we're, we're noodling on. We have our conference coming up October and we've got a couple of good books lined up that we'll be releasing in the next 12 months as well. So I think we've got a lot of exciting stuff in the pipeline for bigger pockets over the next year. Awesome
Jesse (35m 32s): Man. Excited for it. All right. I got four for ya. Rapid fire. If, if you're ready to I'll, I'll sell them over. Let's do it. All right. Scott, first question, something that you know now in your career with bigger pockets that you wish you knew when you started out there,
Scott (35m 50s): You know, I, I'm going to get, answer your question very generally. I think there's a ton of mental models that a CEO needs to have around what good looks like looks like, especially from senior executives, whether that's finance, technology, marketing, HR, those types of things. And, you know, I don't know if there's a way I could've gone back and given them to myself, but developing those as the core responsibility of a CEO. And I think that's been the biggest challenge for me is understanding what are the essential outputs? How do I articulate them? How do I performance manage against those
Jesse (36m 21s): On that point of development? Again, it's, it's great to have you in this seat because it's something I asked a lot of people, and I think you see it from a, from a closer point of view, your view on mentorship for younger people that are getting into our industry or any industry for that matter. What would you say on that point? And maybe just with the added piece of what to watch out for what to be careful for, because I mean, you, you see it all on the, on the forum as
Scott (36m 50s): A hiring manager, as a men, as looking for a minute. Sure.
Jesse (36m 53s): I think for people in a real estate, trying to get in to the industry, your view on mentorship and, and you know, what will you would recommend or, or w what's been beneficial?
Scott (37m 3s): I think the informal mentorship is a really good approach. Like you're not looking if you're paying a lot of money for the mentorship, you better know what good looks like. And you know, here, here's a good framework. If, if you, you know, that you're probably getting on the right track to and begin investing, when you can meet with 10 investors who all outwardly appear successful and say, these two are really sharp. These guys are, are four formulaic, and these two are successful. They're really gonna they're, they're, they're really doing something crazy here. I don't understand it, or they're not doing it.
It doesn't make any sense or they don't seem smart to me. So I think when you can begin meeting with people that outwardly see more advanced than you, and kind of pick out the nuance in their approach, you're probably onto something there. And that might help you begin to spot that mentor. If you do want to engage in something more formal. Awesome.
Jesse (37m 53s): What is one resource? It can be a book podcasts that you are listening to right now that you would recommend to listeners. And I'll just put the caveat out also with this one, I'll give you one from BiggerPockets and then a, and then one outside of your space.
Scott (38m 9s): Yeah. I always, by default have the bigger pockets things. I almost never reference them. Cause I feel like that'd be a shameless plug. No, I I'm listening to good strategy, bad strategy right now. And I think that's a fantastic book. I I'm listening. I'm halfway through it and I can't remember the author's name, but
Jesse (38m 25s): We'll put it in the show notes. Good strategy. Bad strategy.
Scott (38m 29s): Yep. Richard Rumelt. Yeah.
Jesse (38m 34s): All right. Well, wasn't Scott. It's been a, it's been a real pleasure. Thank you for, for spending the time here for those out there. I say this all the time. Everything's a Google search away, but for those that want to reach out, connect, be part of this community, or just learn more, where can, where can they go?
Scott (38m 52s): You can find me on BiggerPockets. You can just search in the nav bar there. And my name will come up or you can email me@scottatbiggerpockets.com. You can find me on Instagram at, at Scott underscore
Speaker 2 (39m 2s): Trench. My guest
Jesse (39m 4s): Today has been Scott trench. Scott, thanks for being part of working capital.
Speaker 2 (39m 9s): Thank you for having me.
Jesse (39m 17s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you like the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
James Scott is an Entrepreneur, Investor, Advisor, Author and General Partner partner at Bar Down Investments, focused on buying and repositioning Large Multifamily Properties. In the past two years James Scott bough, built, sold, rehabbed, lent on and held over 70 millions in Property all around the country. James holds Advisor Roles in several companies and is the Author of BiggerPockets books, including "The Book on Flipping Houses"
In this episode we talked about:
- James’s background
- How James got interested in real estate
- First 20 Million Dollar Deal
- Deal size and the management ‘sweet spot’
- Market Rates and Valuation
- Scaling a Portfolio
- Property Management
- 2021/2022 Opportunities
- Mentorship, Resources and Lessons Learned
Useful links:
www.connectwithjscott.com
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, welcome to working capital the real estate podcast. I've a special guest as usual. His name is Jay Scott. He's an entrepreneur investor advisor, author and partner at bar down investments focused on buying and repositioning large multi-family properties.
In the past 12 years, Jay has bought built rehab sold, lent on and held over 70 million in property all around the country. Jay holds advisory roles in several companies and is the author of bigger pockets book on real estate investing, including the best selling the book on flipping houses. Find out more about Jay we'll put it in the show notes, connect with jake.com. Jay. Great, great. Thanks Jesse. I appreciate you having me here. Absolutely. You just mentioned that you're basking in the sun and Sarasota or not so much,
James (1m 8s): Not so much. Normally we'd be basking in the sun, but I'm in the middle of a really bad thunderstorm. So if anybody hears some loud crashes in the back, you'll know why. Yeah. Eric
Jesse (1m 17s): Just saying we'll have to mute, unmute the mic. Well, Jay, thanks so much for coming on. Really happy to be able to spend the next little while with you. We were both. I saw you on the list for the BP con or bigger pockets con conference. For those that don't know, 2021 is on in new Orleans and you're going to be a, a speaker. I
James (1m 36s): Am, I actually, I spoke back at the original bigger pockets conference back in 2012. Most people probably don't even remember that there was a bigger pockets conference back then. It was a small little thing that Josh dork and the founder put together. And then since then I've written four books for, for BiggerPockets and, and I'm an advisor for the company. And I'm looking forward to speaking again this year.
Jesse (2m 1s): I didn't know there was one in 2012. I thought you were referring to the one, the last one in Austin, Texas, which I guess was called the first one. But, but apparently there was a, there was an original
James (2m 11s): Yeah, 2012 was the original one. And, and for some reason it didn't happen again. I think Josh was basically working on his own and the company back then. It wasn't even, I don't even think he had Brandon back then. And so I don't think I had the bandwidth to do a second one, but it was a really fun conference. Gave us a chance to meet a lot of people in the industry that I'm still doing business with. It's a great community, was fortunate enough to speak at the, I guess the official first BiggerPockets conference last year. I, my wife and I were actually the MCs for that event.
And we're looking forward to getting back there again this year in new Orleans. Yeah,
Jesse (2m 46s): For sure. That's probably where I first saw you. And a lot of the guests subsequent to that were, were on the show and yeah, absolutely. It's been a, it's been really cool to see people from a variety of different backgrounds, a variety of areas in real estate for yourself, for listeners that, that haven't, haven't heard you before, or know a bit about your background. Maybe you could take us back, you know, where, where you grew up, how you got involved in real estate. Yeah. Basically how you got the bug. Okay. Yeah.
James (3m 15s): So I am by education, a, an engineer and a business guy. I actually spent much of my career in Silicon valley in the tech world. I was a couple of big companies, Microsoft and eBay, doing everything, heard of them. Yeah. A couple of people may have heard of them and doing everything from M and a to product, to, to some business stuff. And so back in 2008, my wife and I, we worked together at eBay, decided to get married and wanted to kind of give up the hundred hour work week.
She was traveling literally three and a half weeks a month. I was traveling a couple of weeks a month and we decided we wanted to start a family. We were getting older. So we quit our jobs. We moved from California back to the east coast. We settled in Atlanta, Georgia. And it's not an interesting story, but we kind of fell into real estate accidentally. We flipped a house back in 2008 and that led to another and another and another. And, and over the next 10 years, we flipped about 500 houses and bought rentals.
We did pretty much everything you can do in the single family space. We did new construction. We did flipping, we did rentals. We did lending. We did you name it? We probably did it in the single family space. And so then around 2018, I started to get burned out and I said, look, I just, I, I need a break from real estate. So I took a good portion of the end of 2017, beginning of 2018 off.
And I woke up one day and the beginning of 2018, I said, okay, I'm ready to get back into real estate, but I don't want to flip houses anymore. And I found myself in, in an interesting situation. One, I had a whole bunch of cash that I wanted to deploy. And single-family back in 2018, wasn't a great time or place to deploy a lot of cash and single family really tough to find deals. It just hard to scale a single family business after like 2015 or 16, just because the market got really hot.
And secondly, I had a whole bunch of partners that I had worked with for many, many years who were lending me money, investing with me, partnering with me, who also wanted to be deploying capital in real estate. And they didn't really have a vehicle to do that. So I decided in 2018 that I was going to get into multi-family and specifically I was going to get into multi-family syndication, have a, a friend, somebody that I had known for a long time. Her name was Ashley Wilson. Who's a long time multifamily investor.
And I asked her what we kind of teach me the business where we kind of point me in the right direction. She was very, and ultimately took me under her wing and has spent the last two years basically teaching me the business and multifamily syndication. And so over the last several months, I've kind of come out as a multi-family investor. I've kind of kept it under wraps until I felt like I had a little bit more experience. I'm not somebody who likes to jump around and do new things very often. But after 10 years I decided it was something, it was time to do something different.
And so last two years of my life had been focused on multifamily syndication and I expect the next five to 10 years will be the same. Yeah. It's, it's,
Jesse (6m 34s): It's kind of a journey. You don't hear it take an as often, not the single family to multifamily. You hear that very often, but you know, we had Darren Batchelder on the show, very similar in the sense that you kind of came into that space, you know, you're, you're coming out into, into multi-family and doing it in 2018, you said, right?
Speaker 2 (6m 51s): Yeah. So for,
Jesse (6m 53s): So for that deal, I mean, you come into that area and the, one of the benefits that you have, obviously you're doing single family, but not so much in the sense that a lot of, a lot of, a lot of it translates, but a lot of it doesn't. I think people think the credibility that they have in single family is going to transfer to multi-family and it oftentimes doesn't happen that way. But what you do have is you have a long career that you're not, you're not the idea of building a business is not foreign to you. So what was it that when you decided to make that transition, obviously you, you reached out to somebody that has done it and has been successful doing it.
What were you zeroing in on? You're the first, you know, these are the first few things I need to learn about the business. If I'm going to proceed down that avenue, I'm
James (7m 36s): One of those, those people that takes the learning side of things really seriously. I know there are a lot of people that are kind of the, the ready fire aim type. I'm more of the ready aim, fire type. And I like to do my research. I like to have a business plan. I like to execute on a plan, not just kind of fly by the seat of my pants. Not that there's anything wrong with that. My wife tells me often that if I were, were more of the fly by the seat of my pants type, we would have done a lot more deals by now and she's right, but I'm conservative by nature. And I very methodical.
I'm an engineer by trade. And so 2018, I asked Ashley to kind of teach me the ropes. It wasn't until last year, 2020 that I actually did my first syndication deal. We did a $20 million deal in, in Houston, Texas, but I needed to feel like I understood the business. One of the things about syndication is, again, I wasn't getting in just to make lots of money. Obviously I liked the idea of making lots of money, but I was looking at syndications as a vehicle to deploy my own cash.
I was looking at someplace to put my investments because I'm a control freak, and there are lots of great operators out there. Lots of great multi-family investors out there that I should trust with my money, but I'm one of those people that I just I'd rather have my money in my own than somebody else's. So I was very conservative knowing that I was going to be putting my own money in these deals. Secondly, a lot of the investors I was going to bring with me, when you do syndication, you typically raise money from, from private investors, passive investors. I knew that a lot of the investors I was bringing with me were people that have invested with me for many, many years.
And if I was going to put their money at risk as well, I wanted to be absolutely certain that I knew what I was doing, that I was being conservative, that I understood the deal and that I could be successful. So I basically spent two years learning the business before I did my first deal across comfortable doing my first deal. And so two years later, we, we did that first deal. And what I realized was exactly what you said, the credibility going from single family to multifamily it didn't translate.
Didn't transfer. The hardest thing about doing a multi-family deal was sourcing that first deal in the single family world, I can pick up the phone and I can call anybody in the single family space and say, Hey, it's Jay Scott, can we grab lunch? And I don't mean to sound conceited or anything, but there are most people in the single-family world will know who I, who I am and say, absolutely, let's, let's grab launch in the multi-family space. I would call a broker and say, Hey, I'm Jay Scott. And they're like, great. What can I do for you, sir?
And I'd be like, well, I've done 500 single family deals, and I've done over $60 million in real estate. And okay, great. What can I do for you, sir? And I'm like, well, I'm looking to get into multi-family. Okay, great. What can I do for you? And so they, that, that, like you said, that that credibility didn't transfer. Basically. They wanted to know what multi-family deals had. I done, what deal, what size deals have I closed? And what I realized was with multi-family brokers, the single most important thing to them is that they have buyers that they are a hundred percent certain can close deals.
I can tell them I've done 500 single family deals. I can tell them I've done $60 million in deals. I can tell them I've raised tens of millions of dollars. They don't care because if I've never closed a 200 unit deal, I'm now a risk to them because if they get the reputation of bringing a buyer to their seller and that seller and that buyer doesn't close the deal that brokers unlikely to get another deal from that seller or any other person that sellers network.
Because I basically proven that I, I can't deliver. So basically in the, in the multi-family world, if you want to build credibility, you've got to do a multi-family deal. And that was part of the reason why I was very fortunate to, to have found somebody that had done deals in that space who could give me credibility, who could basically walk me through, help me get that first deal. How did we get that second deal? And, and allow me to start building a new set of, of, of credibility within a new space. Yeah, that's great.
Jesse (11m 51s): You know what, I want to talk a little bit about the team and then going forward into this first $20 million deal, you said it was in, I was in Texas. Yep. But before we do, I have the opportunity here to ask somebody that has had 500 single family, just for us in, you know, in the brokerage world, you see that Blackstone, I think it was 2012 and 2017. They took a really big look into, I think, what they created invitation homes with, which they eventually went public.
And I think Jonathan Gray, that's the CEO of Blackstone at the time. He said, it's not about buying homes. It's about building a business and it's a challenge to scale a single family. So, you know, what is it about that piece? They were obviously successful in doing it. They created this, they spun it off. You know, what is it that, that limits the ability to do that? You were at 500 and you know, I'm sure it crossed your mind at that point, is that, you know, can we scale this? Can we, can we put this, can we engineer this to actually be able to be a scalable investment for, for outside capital?
James (12m 54s): Yeah. So, I mean, there, there are two types of businesses. There are two types of, of scaling for businesses. There's businesses that can scale linearly and businesses that scale by step function. And what I mean by that is there are those businesses that as they grow in revenue, they need to grow in, in team. They need to grow in systems and processes. They need to grow in investment. And it's pretty much a linear growth. If the, if the company is wants to do twice as much revenue, they're probably gonna need to hire about twice as many people and have twice as much investment or income coming in.
And then there's the step function type businesses, the businesses where you can grow to a certain point, and then you're going to stagnate. If you don't add a lot of capital and a lot of, a lot of people and real estate, single family, real estate is one of those step function businesses. What I found is I could pretty much run the business, myself doing something like 10 or 20 deals a year. So if I'm doing 2, 3, 4 deals simultaneously me, my wife, a couple of contractors, and we're good if I wanted to get to more than five deals at a time.
Well, that was a, that's a step, that's a step function. And to do that, I had to bring on a project manager. I had to bring on a construction manager and I had to have some other dedicated resources. Great. Well, now, if I want to get to 10 or 15 houses at a time, that's another step function. At that point, I have to start hiring a, basically a hierarchy. I have to have a construction manager. That's managing multiple project managers. I have to have a team that's raising money. I have to have a team that's doing sourcing and acquisitions and a transaction coordination and all of those things.
And so every time you take another step. And so from, from one house at a time to five houses at a time to 15 houses at a time to 30 houses at a time, whatever that step is, you basically have to redesign business. You have to create a whole new set of systems, a whole new set of processes and a whole new management and organizational structure to support that step. And so what I find is that with most single family investors that try and scale their business, they get to some point where they're not comfortable taking the next step.
They're not, they can't figure out how to design the organization. They can't figure out how to design the capital stack. They can't figure out how to design the construction side of things so that they can take the next step. And for me, I got to the point where we were doing maybe 8, 9, 10 houses at a time. And I realized if I'm going to get to the next level. And that's nowhere near the black, the, the, the, the, the, the, the major institutional companies, whatever, whoever they may be. It's, I, I was still like 10 steps below them.
But if I was going to get to the next step 20 or 30 houses at a time, I was going to have to do something very, very different. And that was the point where I started to burn out and what I find there's a lot of single family investors get to that point, they'll take a step or two steps or three steps, and then they'll get to the point where they burn out. And so it's, it's really in the single family world. There there's some resilience that's needed and some creative thinking. And a lot of times you'll find that the best single family investors have business coaches, because it really isn't just hire one more project manager, hire one more broker, hire one more, whatever it may be, you have to hire 10 more people to get to that next step, and you have to change your capital stacks completely to get to that next step.
And so that was the challenge in single family. And that's, that's, it's, it's a little bit less in multi-family because you can scale a little, little bit more linearly because most things are hired out anyway, and multi-family is more of a team sport from the get-go, but you're going to find that in any aspect of real estate. Yeah,
Jesse (16m 45s): It's really, it's a great comparison. I've ever heard it put that way before, but it reminds me of, you know, you have people that are, have started businesses that are very similar to that step function. That would be very good in single family. You know, whether it's, you know, automotive manufacturing that very, you know, you have to build that base and build business where multi-family sometimes, you know, you kind of get the training wheels because the business is built around the asset. You know, you buy an 80 unit apartment building. There are, there are things that are built even, like you said, hiring out for a lot of that stuff.
But just the fact that there's all these other businesses that exist to necessitate doing things to a property of that size. So take us to this, this $20 million property and, you know, set the stage in terms of, you know, you're fairly new into this, which hat did you wear? And how did that, how did that project go?
James (17m 37s): Yeah, so we got that project under contract, the end of February, 2020. And I think it was like March 3rd or fourth or fifth 2020. I was scheduled to step on a plane to go start due diligence on this project. And the day before everything shut down, this was COVID. And so we, we, we actually had two deals under contract simultaneously, and COVID hit. And obviously think back to March of last year, everybody was kind of freaking out. Nobody knew where things were headed.
The stock market was, was dropping thousands of points at a time. And so without giving a thought, we backed out of both deals. So luckily we didn't have any harness money put up at that point, so we didn't lose any money. And we just stepped back and we said, let's wait and see. So one of the deals that we had under contract that we backed out on, they ended up selling to somebody else. But the main deal that we had under contract, we look back, come beginning of June and we realized they hadn't sold yet.
We reached out to the broker, we said, what's going on? And they said, they're still interested in selling, but they haven't put it back on the market yet. We said, well, how about if we, we kind of revisit, we look at the financials from the last few months, we ended up putting in an offer another offer on that property for about 11% less than, than where we were for the first time, quick negotiation. They accepted our offer. We move forward and we purchased the deal in September. So we basically come June of last year.
We still didn't know where things were headed. We didn't know if things are going to be locked down for another month or another two years, so somewhat of a gamble, but it was a great deal. And, and so in terms of what my role is, my role was, I am, I'm kind of the, the analytical one. So I was helping out in a lot of places. I wasn't the main, anything on that deal. This was my first deal. I didn't want to be the main, anything I wanted to be helping everybody and learning from this deal.
So I was involved in the sourcing. I was involved in the underwriting. I was involved in the due diligence. I was involved in the fundraising. I was involved in everything that took to get it to close Ashley. My partner is the best asset manager I've ever met. So I I've had no role in the asset management, but basically everything from the sourcing to the day we got that property closed. I had my hand in now moving forward, Ashley and I have formed a partnership 50 50. And so I'm mostly responsible for the fundraising and the underwriting and due diligence.
She's responsible for the sourcing and the asset management, but we do have a fairly sizable team that kind of helps us with all aspects of, of the operation. And I
Jesse (20m 30s): Suppose your, your history with investors in single family homes, I mean their money still green. So it's, it's a nice import.
James (20m 39s): It's very nice. I know a lot of people, I'm very fortunate. A lot of people, they do their first multi-family deal. And then they have to freak out about where the money is coming from. We were already planning to raise the money. They had already raised some of the money, but I was able to put out two emails and raise about a third of the total equity raise in the project. So I, I was fortunate that, that I had some history there,
Jesse (21m 3s): Right on one of your, I guess author compatriots said, BiggerPockets, I'm just, just running through his book right now. Brian Burke, the hands-off investor. We were talking a little bit about this. And he talked, he gave a good analogy of, of the, the fund versus a single asset syndication, where one is, I mean, they're both trust vehicles, but the, the, the fund is definitely, you know, you're getting on a plane because there's a, if there is air Canada or Lufthansa has a history for getting people to their place without, without issue for what you're doing today, w you know, single asset syndication is their preference.
And in doing that, is it something that you're going to evolve in out to potentially doing a fund structure? What are your thoughts on that? Yeah.
James (21m 51s): I mean, it's natural growth of any company that that's doing. Single purpose vehicles like syndications is to move towards a fund model, a couple of requirements for the fund model. And I know Brian's talked about this a lot. I mean, the nice thing about a fund is that you have diversification. So if somebody puts money in, they, if one asset underperforms, they don't need to worry as much because potentially there are other assets that are, that are outperforming, but there are a couple advantages. And I'm not saying that that single purpose syndication is better than a fund or worse, but there I'll point out there, there are a couple of advantages.
One with a fund you're basically trusting as, as an LP, as a passive investor, you don't necessarily get to do that underwriting of the deals. You don't necessarily get to say, I want to be in this deal. I don't want to be in that deal. I want to be in this one. I don't want to be a no story. You're basically at the whims of the operator, you'd have to trust that the operator is going to be making good decisions with a single purpose fund. You get to vet the deal. And if it's not a deal, you're interested in you move on and you wait for the next one.
From the operating side, the difficulty with the fund is that you have to have enough deal flow, that you don't have money, basically sitting in a bank account, earning half a percent or a quarter of a percent interest. And so there's pressure on the operator to find deals when they've raised money. And if the deals aren't available. And certainly Brian, Brian is one of the best operators I know. So this, this, I'm not saying this applies to Brian at all. He's fantastic. I invest with Brian, but there are some operators because they're going to feel this pressure to deploy capital because they need to hit their blended returns.
They may end up doing a deal that's thinner than a deal they would otherwise do because they have a fund and they need to deploy that capital when you're doing a single purpose vehicle. Well, you're raising capital for a specific deal, and we've gone now at this point, about seven months since our last deal, there's no stress on us. Like, obviously we would love to do another deal tomorrow, but if we don't, we don't have capital sitting in a bank account. That's, that's, that's losing value.
Jesse (24m 3s): Yeah. And I, I don't think it was a, you know, one better than the other. I think we were talking about just some of the attributes attributes of, of both of them. So in, in terms of, so now, you know, you, you did that deal. You said September 20, 21, we just did a deal through COVID. It's kind of a, you know, it's a weird time to do a deal. It's been a while since, you know, I remember back to doing a deal, oh, 8 0 9. I, but definitely this time was a little bit different in the sense that we went into a deal with certain market rents that we were expecting to go in with one strategy, ended up having to pivot just because the market was not there.
And we, you know, you anticipate that it might be, but that, that definitely seems like something that would, you know, just be a challenge, especially for yourself, the deal itself, just, just for, for Houston, Texas. We're where are you getting where's the market right now in terms of per unit pricing, it's
James (24m 58s): A crazy market. So we're downtown in an area of, of Houston called the Galleria. One of the nicest areas of Houston, most of the assets in that area are a class. We were actually, the property we bought was one of the very few B class properties, which I love. I, I would rather be a B class property in the main class area than vice versa. And it was an eighties vintage, mid eighties, vintage hadn't been renovated for awhile. We came in, I think it was about 130,000 per unit, which is, is pretty high.
But in that area was actually pretty reasonable cap rates in that area are crazy. We're recording this. And the end of June and cap rates are right around four and three quarter percent entry cap rates, exit cap rates are around four and three quarter percent. So it's a, it's a very, very competitive market, but this so far has been a home run deal. We've we've, we're at near a hundred percent occupancy. We're near a hundred percent collections. Whereas I know a lot of properties around the country aren't so we we've been very fortunate to find the right property in the right area.
But like I said, Houston is hugely competitive. Cap rates are hugely compressed. And so finding more deals in that area has been tough. And so we're starting to expand into other markets because we're having trouble really keeping the deal flow going in that one market. Yeah. I can't
Jesse (26m 23s): A nickel for every time on the show, we've talked about exploring different markets or being an expensive markets for us. You know, you just can't buy property in, in my area, we're at, for downtown core, we're talking 350 350,000 plus per per unit. It's just the reality. You go to 18 hour cities, you go outside and just kind of changing the strategy with the, so that was what would that be? Approximately 150 unit buildings. 152. Yep.
So we have a lot of people that come on the show that talk about, there's an inflection point where, where they really want to get over in terms of scaling certain properties. And it seems to be somewhere in 70 to 90, where anything below that just doesn't work for their model. I mean, listen, I it'd be great for I'm myself for a lot of people to be like, if you can get a 65 unit building, but what is it about that? And is it that first of all, is that the case for you? And what is it about that, whatever that area is?
James (27m 21s): Yeah. So first of all, everybody needs their own, what we call buy box. Everybody needs to decide what they are interested in, what types of properties, what vintage, what condition. And so for us, I've invested in a lot of mid-size multifamily, not for the syndication model, just putting in my own cash. And we've bought a lot of stuff in the 20 to 60 unit range. And what we found is that those kind of mid-sized multi-families are very, very difficult to manage.
If you have a single family or duplex or a fourplex, or even a 10 unit, you go out and you hire whatever property management company is popular in the area that does single family houses. And they're going to take care of you. And you're going to pay eight, nine, 10% of the gross rents and property management fees. And you're probably not going to be bothered too much as the owner operator, you get into the 80, 9100 unit range. And you basically, at that point can hire, you have enough income coming in that you can hire full-time property management, one site, property management.
You have an office typically at around at around a hundred and twenty-five units. You can hire two people. You can hire an office manager and you can hire a maintenance person there, essentially. Full-time at the property. If people want to rent a unit, they're going to stop by during the day, there's going to be somebody sitting in the office and a chair that can walk them through a unit. If somebody has an issue in the middle of the night, there's going to be a maintenance person available to take care of it. So under 10 units over about a hundred units, management's pretty easy in between, especially in that 20 to 60, 20 to 70 unit range.
Management is very difficult. You have too many units where not having somebody on site to make things very, very difficult. You may have two or three people that want to see units every day, but if you don't have somebody on site, you're basically deploying somebody. And so they're spending half their time driving. You're probably gonna get enough maintenance issues that you're not keeping them full a maintenance person, a busy full-time, but they're going to have something to do every single day. So you have somebody that literally needs to drive out and drive back. And so you're paying a lot of part-time people and you have to find people that are willing to work part-time to manage your units.
Typically, those aren't the people that are going to be the ones that care the, about your units. And so you ended up doing some weird management scheme, maybe a hybrid management thing, where you find three other apartment owners in the area and you say, Hey, let's hire a couple of people and we'll split them. You take them a third of the time. I'll take them up there at the time. Joe will take them a third of the time, which is great, except when Joe ends up needing them three quarters of the time. And then they, yeah. So you say, so management tends to be the thing that makes those, those mid-size multifamily is really difficult.
And what we've found is typically when you get to a hundred, a hundred and twenty-five units management becomes a whole lot easier. So we're willing to do less than 150, but if we're going to do less than if we're going to do fewer than 150 units, we typically want to have multiple assets really close together so that we can matrix resources across multiple assets. And so 150 units as kind of our baseline minimum
Jesse (30m 38s): Point where you're saying that you could hire two full-time, essentially full-time office manager and maintenance, w D D in terms of the actual property management, you mentioned over one 20 or one, you know, whatever, a hundred, 120, where you're very well serviced on that end. And you're very well serviced on the low end. Are you saying that from the perspective of, you can either build out your management property management on your own at that size or there, in addition to that, you can also go to various companies that will service that size.
James (31m 10s): So I don't want to speak for other operators, but I think I will, because most operators of larger multifamily have found. And I know you had Brian Berkland a couple of weeks ago, and he's one of the few I was going to say, he's very burdened. He's one of the completely, one of the few completely vertically integrated multi-family operators. I know most of the rest of us, we don't want to be involved in property management. So if you've ever dealt, where here even managing your own single family properties or small multi-family properties, it is a very high touch, very frustrating, very low margin business, and to be successful in that business, let's be honest.
That is the thing that's gonna make or break a multifamily value, add property as syndication, where you're taking a rundown or distressed asset, and you're turning it around to, hopefully we sell it. Your property manager is going to essentially make the difference between your success attorney around that property. And not in fact, when you're buying a distress multi-family property, the reason it's most likely distressed is because the current owner doesn't have good property management in place. And so, unless you think you can do a better job than companies who were their core competency is property management.
My recommendation is typically find somebody that does it in the area and, and hire them. Now, there are some benefits to having a great property manager over and above just property management. When we're looking at properties, we typically invest out of state. We invest in Texas. I live in Florida. My partner lives in, in, in Philadelphia. Our property management company in Texas knows that market like the back of their hand. So if we say, Hey, we're making an offer on this property. If I call property management lead there.
And I say, we're thinking of making an offer on this property. She's going to say, yeah, I know that property transacted back in 2017, the team that bought it, isn't really doing a good job. I know they're having problems with, with occupancy and they're having problems with, with deferred maintenance, but I'll go take a look. I'll set my eyes on it. I'll let you know what we think. The cap ex and estimate for the cap X might be. And so they're doing all these things for us that we would never be able to do ourselves without getting on an airplane and flying there every time we want to see a property.
And we're, we're looking at 20 properties a week. We're not going to get on a plane 10 times a week and go look at properties, chubby, a great property management company. They're also going to perform a lot of other functions for you. In addition to just managing your existing properties. They're great. During due diligence, they can do forensic analysis of, of, of leases when you're, when you're going through due diligence, they can find discrepancies and inaccuracies and leases. Basically they are your due diligence team. They're your scout, they're your property manager.
They're everything. Yeah.
Jesse (34m 1s): I've, it's amazing how much that will take even seasoned investors by surprise or just something that they don't think of. I I've said that since I, I started buying properties and even student rentals where even if you're buying single family property managers know the areas better than anybody. And like, it's, it's to the point where you get in some smaller towns and they know the individual tenants in certain, in certain buildings. So that's, that's a great point. And I think, I think the, the aspect of vertically integrated, it's funny that that was tangential to the point about funds.
I think what would happen with Brian and hopefully I'm getting this correct was I think when he moved to the fund model, for whatever reason in the private equity world, they wanted to see vertical integration. Just maybe that's just something that when they buy businesses or when they invest in businesses that that's just expected, but real estate seems a little bit different. I think there's a lot of, like you said, great companies that that's their core competency, property management. Yeah.
James (34m 59s): And vertical integration. There's, there's a level of control that comes with vertical integration. And for those that are familiar with the term vertical integration means basically pulling all aspects of the operation in house, as opposed to hiring third parties. There's a lot of control, obviously that that comes along with, with vertical integration. But there's also risks because you're probably you as the owner of the company probably don't have core competencies in all of these areas. And so it's your responsibility to ensure that the people that you hire do and you need to manage them.
And so it's, it's yeah, there's, there's good and bad with that with the vertical integration. And what I find is that a lot of multi-family operators will start out not vertically integrated. And then they'll add pieces in with property management being kind of the last piece, if ever being vertically integrated. And again, Brian is one of only two people I know in this industry that has, has done full stack, vertical integration. Yeah. At
Jesse (35m 56s): P it's a thankless job. I mean, they're like, you know, kudos to everybody that, that works in that, in that area. Jay, you've been really generous with your time here. We typically ask guests for questions where we, where we end off before we do that, I 20, 21, 20 22 opportunities, you know, what, what are you looking at? What's on the horizon for you?
James (36m 18s): I think that there's going to be a lot of opportunity in multi-family in general. I'm, I'm very bullish in real estate. A couple of years ago, I wrote a book called a recession proof real estate investing back in 2017, 18. And I really thought we were going to see a downturn in the market before now. I think COVID may have kind of derailed the downturn. I guess that's a good thing. And I think the next few years should be pretty interesting. I think hard assets are gonna are going to continue to outperform the market.
I think we're probably going to see multi-family real estate do really well simply because it's been reported that there are about 5 million underserved or 5 million units that, that we're under. What's the word I'm looking for? We're we're, we're, we're low about 5 million units across the country to, to meet demand. We haven't done. Yeah. And we haven't done a lot of buildings since 2008, so there there's still population growth and there's, hasn't been nearly as much housing growth.
So there's at this point about 5 million, too few housing units. And we're likely to see inflation over the next couple of years, which is going to lead to potentially more cap rate compression. It's likely to lead to more rent inflation. Even if we see some interest rate increases, which I think we likely will over the next couple of years, maybe a point, maybe a point a quarter is what the fed is talking about. I think that's going to be outweighed by, by the, the rent inflation and, and wage growth.
So I think the next few years is going to be a good time to be in real estate can be a good time to be in, in multifamily real estate, right on,
Jesse (38m 5s): All right, Jay, we got four questions. If you're ready for them, I can serve them up.
Speaker 2 (38m 9s): Let's do it. All right. Something,
Jesse (38m 11s): You know, now in your career, whether it's in real estate or other areas that you wish you knew when you first got, got into the game,
James (38m 20s): I wish I knew that that real estate is a full-time job and you can't push off family and other things that are important to you thinking I'm going to get to the point where I'm going to have everything I want. And then I can go back and focus on them. I got into real estate because I wanted to put my family first. And I spent the first many years in real estate, not doing that thinking I'd eventually get there. And what I realized was if you're somebody that loves to work, you'll never just get there. You just need to make that decision and you need to decide what's most important in your life and prioritize things correctly.
That's
Jesse (38m 56s): A great answer. All right. Number two, in terms of mentorship for younger investors, entrepreneurially minded people, your view on mentorship and what they should be doing. I am
James (39m 9s): A huge fan of mentorship and that doesn't necessarily mean paid coaching. That means mentorship. And typically mentors are people that help you because they have a vested interest in your success. And the reason somebody might have invested interest in your success is because they have a personal relationship with you. So seek out people that are in this industry, that they already know you, maybe their friends in the family, maybe they're friends with friends, where there are people that feel like they owe you for some reason. And what I tell people is provide value first and you'll get mentorship in return, go out and find somebody that if you want to do, I'm gonna make it up.
You want to flip houses, go find somebody that's successful, flipping houses and say, Hey, can I come work for you 20 hours a week? Don't pay me. I just want to help you 20 hours a week. And in return, be able to ask you questions, see how your operation works. I promise you that if you go put in a solid effort for them for a few months, they're gonna be happy to help you out. So when it comes to mentorship, give first and ask second.
Jesse (40m 9s): Yeah, absolutely. That's great. What is a resource or book that you find recommending time and time again? Whether it's an old one new one, what do you got?
James (40m 18s): I'm a systems and processes guy. I love systems. There is a book out there and for some reason it's not a whole, it's not as popular as it should be. It's called the goal. And it was written in the eighties. It's a best seller, but for some reason, it's just not as popular as I, as I think it should be. I try and read that book at least once every year or two. But it's all about clearing roadblocks in your business and making your business more efficient. One roadblock at a time.
Yeah, that's great. Yeah. The title is the, it's the theory of constraints
Jesse (40m 54s): Like it. All right. Last question. First car maker.
James (40m 58s): First car. I had a bright orange. It was called the, we called it the fire engine Dodge Omni from, it was my grandmother's car that she bought in like 1982 and gave it to me when I got my driver's license in like 1987 where I just dated myself. But yeah, the 1982 orange Dodge on me,
Jesse (41m 21s): That's the first dog Dodge Omni we've had. I've always liked this. I don't know if you're big, if you're a fan of a master's in business, the podcast and just re Ritholtz. I was like, you know what? That's a great question. I mean, that question. All right. Four for listeners. I mean, everything today is a Google search, as I always say, but for those that want to either link up to S see, when you're read one of your books, download one of your books, reach out to you. What's the best way to get ahold of you. We'll put it in the show notes.
James (41m 52s): Yeah. So anybody that wants to get in touch with me or getting the connect with me, www.connectwithjayscott.com and that'll link out to everywhere.
Jesse (42m 3s): My guest today has been Jay Scott, Jay, thanks for being part of working capital
James (42m 7s): Gassy. Thanks. I really appreciate you.
Jesse (42m 15s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse, for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Chris Prefontaine is a three times Best Selling Author of Real Estate on Your Terms, The New Rules of Real Estate Investing, and Moneeka Sawyer’s Real Estate Investing for Women. He’s also the Founder and CEO of SmartRealEstateCoach.com and host of the Smart Real Estate Coach Podcast.
In this episode we talked about:
- How Chris got into Real Estate
- The “On Terms” investment strategy
- Non-bank financing
- Owner financing
- Principal only payments
- Family run businesses
- Importance of value and mission statements
- The value of discipline
- The power of self accountability
- The impact of Great Recession on Real Estate profitability
- Searching for Deals
- Distribution of Team Roles
- Opportunities in 2021
- Mentorship, Resources and Lessons Learned
Useful links:
https://smartrealestatecoach.com
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, welcome to working capital the real estate podcast. My name is Jesse Fragale and my special guest today is Chris Prefontaine. Chris is a three-time bestselling author of real estate on your terms, the new rules of real estate investing and when Nika Sawyer is real estate investing for women, he's also the founder and CEO of smart real estate coach.com and the host of smart real estate coach podcast.
Chris, how's it going?
Chris (47s): I am doing awesome. Thanks Jesse. Thanks for having me on.
Jesse (50s): Yeah, my pleasure. Like I was saying before the show, we're very happy to have you on, I did get a copy of your book. I believe the one I received was new rules of real estate investing. I brought that into, into the brokerage into the office. So a lot of good stuff in there. I found it really interesting just because it took a little bit of a different approach as it was kind of a best or greatest hits of different people and different experts giving their view. So hopefully we can get into that. How's everything been. I mean, we're in a bit of a unique world right now.
How have you, how have you been fairing over the last, the last year or so?
Chris (1m 27s): Yeah, we're super busy. I hate to, I hesitate all the time to say that, cause I know some people get hurt, but literally from April 1st, 2020, we have crank and it got a little tight with the market being so crazy these last few months, but we're literally, as of this morning, seeing the people commenting and the deals going up through the roof again all across north America. So that's kinda neat. We built this to kind of hit all markets and it's doing well with it, you know, it's been tested.
Jesse (1m 54s): Yeah, for sure. So for listeners, a little bit of a background, your experience ranges back into the nineties for those, you know, that it's the first time hearing your name, hearing you speak. Maybe you could talk a little bit about your history and how you got into real estate. Obviously, you know, you've seen more cycles than a, well, I'd say a few of the guests that we have on more than I wanted to probably yeah. So high
Chris (2m 20s): Level, right? Cause it would be 30 years. It'd be here too long, but I, I journeyed into real estate doing some building. I never was a builder, had a partner who ran the field. I ran inside. We did everything on terms back then without knowing it without calling it terms, I was in my twenties. So we, we found lots. We pre-market them. We sold a finished package and everybody could pay it a day and it was pretty cool. I then bought a Realty executives, franchise, mid nineties, sold that to Coldwell banker, ultimately in 2000. And then I started coaching people throughout U S and Canada, heavy Canada at the time, coincidentally up in Toronto, but 48 clients or so up there that while that was going on, I started doing some of my own investments from 2000 up to the crash.
And then that brought us to today in the sense that the crash has beat us up. I mean that I was on personally on signature in the U S on loans, 23 properties or so. So in the values drop where they come in, they're coming to me, unfortunately. So that caused us though, Jesse to rewrite the rules. So to speak, not to use the book, no pun intended there, but causes us to recreate what we're doing. Re-engineer what we're doing. And that is now we buy everything on a terms. We do not use banks. We don't sign personally. We very rarely if ever used that capital and that way I can go to sleep at night, knowing that we're not at risk, if we were a pre crash, you know?
So we've gone through all those storms that you alluded to and rebuild this model to only buy on terms.
Jesse (3m 43s): So before we get into that, the clear follow up question is would, is on terms. But before we do in the nineties and subsequent to that, w w was the wheelhouse for you in real estate? What, was there something that, that, you know, gave you the bug of, of wanting to get into real estate, as opposed to, you know, other areas,
Chris (4m 4s): You know, the bug so to speak was when I was younger, my dad was not in real estate. He would, he had a welding business, but he had branches. And as he would expand, he personally would build the building and lease it back to the business. And I was young and I go, whoa, you're the same person. How does it, like, how do you do that? So that's where I started to learn real estate. And it was kind of cool. He always said that up until a few years ago. So then he would find land tracks of land engineer, do the engineering and flip them. So he just always tinkered. And I had, I really was around that environment a lot. And then, so as soon as he sold the company back in 91, I think he sold his company where I was working.
I went into real estate. That's when I started building
Jesse (4m 41s): Right on. Awesome. So let's move on to that for, for listeners. W w you know, you hear in the industry, I mean, not so long ago, the first time I heard that on terms, you know, you alluded to a little bit about getting non-conventional financing. Why don't you give listeners just kind of an understanding of what that means?
Chris (5m 1s): Yeah. So for us terms means a better word that people would recognize as creative real estate, right? So terms for us means three things. We buy, lease, purchase, owner financing, or subject to existing financing, lease purchase being, in my opinion, the simplest entry, if you're new, we're looking to expand what you're doing, because you're not taking title. Your risk is definitely minimal. You are in our agreements. Anyway, you are putting up $10 for at least prejudice. All our properties.
We could show about 80 million with our students in our own, and there's not more than a few thousand spent total on all the 80 million control, because a lot of us that own these purchase on a freelancing niche is a little bit different niche. We drill down deeper than just regular on a pricing. We look Jessie for a free and clear properties. So owners that are free and clear, they're in a good spot. Most of them not even in the market and they want longer term, they want the, the, the, the estate planning or the tax planning to be longer term my building. I'm not in it today, but my building right, five minutes from my house was bought from an investor who had this building for 120 years, 18 years, it was free and clear.
And he sold to me on owner financing. You know, I don't care where you are. If you go for a mixed use building loan right now, it's grueling underwriting. I didn't do any of that. It was a handshake quick PNS closing in 30 days done. So just,
Jesse (6m 23s): Just to recap there, lease purchase owner financing, and what was the third one subject
Chris (6m 28s): To existing finance. So sub two for slang, sub two. So that means I buy your house for those listening and you owe some money on it, but I'm buying it. And the loan is staying in your name, even though deeds transferring. And so, again, I own the house. I don't have a lease purchase on it. I own it. And I'd appreciate it. And I get all the owner benefits, but the loan stays in your name until someday I cash it out.
Jesse (6m 49s): Interesting. I, you know, I've, I've heard, I've heard this recently called something different, but that, so in the, in, so it's not, it's outright ownership. It's not a lien on the house. It's you actually owning and being like you said, being able to depreciate.
Chris (7m 2s): Yeah, no, definitely own it. It, you know, disclosure do, do people who have a ton of equity typically, are they okay with entering into that with their name and alone? No. Do do sellers who don't know you that well, gladly jump into that environment. No, not all of them. Now, many of them will enter a lease purchase. We'll build up the trust will build up the credibility and we'll transfer that to a sub to later that happens a lot or someone needs immediate debt relief, and frankly, they don't care.
They want it done. They'll do sub two.
Jesse (7m 35s): Yeah. I could see that. I mean, the logical movement from owner financing where, you know, sometimes you have two, three year debt and then having a track record and building up, and then being able to push the relationship further, the lease purchase th this, this piece here is this, would this be similar to an assignment or a wholesale or, or is this something different?
Chris (7m 57s): Good question. So the way at least purchase works and you can circle back and say, yup, bingo or no, I didn't hit it. So all these purchases like this, let's say your house, we agree it's worth about 300 grand. You owe about two 50. My lease purchase says, I'm going to start making your underlying debt payment on your behalf, but everything stayed in your name. Once I find my buyer, we put tenant buyers in these homes rent down. So once I find my buyer, I got, and I stopped making payments on your property with the promise that on or before the end of the term, I'm going to pay off your loan, which is less.
Now that's my benefit. And I'm going to give you a 50 grand equity that we agreed. You had some projecting that as long as you can wait for it. So what's the difference between that and maybe an assignment or a wholesale. We get paid three ways on all our deals. So we trade rocked out in the United States. So we get, we get payments upfront. We get payments over time. We get payments when we sell versus one payday. So, which I did for years, it's lucrative. But I don't know if that answered your question. Yeah.
Jesse (8m 52s): I think it did. In terms of, you know, you hear so many different terms in real estate and really trying to drill down on what exactly it is. And that could go from, you know, everything changes from country to country, state, to state province, the province. And, you know, there might be just a wrinkle. That's a little bit different. You mentioned patented or certain trademarks. How did you go about that process? Having that trademark? Are you talking about the, just the term itself?
Chris (9m 15s): Yeah. Three paydays. So we created that after we re-engineer things after the crash to get paid three times, I just started saying, wait a minute. It's like, I'm on a treadmill. Real estate treated me really good, but it's like, you're on a treadmill. Every January, you start over, right. If you're doing building or wholesaling or you're real tight, did that for years. So this way we get paid three times and yeah, we had attorneys file in the United States, took awhile for three pay days. We have all the things like our logo and things that in the company, but three paydays was an important one because no, one's had it.
Jesse (9m 43s): Yeah. It's almost like you want that recurring revenue in the real estate version of that. Yep, absolutely. So for, for yourself, Chris, when, at what point did you make the move or maybe it was at the beginning, but if not, what point did you make the move from going into real estate? Full-time that, that this was your full-time gig?
Chris (10m 3s): I started tinkering with it around, well, I've always tinkered with it, but late eighties, I started tinkering with it on the side, so to speak like a lot of people do. And then when my father sold his company, 91, the company lasted as a corporate structure. I was used to entrepreneurial mindset. I lasted about maybe three weeks before they fired me. And my kids were probably a two and three at the time. So that, that, you know, you get a severance practice for four weeks and then you're out. So I had to kind of move fast. Luckily I had a couple deals going and then we just ramped it up right
Jesse (10m 34s): On. So for, for the comparison, you know, we talk a lot on this show about real estate, flipping wholesaling, apartment buildings, commercial real estate is the space that I live in. You know, what's, what's the difference, you know, what's the value add here, or what's the, the value proposition or difference with this type of investing?
Chris (10m 54s): Well, first I'll say, cause I have, I have all of those niches that you just said on my podcast, good friends. So I'm not, I'm not against any niche. They're all wonderful. And they're meant for some, all the lessons are going to attach to what they want, in my opinion, why I gravitate towards this and stay with this after all the things I've done is the, the minimal risk. I'll never say none, but the minimal risk because I'm not going on any loans. That's the Milan number two from going to get paid. Why not create three pays per one deal? It's real simple. So if I do a deal today and it's, even if it's a hundred thousand all day, I'm just using that number.
It's over. If it's a build or flip or wholesale, if I do a deal today, and it's three pay days, I've got somewhere around 75 is our average, but 75 to 250 grand paying me over the next three years, next deal next three or four years or five years or 10 years. So you have this spreadsheet. Eventually we have all this income coming in. You can take six months off if you want predictably, and you can see where to, once you track all this. So the three payday and the low risk is the, is the main reason. The third is it was built. Jesse, if you remember my steroid coming out of the crash, it was built not just to kind of weather the storms and then COVID slapped us.
And then we went, okay. Work, not only at work, but we thrive. So it's a great tool for up down and flat markets really is. So
Jesse (12m 7s): What was it about the, the crash or the great recession that, that really amplified or put a spotlight on how lucrative or beneficial this type of investing can be?
Chris (12m 20s): It wasn't, it was from a defense mode. I wish I could tell you that I brilliantly thought of this thing was going to be great after, but I didn't. I, what I said was all right, I just had four years, it took from oh eight til 12. I had four years of just garbage, you know, loans being called for colleges workouts the whole bit. That was, that was stressful. So it was more, what can I do that? Doesn't go that way ever again. It wasn't, oh, I got this brilliant light bulb then organically. It evolved to the three paydays and to building what we, what we built today to be doing deals all over the country.
Jesse (12m 52s): So Chris, when, when you put these deals together, if from a high level, what type of structure do you typically use? You've talked a little bit about that. You know, you have different people on your podcast, you hear corporate structure, LLCs partnerships. W what would you use for this?
Chris (13m 9s): Ah, good question. So in the lease purchase is pretty simple, Jesse, because you're not taking title, nothing's even going to show up on record. So we just had that and we started in an LLC. It's your comfort level? It's like my attorneys to say, when the basket tips over, are you comfortable with what's in it? Right? So we would do a 10 or 12 deals in one LLC on the sub two deals. It gets a little bit more, I won't say complex. It gets a little more detailed. We take it in a land trust. A company is the beneficiary. So it's a little bit more anonymous and on the, on a Francine deal, same thing, LLC.
Jesse (13m 43s): Got it. One of the biggest things that we hear, and I'm sure you've heard it on your podcast, especially at this point in the market, even with, with the, you know, the last 18 months is just the ability to find deals or inability to find deals. How do you approach that? What's the, what's the method for yourself when you're looking at it through the context of terms.
Chris (14m 5s): I agree with you, first of all, wholeheartedly it's we are talking to more sellers to get a deal. Now there's no question about it. So I always tell my students, like literally today, we're talking about this, a fish in a different pond. So I love fishing in the pond of these free and clear properties, for example, because usually they're not dying to sell that are harder to sell. They don't want to pay a relative they're free and clear. They just have, I'll call it an ego. It's a healthy one, but it's usually I want this price. I don't care what's going on. We don't care about price if I, if we get the term.
So they love that because you're satisfying their price issue. So that's one point deficient. The second one is unfortunately now, just so you know, this, there's a lot of people that need help right now. They're kind of like below the radar, they got beat up a little bit with COVID or they had these forbearance agreements that are now coming an end or stressing about. So we're finding a lot of those finding us where we've, where we've set up our name properly in these markets. Those are two great areas to fishing because they want you, they, they want a guy and they want different, do I fight for MLS properties or properties that are, or else is going to have to know?
It's just to your point, too competitive right now.
Jesse (15m 10s): Yeah. And what I found, you know, when you described this type of investing and even in your book, what I think just comes to mind, right. Or right or wrong is I always think of more push marketing or sorry, pull marketing rather than push marketing. I feel like you put, you go out there and you put yourself, you put your name out there and have people come to you at a certain point, but it is first of all, is that, is that the case for what you do and has that evolved since you, since you started,
Chris (15m 39s): That's a great observation. So what happens is typically for us is we'll start a new student. I just had two brand new ones on today, and I'll have them doing what you just referred to as push, because they've got to start cultivating something. And as they rise in the ranks, I'll say for lack of a better expression, we teach them how to become what we call the authority so that yes, now you get more of a pull. You're establishing yourself more and more. You're layering in all this authority stuff, whether it's a book or a podcast or a blog or whatever it might be. So you are the local expert. So when these national companies come in, they're in every market we're in by the I buyers, are we calling all these other companies?
They don't really affect us because we're the local expert once we've got established. So the answer is, it's both it just transitions to more pull a little bit later on in the career. And it usually takes a good couple of years.
Jesse (16m 27s): And from a, a, you draw out a well-oiled machine now, just from a, a cost perspective, you know, does the marketing take up a large, you know, percentage of, of what you do in terms of costs? You know, after a while, I think people that are in your space seem to seem to have a knack for what they're doing. Do you guys put a lot of resources and effort into the marketing?
Chris (16m 49s): We don't mailing wise. I know like the wholesalers that I know, oh gosh. How was that? How was that a group of private group wants, and someone was spending 10, 20, 30 grand a month. Yeah. We spend to do ideals that they create three paydays. And that average us a low of 45,000, a high of two 50 per deal. All three we're spending overhead wise about a grand a month. Our students were spending more now. So what's the ramp up the ramp up would be more, I'd rather put a VA on a virtual assistant, calling more houses than I would put mailing pieces of the door only because I know, I know the metrics now, you know, he was doing terms 30 years in the biz.
I know the metrics. And then a little bit more predictable, in my opinion, in number two, I don't want a new student. It's a bummer. When you have to say to a new student, Hey, you know, you have a budget of five or 10 grand a month. So we don't do heavy marketing. Believe it or not. If we do it's in the hundreds per month, not thousands of tens of thousands.
Jesse (17m 41s): Have you found that this type of approach has, has had a, a state or two that it's something that really works and is, is really conducive to in other states not so much. And what's, if so, w what, what are those?
Chris (17m 60s): Okay. And this is a good question. You're hitting some good high points that I usually don't get. So this is awesome. It's usually not the state. It's usually, I don't care if we're in a flat or down or up market. It's usually going a little bit on the outskirts of, of kind of like, let's say, New York city, would you be doing a lot of terms deals right in the city? I'd rather you go out a little bit, cause you're gonna have a little, it's gonna be a little hectic. I want to go into the outskirts. I want to go where even in a hot market, you have some expired listings in the MLS that, you know, I want to go out a little bit to get out of the frenzy. That's all.
Jesse (18m 31s): Okay. And w w what's the, what's the rationale there? It's just that there's, there's more volume. There's, there's more of what you're looking for there. As, in terms of a,
Chris (18m 40s): You need our guidance more, you know, right now everything's selling so quickly. So like you said, we got a fish in different ponds, but one of those ways to fish differently is just go out a little bit from the frenzy. Now, keep in mind. Remember I said, one of my favorites is free and clear. Yeah. Well, a third of the property in the United States, roughly a third are free and cliff really that's all the, all the country. So how about, how about just talk to the free and clear people. They want to talk to you. They're awesome to deal with. They don't need money, quote unquote. And they would've pulled it out already. Right? So the fun to deal with,
Jesse (19m 9s): That's fascinating. Three out of four, three to four properties that are owned in the states are free and clear.
Chris (19m 16s): One, one third, one third are free and clear. Third. Yeah.
Jesse (19m 20s): Yeah. You haven't even 33%. That's pretty, that's pretty amazing. Now for, for your process to find these, whether the, you know, is it secretary of state, is it a land registry? Where do you go to find the properties that you know, are, have a mortgage paid off?
Chris (19m 35s): We have two different softwares we use that are free in our resource center, but the one that does the free and clear very well is prop stream. Let me do a great job. And then freedom soft is, is where we pull a lot of, out of the less. It's crazy. Now you can, you know, I can only set to the sky today to show. You said, you could find out, you can go geographically and go. I want everybody in this zip code that has a mortgage of this much percentage. And you know, where's pink socks. I mean, you can buy any data now. It's crazy.
Jesse (20m 3s): All right, one sec, let me make a note of pink socks here. You know, what it is, it is pretty amazing how the, I think it's a good thing. A lot of this information has been democratized, just my, you know, myself being a broker. I've never been of the mind that having this stuff unavailable to the public was, or having it just available to us with some sort of, you know, competitive advantage. I feel like if people want to get information and, and can use it properly, I mean, if it really came down to access, we would all be millionaires and ripped because, you know, w where was Google 30 years ago.
So take us to the book. I, I, like I said, in the beginning, it's, it's a very interesting book in the sense that it's, it's kind of a amalgamation of different viewpoints experts. And for those that, that want a link, we can definitely put one in the show notes, but yeah, take us back to this process. Every person I've talked to that has, has written a book. I know it's a long and challenging process. How did that go for you?
Chris (21m 1s): Okay. So here, here's how it went. And here's why, so the first book we did, and then we we've since revised it, and it's a bestseller it's called real estate on your terms. And it was very us like very niche. How do you do what we just talked about? You and I, and so some people on my show said, well, that's great, but you seem bias. I said, I'm biased because that's what I do now, but I'm not so naive to think everybody has to do that. So then we said, all right, so let's take all the podcasts interviews that we have a majority of at the time, and let's take the 24 or so that we love the most that we think that can be the most broad.
And let's have everybody do a chapter. And so that people could look at us and say, it's free info. We're going to go look at the 24 different experts in this book, we did the new rules of real estate. And then we get to pick where we want to go. And if it's termed great, if it's tax liens, great, whatever you want to do, I just want it to be more out there of prosperity mindset versus no, this is the only way you do it, even though clearly I believe that because I'm in it, but that, that everybody has their fit, right. Here's a quick formula. I say, when you read the book, do this say, okay, what niche can I get behind?
Like what, what do I get rubbed about too? Can I find someone in that niche that already did what I want to do with success? Leaves, clues. There's no reason for you to reinvent it, right? I didn't create terms. It was available in the 18 hundreds. And then third then put blinders on for 36 months. If you do that, you'll have a great experience at any niche. So I wanted to expose them all. If that makes sense. Long answer to a good question.
Jesse (22m 25s): No, it does make sense in terms of how you want about picking your, your list there. What was it, what was that process
Chris (22m 32s): Like? I wanted similar to my show recently, I'm really picky with this. Now. I wanted people that have been through market cycles and, or life events, both a great, so example for me, my son had a head injury and no three doctors told my wife and I had never walked talk or eat again. He's running the business with me then nine 11, and then COVID, and then the different market. Okay. So this some crap thing, right. That people can learn from while same in this book. If you look in there that one of the, the guy that does tax lanes, I think he's like 82 years old and still doing it.
Well, you can learn a crap load from him. Like I just wanted to experience versus brand brand new. And it's not that, that bad. My son's been, my son-in-law has been at this for seven years. He knew do hundreds of deals now, but, you know, he learned from some great mentors, but, but by and large, I wanted a lot of experience. That's all. Yeah.
Jesse (23m 18s): I, I live really like that format. I think it's, hopefully I don't butcher this, but I think it's the Titans of real estate. A book I read recently that was similar in layout. You know, it was real estate, but you would have on one side of developer, another side, a investor in industrial and other side office. So it was really good to get every perspective. And like you said, it's, I mean, it's not gonna appeal to everybody. You're gonna be biased in certain ways. There were some chapters where halfway through, I'm like, yeah, you know what? Good, nice to know. Not really, not really my cup of tea. You talk a little bit, or you, you talked a little bit about your son there.
One thing I thought was really cool, just like when we got Jake and Gino on a very family-oriented, I'm the same way your team, you picked some of, some of the people closest to you. Maybe you could talk a little bit about the team that you have in what you're doing and how that's, how that's impacted you and, and just day-to-day life. Yeah. And by the
Chris (24m 9s): Way, I hung out with them too. I think I was on their show on vice versa, that fun Jacobs, you know, they're good guys. You know what? It's somewhat of the answer I gave you that when I said I didn't brainchild that the niche and kind of organically happen, what happened to this business? And the family was, Nick has always been around me. He witnessed a lot of the stuff I went through in oh eight. We literally share an office. That's my son. So when I get busy and 14 ish, I think it was, he started as a broker at the same office as me. I'd go, Hey, I can help you on the buyer side, I get it. I not do this online. And they said, great. We started slow.
He then went full time. And then my son-in-law and my daughter, Kayla were in the bartending and personal training business in this area. That's big, it's a tourist area. And money was good lifestyle crappy. So they said in 15, is there any room for us to come in? I said, you have game for like incentive. We do deals. We make, we don't, we don't, you don't get paid if you're good for that. So they came in, everyone kind of organically took what they like, Nick does buyers still, Zach loves doing what I didn't duplicate me. Kayla ran the office. She's busy with the kids now, but the point is, they all organically, when it wasn't like I had this massive plan kid said, Hey, let's hand fuck these people.
Right. So it's good. That way it's helped because everyone does what they really like to do in their own zone. That's how it started. And now I've got a team of like 12 or 14 people.
Jesse (25m 23s): Yeah, that's great. What are you? You know, what are the opportunities at this point? And we're in 2021 or halfway through the year, it's been a tumultuous 12 to 18 months for a lot of people. But I think every person that's been on this show has talked about opportunities. We're where are you setting your sights on right now?
Chris (25m 42s): Hey, this is what I've been screaming about. And to this day, I think tomorrow night, I'm talking about it with a group. And that is, I think, as the market slowly starts to turn again. And who knows when, if you and I knew we wouldn't run the show together, it would be on a beach somewhere. But when it does, I think in the next nine to 12 months, anyone in the terms, niche or Marietta reasons for another show, and it's the opportunity to get probably a decade worth of income. And the reason I'm saying that is this. I look back to like 13 or 14.
Some of those deals are now cashing out, literally like this month. And I can equate all of the next six weeks, probably half a million to a million more in cash outs for our personal team, not the students all coming from a few years ago. Well, the, the market right now is screaming for deals outside of the conventional bank. My opinion, the amount of deals being done in the us outside of banks used to be like one or 2% in the nineties. It's I don't know the percent now, Jesse, but it's big. It's like in the teens, that's a lot of deals and need the guidance and they, they there's tied a lot of the bank crap going on.
And so I think there's a big opportunity that in our niche, that's why I'm putting full gas pedal down, starting April 20. We just not doubling down versus pulling back.
Jesse (26m 56s): Yeah, I wish there was, there was more re like there are tons of resources out there for real estate, but ones that you can trust because, you know, we're in this space I've been investing for, for quite a number of years. You have been, I have the benefit of being in brokerage. So a lot of these contracts and these things that you do outside of the normal normal realm of financing, or you know, who you're dealing with in real estate, or just something that we're surrounded by. And I think people, you know, that say the PR the private or exempt market for instance, is just one example.
I think people generally speaking are afraid to, to deal with that because it is something that looks like the gray market, something that they don't normally do every day. So that's a good point. I think that that opportunity is, is something that we're going to see more and more of and, you know, leading, leading into my next question with that in mind is you teaching or coaching you mentioned is, is that part of what you're trying to do right now is kind of explain or demystify this type of investing to others.
Chris (27m 58s): Yeah. You said it right. We literally our mission, we have a mission called the kingdom town mission. Our mission is to dominate the, the education field and real estate by helping associates. That's what we deal with. That's what we do deals with. We call them associates by helping them complete 500 deals by 2022, and then we'll rewrite that. But the reason I shared that relative to exactly what you said is so far, we've helped about 1400 families between the deal with the buyer and seller and our students do the deal outside of a bank, right?
It's a lot of families. So then you start affecting them generationally that disruptive market a bit. So we're out on a mission to do that. I know it's a long road. There's only a small percent of younger 20 of these deals that are being done and where we're a tiny fraction of that. But that's where we're going with that because lives are being changed because of it. And you said something about trust. The big thing right now is like, I call it bridging the gap from the time someone does a real estate seminar or course, but when they actually do a deal, some people don't get out of it. I get calls weekly saying I never did a deal.
I follow so-and-so. It's crazy. So, so we don't focus on selling a course. We focus on doing these deals and affecting lives. It's pretty cool. And it's rewarding as heck.
Jesse (29m 9s): Yeah. I, you touched on something great there. And I think there is, I mean, there's oftentimes a analysis paralysis and you have people that listen to podcasts and read books, and it's one thing to, that's all great stuff, but a certain point you got to take action. You don't want to be that guy or gal that three years, you know, you're hearing the same podcast. You're hearing the same people, but you've never actually taken action.
Chris (29m 30s): Yup. So
Jesse (29m 32s): For, I do have just a side question here. You were, again, like I said, you were fortunate to send me, send me the book, wicked smart is I have something to do, set it. Well, I was going to say, so for listeners, I got a shirt and a book, and I was like, you can't look at that shirt and not say wicked smart. You just think so. I think of like Goodwill hunting or a Bostonian accent is that, I mean, it tells a little bit of the background of that you're in Rhode Island right now. So I got to feeling that it's something to do with that. Yeah.
Chris (30m 2s): It's fun. It's yeah. Boston area, wicked smart. We w smart real estate coach was first. And my wife thought of that way back in like 13. We, so we started that. And then we recently trademarked the name. And then, and then the LLC, we changed names to wicked smart. It's our brand. Now the, the, the wicked smart community is all associates. The wicked smart listeners as the podcast list says, it's nothing more than kind of a new England. It don't work because the name was already smart, real estate.
Jesse (30m 29s): Careful here. I've heard a trademark three times here. I've got to be careful. What I put in the show notes. Am I to get a couple of calls from your lawyers? So we, we asked four questions to all the guests that we have on the show before we wrap up. And if you're cool with that, we, we can hit you with those. Then after we'll, we can go over, you know, where people can reach you and a little bit about what we, what we'll be putting in the show notes. Awesome. Okay. Number one, what's something you know, now that you wish
Speaker 2 (30m 57s): You knew at the beginning of your career
Chris (31m 0s): With certainty, the fact that everything you possibly could think of that you want to do, someone's done it. And I know that's easier said than done. I thought that when I was younger, but the only two times I ran into trouble in the rockets and had a tough time. I look back. If he isn't going to realize I didn't have that mental, because I got too cocky. Like I know, and I know literally everything you can think of, it's someone did it go find it and model it
Jesse (31m 23s): Right on ties in nicely to the second question we ask our guests, your view on mentorship for the guys and gals, young and old, what are, what's your take?
Chris (31m 35s): Well, look, I'll give a good example. A direct example. Again, Jesse, we have stuff we can sell people and they can disappear. Never talk to us. It's okay. But the fact is without the hands-on guidance with us or anyone else like that, formula Gabriel, you have three steps. You will leave money on the table. So why not do it more profitable, more, more quickly than the opposite? Why not? It's crazy. So I can attribute. I could pick out in the last 10 years, it'd be at a time I could pick out each mentor I've had in literally attribute for a million million to that particular relationship.
So it's, it's, I couldn't stress that enough. And people say, I can't afford it. Yes, you can. If you simply get resourceful. When I came out of the doldrums of the crash, I found some of that. I said, look, I'm going to crush it with this particular mentor. And as I do deals, I will give you a third or half whatever I told them until you're a hundred percent return on your money. You can get resourceful. If you believe in yourself and your mentor, you can go find the money when it's not certain,
Jesse (32m 33s): For sure another good lead into a resources. So right now, stuff that you've had, you know, whether it's a book, whether it's a podcast, what's a resource you're you're into right now that you'd recommend to, to listeners.
Chris (32m 47s): Okay. Depends on what stage of the business they're at. So it's, so instead of being a general and say, mentor, if you're at a stage where it's at least you and one person on your team, at least two people, and you're at a stage where you're kind of have a goal to get to that seven figure, mark, there's a group I follow still to this day. Since the day I met him at 17. Although he entrepreneurs amazing group, I attribute most of our scaling and success to them. If you're a smaller entrepreneur, solopreneur, it's back to what you and I already talked about. Find someone specifically, that's doing what you're doing and go latch on with them.
Jesse (33m 20s): Great answer. Final question. First car, make and model
Chris (33m 25s): 1978 deep wagon there Jeep wagon ear.
Jesse (33m 31s): I like it right on. Okay, Chris, you've been really generous with your time here for listeners. Where could they find you? What, what can we put in the show notes?
Chris (33m 43s): I just thought of two things, as you were talking, you asked some really cool questions about the book. So one is wicked smart, sorry. Smart realestate coach.com is the main site. So you can hit the webinar there. It's free. You can get a lot of free resources there. I'm big on free. Find out if you want to do this niche, right? Secondly, because you have so many cool questions with the book I tell you what we can do, and my support will love me. But you can put in the show notes, I'll give you the support email. I'll have you want to do it. They can get the hard copy so they can get the hard copy of the new rules and the hard copy of real estate on your terms, we'll mail or our expense.
You won't put a in, we just need an address. So put that in the show notes. And then if they want a free call, there's a really cool strategy expert we have now. And just 18 months ago, he wasn't even in real estate. His name is Brian. And if you've got a smart realestate coach.com forward slash action, you'll get a free strategy call with him. They'll tell you a story and see if it's a fit for you. And you can keep digging free until you decide what you want.
Jesse (34m 38s): My guest today has been Chris Prefontaine, Chris, thanks for being part of working capital. Thanks buddy. Thanks. Pleasure. Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one.
Take care.
Matt Gouge has spent 5 years in direct lending before making a switch to Independent Mortgage Broker in 2018. As an Independent Mortgage broker he takes private advising to the wide variety of clients with diverse needs.
- Matt`s background
- Entering the Mortgage business
- Matt’s first investment
- Business Overview during the 08-09 recession
- How to grow a real estate business
- Interest rates and inflation
- Where Matt is looking for deals
- Building a team Real estate marketing
- Investment outlook
- Mentorship, Resources and Lessons Learned
Useful links:
https://www.youtube.com/channel/UCq2XM1Q4PXs-msULABdk2Yw
https://mattthemortgageguy.com
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesse Fragale. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, welcome to working capital the real estate podcast. My name is Jesper galley and my special guest today is Matt. Matt has spent five years in direct lending before making the switch to independent mortgage broker in 2018 as an independent mortgage broker.
He takes pride in advising a wide variety of clients with diverse needs as to which lender and loan product is right for them. So today we're going to be talking about all things, investing, all things, mortgages, Matt, how's it going? Oh, it's going great. How are you doing Jesse? I'm doing great, man. The sun is out. It's a beautiful day down here. How's it up in Sacramento, same, same thing.
Matt (56s): And I get this when I record something on YouTube or court's on anywhere. They're like you're in California where it's hot and you're wearing a jacket inside my office freezing cold. So it's, it's 66 in my office, but outside it's, it's probably mid eighties. That'll get to see out that often with as busy as mortgage has been these last few years, but I assure you it's, it's sunny in California still.
Jesse (1m 16s): Yeah, well, it's a pretty topical to be talking mortgages right now. I think over the last few podcasts and just in general, you know, everything has been spotlight on where interest rates are at inflation, you know, the impact of this stimulus. And I'm sure you're seeing a ton of volume right now just given the fact that there's so much capital out there,
Matt (1m 35s): Right? Yeah. There's so much capital and there's so much demand for real estate. That's what people don't realize is like sure. We have a supply problem where, you know, the supply demand imbalance causes this run-up in real estate. You know, you've got viewers that are in Canada, they're seeing similar stuff, but in the United States, we've got price appreciation of 15, 17% sure that, that we need more supply and not enough was built in last 10 years, but nobody's really talking about the fact that like we're on pace to have 7 million sales in 2021, which is like a 20% uptick from previous years when the average year sees about five and a half million sales.
So plenty of demand, I'm surely not lacking in, in business or incoming, you know, loan applications.
Jesse (2m 15s): Yeah, absolutely. Well, I can't remember which guests we had on and put said, there's always that conundrum or that thing in real estate when there's a lot of capital out there, it's just seems, seems like deals are harder and harder to find. And when there isn't, it seems like there's a value deal everywhere. So I think we're definitely in the former right now, trying to find good deals is becoming harder and harder to do. But, you know, from your vantage point, maybe we could take a step back and, you know, how did you get into real estate, the mortgage business? Give us a little bit of a, of the background.
Matt (2m 42s): Sure. I mean, a quick snapshot of, of where, where I've been and what I've done is is I graduated college in 2005 with international business and finance degree. And so I've had a finance background, always been a numbers nerd. Since I was a kid, I used to, you know, tally the groceries as they came into the cart. And if I got it wrong, adding tax, I would cry. And that's the famous story my mom told. So since, since I've been a kid, I've been a numbers, nerd got a finance degree, actually went and ran a small business from graduating till about 2013 and then a small stint in 2013, working for the state of California, doing more finance stuff.
But it just wasn't my cup of tea had friends and mortgage that said, Matt, you know, you've got the numbers, you've got the work ethic, you've got the, the networking and all the stuff that would make a good mortgage professional. You should come do mortgage. And I did. And the rest is history. And, and so into, you know, my foray into mortgage, like other professions you get to see inside of what other people are doing. You know, you get to see inside finances and you sort of learn a little bit about finance. You get to see inside, wow, this guy has got 14 rental properties. That seems kind of cool.
This guy's live in a pretty cool life. And so that I think is what turned me on to, it was just seeing through my mortgage business, what, what investors were doing. And so like so many people, I'm sure you, you, you click onto a bigger pockets podcast, you read a book or two, and you're just like, wow, this is really, really cool. The, the crazy part is, is when I'm talking to investors now in 2021, I'm trying to get them to avoid what I did is literally like, listen, talk about, get excited about everything, but take action. Right? And it's because it was like 2017 before I actually started buying property.
And, and so when I did start buying property and I, and I, and I put together a couple of deals, bought a few fourplexes, a few single families, then it was not just like an idea like, oh, you could get cashflow and you can look at your net worth statement and see the principal pay down and see how things appreciate over time and all the benefits of real estate that, you know, on paper, on a book, in a book, on a podcast, sound great. Then you experienced it in real life for yourself. That I feel like I talk about it different.
Now, when I talk to clients about the power of real estate and all the benefits of real estate, I can use myself as, as a case study or the hundreds of people that I've now worked with that have built wealth one way or another through, through real estate and real estate investing
Jesse (5m 13s): Right on. That's pretty cool. And you know, it's not as a similar story we hear from, and I'm sure you've heard from accountants lawyers where they're like they see a portfolio or a client list where they're like, there's a lot of these wealthy people owning real estate or investing in real estate. So Matt, what was the, you mentioned fourplex, single family. What was the first investment that in 2017 that you made? Well, the first
Matt (5m 33s): One was actually an out-of-state rental and I I've got a video on my YouTube. My YouTube is just Matt, the mortgage guy where
Jesse (5m 41s): Checking that out. I've got a lot of traffic up there. Thanks.
Matt (5m 45s): Yeah, it's, it's, it's been picking up some steam and it's been over the years, just, I get commonly asked questions and I, I basically make videos answering questions. And, and if, if five or six clients asked me the same question a month, my guess is that, you know, nationwide or worldwide, other people have those same questions. And so I made a video, please try to avoid my mistakes when investing at a state. And so like other stories I've heard my first investing experience, wasn't that good. I bought something out of state because in my mind, and being a numbers guy, I thought to myself, you know, this low price point, this, you know, rent per month, this thing's going to be 22% return, 23% return.
What could go wrong? Well, when you're buying stuff, that's in a war zone, you're going to have bad tenants. You're going to have repairs. You're going to have all the nasty stuff, which I've, I've learned. I don't want to deal with not saying that out-of-state real estate real estate doesn't work. Cause I know tons of people that have done it successfully. They've just done it differently than me. If they've done their due diligence, which was mistake. Number one on my part, they've got boots on the ground and professionals that they like and trust in the area they're investing in.
A lot of times they're doing it at scale. So it's not just one property. They've got eight or 10. And so that was 2017. And then my, my other single family rental from 2017 was another common story. I see. And really how I kind of advise my clients to get into real estate investing. I moved out of my primary and bought a new one and kept my old one. And so my old primary became an investment property, not a home run, but it's cool to be able to show people, not just, you know, random figures and say, you know, here's how real estate investing works, but here's me.
I moved out of this thing. If you thought about it, it's going to rent for 2200. Here's the mortgage. It doesn't sound that attractive. But if I show him a 10 year, 15, 20 year horizon and they're working for the state, they're grinding away for, what's going to be, you know, their retirement 30 years from now, I show them like, look at how cool this is. I'm going to get paid a couple hundred dollars a month on this investment. That's an increase in value. You know, even if we only see 3% appreciation on average, which is really conservative for California, you know, this, thing's going to add a half, a million, three quarters of a million to my net worth and then be cashflow positive $2,000 a month.
Once it's paid off. And I'm just doing tax and insurance, like that's cool stuff to show somebody who doesn't know anything about real estate. And it's an easy way to say, could you save up 5% to buy a new primary and have this old one, be your first investment property and then get that, you know, where different parts of the country are different than if I talked about, you know, a half, a million or 700.
Speaker 2 (8m 31s): Yeah. That was in and in equity. People are just like, not here in, in Ohio where I'm at, but
Matt (8m 38s): You know, it's, it's, it's going to be different, different places, but that stuff, it's not rocket science. I don't feel like it's something that's, you know, a super complicated formula other people can follow. And that was my first one. Yeah. And for a lot of people, if you did nothing else, but that, and then maybe buy another or two every Wednesday, I'm on a one rental at a time, a buddy of mine who, who his book that he wrote. And his whole thing is like, try to get to four rentals and four rentals will change your life.
And so a lot of people I talked to that's, that's at least a start, right? Not everybody wants to own 150 units. Not everybody wants to build this humongous empire, but you know, if you, if you have a few rental properties, imagine the folks that just grind their life away for 40 years and then get 36, 24 a month for the rest of their life. You know?
Jesse (9m 33s): Yeah. I think ultimately, you know, even at one or two rental properties, like you said, not everybody wants to own hundreds or thousands of units passive, you know, you're in this game long enough, passive income is not so passive there. There's still, you know, you, you make a decision at a certain point, are you going to start a real estate business? Or are you going to try to make it as hands-off as possible? But one or two properties for a lot of people would rival their 401ks, their retirement savings plans, whatever they have there. Because like you said, you're, you know, you have that appreciation and then you can get into the forced depreciation, depending if you're going commercial, residential.
And on that note, so you got oh five to 2017 and 20 2005 is when you graduated. Did you get into the business? Were you in, were you in the business during 8 0 9 and not like during the recession and deal with, with hap what was happening during that time? Well, I had bought
Matt (10m 24s): My primary in oh six and the small business I was running was a poker room. And so I got to do a ton of great networking right through the poker room. And I had plenty of buddies who, you know, like me were in their mid twenties, starting off, everybody's doing something different. I had plenty of clients, plenty of friends, plenty of family that were all into mortgage and just having a finance background, you know, it interests me. And so I had talked to them. I wasn't actively involved with writing mortgage or anything like that, but I definitely saw a lot of it.
A funny story that I don't tell that often is when I came back, I went and studied abroad in Mexico in oh three and oh four. When I came back, I interviewed at a mortgage company and this was, you know, subprime and AmeriQuest and just injuries. Yeah. Crazy stuff going on. And this company, I went there and I'm like super excited. I'm 24 years old. I'm about to graduate from college. I feel like I've got a good handle on business and, and marketing. And, you know, I've always had good work ethic.
They asked me if I would be willing to like forge documents or they asked me if I'd be like, would I be willing to do, to, to make a deal close? And basically none of it, I said, you know, I'm bilingual. And I live in California, I work hard and I've got some, some business sense. I think that without cheating, I would do fine. And they basically told me I wasn't for them. Right. So no surprise a company like that went out of business, but looking, I think it's cool because I never was involved in writing any of these mortgages that people, you know, look back on and talk about like how terrible of a product, some of these, you know, two 20 eights and interest only arms and whatnot were.
And, and so, you know, having not wrote a alone until 2013, I've only wrote the vast majority 30 year fixed no prepayment penalties and, and really clean loans. Like we've seen since all of a sudden destruction
Jesse (12m 26s): Since the recession. Yeah. So I mean, crazy time, obviously, you know, they've made movies about it. They've people have gone gotten sued, gone to jail now after this time. So why don't we go on to that 30 year fixed, but Canadians will be like, w what the hell is this? This is not a product we have five years is our max for residential in terms of actually fixing rates. But why don't we talk about, we break it up into residential and commercial. So you're looking for single family property.
Why don't we start with that? People that are listening and maybe they have one, a rental property, maybe they're buying their first rental property. It, it is on the single-family side. What do they do once they, you know, they spot a pro property that they like and they're underwriting it. Sure.
Matt (13m 15s): I mean, for most people to, like you said, if, if they're buying their first rental property, they'll reach out to me and say, how do I qualify for rental property? Is it different? It's fairly similar to how you qualify for your primary residence. It's going to be a debt to income ratio thing. So it's, so it's all math on the income side, you vet your income and then debt side, you've got your current mortgage, you've got the new mortgage, you've got whatever car payments, student loans on that. And you just have to have the debt to income ratio work where your income versus all the debts, you know, 45% is probably a good, you know, rough figure.
Some programs go a little higher. Some might even be a little bit stricter depending on your credit score. You may or may not get approved higher or lower, but, but that's the basics of it is that, you know, you're going to have to have verifiable income, unfortunately, through COVID folks that are self-employed are having a little bit harder time. A lot of them that I've seen, you know, business declined in 2020. And that's, that's something that I would love to have a better mortgage products available for self-employed borrowers.
Unfortunately in the, you know, Fannie Freddie, conventional world, there's just not, and it's, and it's something that lenders look at as, you know, variable or uncertain. And so you really have to have a track record as, as a, as a self-employed borrower, because the lenders don't know any other way to look at, like, what, what do I think your future income is going to be? Well, what you made in 19 and 20, and then your year to date P and L and 21. That's the only thing we go off we'll those 30 months and divide them by 30. And that's what we think you're going to make in the future.
And
Jesse (14m 56s): I think, you know, to that point, and like you said, it's, if you're in a different area, different banks, you know, we call it the, the total debt service or the, the, you know, the gross debt service, your TDS and GDS racials. But like you said, 45%. I know in my area, 35%, we're pretty conservative up here is, is fairly standard. May be pushed to 40. But yeah, I think on the self-employed side, it's so funny, you mentioned that because I was just talking to a colleague in the industry, it does commercial mortgages. And he was saying that basically, they're almost creating a product or adjusting, basically making an adjustment for 2020 income.
You know, especially if you're self-employed for a long enough time, they see, you know, a steady increase or, or, you know, stasis, and then 2020, you know, came back and then 2020 started picking up again. So it's like, well, if we lose, if we use your last two, it's not really a good picture of what, of what you're, you're really making out there. Exactly.
Matt (15m 50s): Yeah. And I've been telling self-employed borrowers that like stay tuned because mortgage guidelines change. Unfortunately they don't change fast enough sometimes for you, but in, you know, in an ideal world, it would be, make sense where, like you said, I could look back at the track record, you had a blip and you were out of work for three months, maybe your state shut down or whatever it was. And now you're back, you know, full bore. But you know, the guidelines that are in place right now are, are to be completely honest, fairly restrictive for self-employed borrowers. You can just got to have a business that has weather the storm and can show that on paper.
Right. Because that's, that's another part about being self-employed is that you could have a business that has a $2 million top line. If your bottom line is 24 grand, you're not going to be able to buy a half a million dollar house. Yeah,
Jesse (16m 39s): Absolutely. So, okay. On the residential side, what are you seeing in terms of, you know, the average client, you have percentage payment that they're able to achieve and what, at what point can you not stay within the residential, you know, mortgage product and you have to go into commercial, I assume that'd be a unit count. Right?
Matt (16m 60s): Exactly. And so that's, my, my lane is one to four unit residential stuff. Once you get to five units and above it's going to be commercial. And so literally all the business I write is going to be a single family, a duplex or triplex or a fourplex. And, you know, even if it looks really similar to a fourplex down the street, if you've got a five unit building, I just can't finance it. And, and so you gotta look for commercial financing and, and the main difference, you've probably talked about this in the past, being in commercial is that, you know, when you're looking at a commercial asset, they're looking at the building and they're looking at it's producing this much income.
If you're buying a four unit property, if it rents for a zillion dollars and your mortgage payment is 3000 a month, that isn't necessarily what the lender is looking at. They're looking at your ability to repay. And so somebody who's got $200,000 a year in W2, income is going to qualify no matter what, you know, the building could be a net loser. And so that's, that's something important to think about for people that are looking for residential properties. And another reason when I'm coaching investors or I'm talking to investors about qualifying for mortgages, and the fact that you can only do 10 conventional loans, is that if you've got a great W2 income and your plan is to, you know, leave that job, but build a rental portfolio, as long as you want to get this cream of the crop financing, where you're getting, you know, 3% on single family and sub 4% on the multi-family on a 30 year fixed rate term, keep that W2 jobs, you can qualify for those because once you quit that job, it's, it's highly unlikely that you're going to have enough net rental income on your tax return to qualify for those same sweet, sweet, conventional Fannie Freddie loans.
Jesse (18m 49s): I'm curious the, the 10 property limit. I, you know, I've heard that thrown around a bunch of times. Do you know what the actual, first of all, what the logic of that is, or the history is, is it just something that has always been done?
Matt (19m 3s): You know what, that's, that's an awesome question, dude. Like, I've never, I've never thought about the history or the logic behind that. Besides like, I know that some lenders have implemented stuff in the past where they don't let you know, some, some lenders aren't huge. And so they're smaller. And they'll say, I don't want more than four loans from one individual, even though they could do, you know, that person's ninth and 10th, if they already had eight finance properties. And so maybe it's something where, you know, a smaller lender or even a bigger lender, doesn't want to have 77 finance properties from one person.
If that person goes belly up, you know, it's, it's spread the risk for that one. That, that would be my only thought because, you know, if somebody qualifies. Yeah. And I guess in general, it's probably a higher risk if somebody has 47 finance properties. And so that, that, that could be the only thing is that yeah, that ship crashes, then, then it's, you know, $14 million worth of mortgages. Versus if they've only got a handful, then it's, it's less risk to the lender, but that's, that's a good one, dude.
I'm going to even take a note and see if I can find some history of like, when that started. And
Jesse (20m 15s): Yeah, I've always been curious because I've heard that before. And then usually I guess it, perhaps one of the reasons it doesn't get answers by the time you get to approaching 10, a lot of people are switching to commercial product. So it's almost like, you know, unless single family is literally your bread and butter. So in your lane, one to four units, are your clients, are you able to still have them put the properties into a corporation or LLC, or do being a residential mortgage?
I assume there's, it still comes with a personal that, you know, you're, you're personally still on the hook for the right,
Matt (20m 51s): Right. Yeah. Yeah. And that's the thing too, is a lot of people want to, you know, not like be personally liable for the debt and lenders just aren't going to lend to you. And, you know, you can, you can slap it into an LLC for liability protection and for a slip and fall at your property. But as far as like closing alone, most all traditional lenders are going to make you close in your personal name. You're personally liable. You know, they're pulling your credit, they're qualifying you as a person. And then I see investor slap at Nelsey just, just for the liability protection.
There are some like non QM lenders, which has a broker. You know, we broke her out, plenty of that, where we're doing non-traditional type loans, debt, service, coverage, ratio, loans, bank statement, loans, and those lenders can work outside of, you know, the, the regulations that are put on conventional loans where sometimes they'll allow you to, to actually fund the loan in, in an LLC. But it's really not that common. And I get the question quite a bit and I haven't dove in deep enough to find lenders that, that do that, do that very often.
Jesse (21m 59s): Yeah. I think on the commercial side, even, even on our side at the beginning, when you're getting into it, you're, you're personally indemnifying until you really build up, you know, actual assets within, within the company in terms of where we're at today. I mean, like we talked about a little bit the last year and a half has been kind of crazy. There's a lot of volume in terms of mortgages, what you're seeing. If we focus kind of macro economically interest rates, how are you advising clients? How is that impacting if at all, the way you're doing business in, in 2021,
Matt (22m 33s): As far as far as like where interest rates are headed or what I think about the housing market
Jesse (22m 37s): Or, well, number one we're interest rates are headed in. And do you have a strong view about that? I know, like you can have people on completely opposite sides of this, of this conversation that are both really intelligent and informed that have very different views of where they think interest rates are going. But yeah, I would just like to get your perspective on that and obviously, you know, that has a material impact impact on the, on the products that you offer, right?
Matt (23m 2s): Yeah. I mean, I think like when people ask me, cause that's a million dollar question for a mortgage broker, like what's your rate is the question number one, and what are rates doing? Where are they headed as question number two? And I mean, we've seen some volatility last week was, was the, the, the fed meeting where, where the fed talked about, you know, the, the future thought of, of moving the fed funds rate. And so people don't know, like in the U S the fed fund rate, it doesn't necessarily track the 30 year mortgages in the short term, but over the longterm, it certainly does.
And so just them talking about talking about the future of moving the fed funds rate saw a tick up in 30 year rates, probably like a quarter percent in, like, I think it, what was last Wednesday was the 16th, 16th, 17th, 18th were all red days for mortgage mortgage bonds. So it was like a quarter worse on those three days. And so I think that anybody who follows mortgage and mortgage rates knows that the fed who's buying over a hundred billion dollars a month in mortgage backed securities.
They're like keeping mortgage rates low in the U S once they start taking their foot off of that gas, or, you know, rates have nowhere to go, but up, I don't think that they're going to increase fast. So I wouldn't tell anybody like, you know, get it now hot. You've got to, you know, refinance today are going to miss out. But Morgan now that are really close to 3% on a 30 year fixed for the most well-qualified clients, if those are three and a half or 3.75, by the end of the year, I wouldn't be surprised if they're still at the same levels they're at today.
I would be surprised cause cause they they're going to gradually increase is kind of my thought. And like, if, if you look across like national association of realtors, mortgage, professional association, anybody who's got surveys on where they see mortgage rates by the end of 2021, it's higher. It's not a ton higher, but it's a little bit higher. And so what I'm seeing a ton of on this subject is people that have a bunch of equity because we've seen, you know, 30 plus percent appreciation over the last 24 months for a lot of people in a lot of places in the U S is people are grabbing that equity and they want that long-term 30 year fixed money.
A lot of people think that, you know, inflation isn't necessarily transitory and some of it is here to stay. So they want to hedge against inflation. They want to pull some of that equity out of their home. And the crazy part for me as an investor and dealing with so many investors is there's all this money and nowhere to put it, like, there's just, they're, they're looking for you, especially I think in, in residential real estate, because I'm not going to pretend like it's easy to find cash flowing deals or great deals out there.
You know, I'm looking, I'm submitting offers, I've got dozens of clients that are submitting offers and you know, even the ones that are playing the long-term don't need humongous returns are, you know, they're searching for six and 8% before they wouldn't even look, they wouldn't even think about that deal. And they can't even find that in some of the markets they're looking in. And so that'll be the interesting thing going forward is where are people going to find a place to park all this money? Because I know with absolute certainty, there's just so much capital looking for a place to park it, you know, in my little micro world of me and my mortgage clients, I've got people in the bay area that had paid off homes that just said, I'm going to pull out the 820 2003 75, park it on the sidelines.
I mean, clients that have seven 50 already sit in the bank, they're just doubling up because if something happens, if, if there's a deal to be had, I want to be ready.
Jesse (26m 45s): Yeah. Yeah. I think it's a, I think that's everywhere. I think people are any appreciation that they've built up, you know, and the products where you have, you know, different banks call them different things where you have a line of credit attached to the mortgage and you can actually utilize that when you see an opportunity, speaking of your markets. So you're in California, you're an investor. Number one. How do you do that? And where are you looking right now for deals
Matt (27m 12s): I'm looking, you know, with, with, with the experience I had at a state I've, you know, it's, it's good to be self-aware and you know, your strengths and weaknesses, the people that I see do it out of state have, you know, a tie to the city that they're investing in either. It's, you know, I've got family that lives there. I've got a real estate buddy who lives there and he helps me find the real estate. He knows the great property managers. He knows the great construction folks. I think my weakness for investing out of state is I just don't have the boots on the ground that I would want to have to make it a successful operation.
And so my general investing, I guess, philosophy is I want to be able to drive to it. And there's some markets that are three hours away, three and a half hours away in California. Some people think that I'm crazy because it's so tenant friendly in California, but there's, there's something about being able to drive, you know, meet a contractor, meet the property manager, look at the building, talk about the building. And so the neighborhoods that I'm looking at, I, I created a video that could send out to real estate agents who are working in the markets where I'm looking and, you know, I don't want stuff in eight neighborhoods because it's just, it's expensive.
It's just too expensive. And so, you know, the, the B minus C plus, if I could duplicate what I did in 2019 with the two fourplexes that we bought, I would do it 10 times over because those are, you know, appreciating their cash flowing. And I think when I looked at it last, it was like 16 or 18% cash on cash return after all expenses. And now after 24 months, I feel like I even have like a worst case scenario because obviously there was some tenants that were struggling and in these type of markets, these type of units I have that are mostly one ones, some, two ones and some three twos between those eight units in those two fourplexes, I would imagine expenses and vacancies would only improve in the future and not get worse.
But even with all that stuff considered, you know, a 14, 15% cash on cash return, now it's more expensive. And so I've adjusted accordingly and, and I've looked in other markets like Fresno, California, which is more central. And, you know, similarly it's, it's, it's a C plus B minus and you know, the homes are 50 years old, but I just, as, as a person, who's going to be continually bullish on real estate. People are always going to need a place to live.
And as crazy as people think that I'm home, like price appreciation for purchase has gone crazy. You should see some of the numbers for rentals around rental increase is, is gone crazy as well. And, you know, I don't think I'm ever going to have a thousand units. So if I have, you know, 50 spread across a couple of different California markets with really good property managers in place, I'm not worried about the tenant laws so much because in my experience at least, and it's maybe it's only been three to five years.
I haven't experienced the worst of the worst. You deal with tenants like they're human beings and you work with them and you're kind, I, I just, anything can be worked out. You know, I had some terrible tenants where we just had to say, I don't want an eviction to go on your record to where, you know, it's gonna affect you for the next seven years. If you can be out by next Friday, we'll forgive all the back rent and you won't have an eviction and then they're out. And then we clean it up and we move on. And, and that type of stuff I think is just to be expected.
And you just write it into when you're thinking about how something's going to perform. So I guess long-winded way of saying, I'm just looking for cash flowing stuff that, you know, appreciation would be kind of gravy, but thinking about 10, 15, 20 years from now, let's call it 50 units that are paid off. And when they're paid off, they're $500 per door or something like that, then
Jesse (31m 25s): What kind of mortgage broker says that
Matt (31m 28s): I know, well, that's the thing too is, is, is, you know, I'm human like everybody else. And I feel like when I talk to somebody, I try dig into like, what's where are you at in life? What are you trying to do? Certainly right now, I'm not trying to pay anything off. Yeah. And it's funny because I made a video talking about like fast ways to pay off your mortgage. And people are just like, okay, you're an idiot. It's a 3% mortgage. Why would you ever do that? I'm like, listen, I've literally like stopped any additional principal payments on all the stuff I own because I, I see what you see Mr.
YouTube.
Speaker 2 (32m 3s): Yeah.
Matt (32m 4s): Not trying to like throw that money at, at this long-term 3% debt, but, but things change. Right. And I think if I talk to a client who's 57 and you know, they've worked their behind off, and they're like, I'd love to have this stuff paid off at 62. It feels different for me and, and whatnot. Then I'm not going to tell them, don't do that because you know, the money versus, or the rate versus inflation, it's getting that money for free. Don't do that, sir. Like, you know, every everybody's different, so I'm not, I'm not tied to one belief. And I, and I honestly try to keep an open mind to not just like how I view things, but people in different stages of their life can view things.
Jesse (32m 42s): Yeah. I think it goes back to what you said before, even before the show, when you're talking about not everybody wants to have a, a thousand units and in the same breath, not everybody, you know, wants to maximize and be, you know, most efficient with every single dollar. They have, they, some people just rather the peace of mind that that's paid off, I feel better. You know, even, even if I know I can get a better technically return on equity or, you know, whatever it is. So in terms of, in terms of the actual market that you're looking at, these micro markets, you know, three hour drive, four hour drive, are you, do you have a team that, where you're going to look for these properties, because if it's anything like our market, you know, if you go on the MLS, you can pretty much forget it.
You're in there with 10 other people bidding on stuff. Are you seeing the same thing? And if so, how are you finding the deals? And what's, what's the marketing like?
Matt (33m 32s): Yeah. I mean, I don't have a huge marketing budget or team, right? Because truth be told I'm 95% focused on the mortgage business, serving clients and in a stage where my business is growing, you know, bonkers, but for the areas where I am looking, I tried to duplicate what I did in Sacramento and surrounding where it's just all network. And as a mortgage broker, I probably know 500 real estate agents.
And of those 500 real estate agents, 20 are active investors. Try to let them know I'm looking for stuff as well. I, I know through conversation with them, stuff that they're looking for, some of them are doing just flips. They don't care about a buy and hold. Something might come across, you know, them, that makes sense to me. And they would never even think about buying it. So getting clear with them about, Hey, here's what I'm looking for. If you find it, let me know. I probably have between two or three different markets and 40 to 50 different agents, eight or 10 deals coming across every week.
You know? And if I was trying to build those, trying to get huge, I could probably find a way to 10 X that and get a hundred deals to look at every single week. But I
Jesse (34m 44s): It's just not your full-time job. Right.
Matt (34m 46s): Right. Yeah. And so, so focused on the business and growing that, and then with those deals that I'm seeing, you know, writing one or two offers, but other investors I've talked to have had similar story as me where I've probably wrote a couple dozen offers with zero getting accepted. It's like, sure. I'm in the market to buy it. If a deal comes across my desk, I'm, I'm willing, able, and ready and I've fired. I just haven't hit anything yet.
Jesse (35m 15s): Yeah. And so it's almost sorry. Sorry to interrupt you there. Go ahead. No, go ahead. Go ahead. Yeah, no, I was going to say it's almost a, it can be a feature, not a bug where I know friends of mine that are putting offers literally this year on a hundred different properties, not getting many of them, but they have capital that they need to put to work. Whereas you can kind of do your full-time job, put a few offers in, you know, if the right comes along, you'll jump on it. But that makes you actually a bit more conservative in your underwriting because you don't have to, there's no pressure for you to do deals.
Matt (35m 46s): Right, right. Yeah. There's no money that needs to be deployed. You know, it's, it's, it's more just me itching, right?
Speaker 2 (35m 52s): It's like, gosh, somebody has got to get to work. I
Matt (35m 56s): Can't have it in a, in a one half of 1% yield savings or whatever that gets in for too long. Because then I feel like as I look at gas prices, as I look at everything going up in price, this, this, this money is withering away.
Jesse (36m 12s): Yeah. Right on. Well, before we get to a, we ask every guest like a final four question, bunch of softballs. I just want to get your take on the next few years investing. It sounds like single families, the space you're going to play in. Is there any interest in branching out to other areas, whether that's, you know, multi-family retail office, industrial, what what's on the horizon for you?
Matt (36m 36s): You know, I've looked at some office space and I've, I've, I've gone through like learning how to underwrite deals, which started as I'm going to buy an office in Sacramento. And if I'm gonna buy an office in Sacramento to do mortgage out of, I might as well buy something where I can lease out space to others. And you know, not just my mortgage business, leasing out space, but, but others in there, you know, paying myself.
And so, so that's something that, that I'd be interested in. Cause it was cool. I got into some underwriting and talks to people that know a lot more than I do. And it's cool to think about, oh, you can buy this $900,000 building, you know, put about a hundred thousand in upgrades, get it fully occupied. Now it's worth 1.5. Like that value add which to be, to be completely honest, as I looked at it, I thought to myself, like everyone I talk to is working from home. Why isn't commercial real estate on sale more than it is. Right.
And so that, that might be something, but, but I really, you know, have a strong tie to residential real estate and probably more of an in right where I just know so many people that I can be presented deals and, and be picky and choosy and add good stuff to the portfolio. So that's, that's more likely area where I'll play at. I looked at some apartment deals over the last couple of years and I guess I, I, I put in a few offers on, on a few different, like smaller, like 12 to 15 unit apartments, but nothing stuck.
So I think I'm open. I think that, you know, the entrepreneur entrepreneurial spirit, you know, lives, whether it's a commercial building and, and it's all with the same goal, really, it's just like freedom, like thinking about being able to take a month and, you know, take the kids and the wife to Europe and have cashflow coming in. I mean, over the last eight years, as I've grown this mortgage business, I've worked hard. And so, so thinking about, even if it's fairly passive, you know, like the Marysville stuff is one hour per month talking to the property manager, it's, it's, it's as passive as it gets.
And so adding more of that, you know, passive fairly passive income is pretty attractive when I think about it.
Jesse (38m 55s): Yeah, sure. I can definitely agree with you there. And echo just because office is, is my world on the broker agenda and yeah. Prices are sticky. You know, they don't like to lower their rents long-term leases. You think half of it would be on sale, but we'll see in the next year or two, see how things go. Obviously retail has taken, taken it on the chin to a certain extent. All right. So four questions we typically ask every guest, I'll lay them up if you're ready. Yes, sir. Let's do it.
All right, Matt, what's something, you know, now in your career that you wish you knew when you got started. Oh man.
Matt (39m 34s): Something I know now that I wish I knew when I got started, I wish I wish I knew what a great deal. What, what, how many great deals were around me? Right. It took me so long to pull the trigger. I wish somebody would have been like, Matt, just take action. Because this is what I tell investors do is I tell them, like, once you take action on the first property, you're gonna look back and go that wasn't that hard and you can do it again and again, and again and again. So if I could rewind to 2013 and be like that first couple times, that that, that idea got into your head where you saw a client that had investment real estate and you thought it was a good idea.
If you would have taken action then, and started that a little bit sooner, w there, we might be a, you know, three X where we are today, as far as real estate holdings.
Jesse (40m 17s): Yeah, absolutely. Zero to one. All right. Number two. Mentorship for the, for the younger people out there, or just your, your view of mentorship, has it, has it been a, a large part of your journey?
Matt (40m 29s): Oh, it's been so, so important. I think it was funny. I was talking to a guy who works for a bay area startup, where they basically do, you know, mentoring and coaching and all kinds of stuff in that space to C level executives. And I talked to him about, you know, personal coaching around real estate, around my mortgage business, around even life and family and whatnot. It's super vital. And my trick, when I talk to people about mortgage, like how did you go from zero to do on 125 million a year and 300 plus transactions?
I literally started and I did 27 deals. And I looked around and said, who's doing deals a year. I want to talk to them. I talked to them, how do you do it? What's your, you know, what are some best practices that you have? And I implemented some of that. And then when I got to 70 or 80 deals a year, I looked around and said, who's doing 150 deals a year. And you know, you'd be surprised at how many people who are rungs above you on whatever ladder it is. You're trying to climb that are happy to share, you know, their story, their structure, how they do things. And I continue to do it.
Now, I'm trying to find mortgage teams that do a $500 million a year and how the heck they structure that, how they manage their time, their team, their systems, all of that stuff like that, to me is the secret sauce. And so anybody who starting out in mortgage who's like looking for mentorship or really anything investing or whatever it is, you know, you look to people who are either where you want to be or headed and closer to where you want to be. And you do as much as you can to soak up some of that, get some of those best practices.
I've tried to do that for people who are newer in mortgage, my Monday Q and a on YouTube, I started doing 6:00 PM Pacific standard time, two hour question and answer. And at first I thought I was just speaking directly to consumers who were looking for a good mortgage advice. And we could just do a Q and a, rather than post a comment and wait two days to get a response. Let's do it live. I found out there was a ton of brand new loan officers. They were like, this is super informational. This is cool. I, I I'm learning so much. And so now I'm starting to invite new loan officers because that's, that's how you learn.
Just talk to somebody who's been doing it and is a little bit farther along the path that you're trying to walk down.
Jesse (42m 46s): Yeah, absolutely. Couldn't agree more with that. Or what is a, either in the past or now a resource that, that you find vital, you'd like listeners to know about resource that could be podcasts, YouTube channel book.
Matt (42m 59s): I mean, I think that I love books and I love audible. And so, you know, there might be some listeners that want to do commercial real estate. There might be some listeners that want to do residential real estate. There might be some that, you know, are hanging out and listening to this, but they want to lose 40 pounds, whatever your, your, your passion or your goal is. If, if you're spending your time listening to information, that's going to help you with that. It's so powerful. And I think that over the last few years, like my personal growth, I can attribute to the fact that, you know, I'm letting a lot of the good stuff get in.
I'm not spending my time. I couldn't tell you about all the cool Netflix series and stuff, but I can tell you about, you know, what's the guy's name that wrote winning Tim Grover, the guy who coached Jordan and Toby, you know, all, all the cool books that are out. I can tell you a lot more about those. And then the Netflix series that are out. And I think that, you know, that's, that's something that, you know, it, we live in a great time. In 2021, you could literally go on YouTube and learn anything you want. You could find a podcast on anything you're interested in.
You could find an audible book on somebody who's wrote on a subject that you want to learn more about. Plug yourself into that stuff and watch yourself grow by a half an inch every day in a few years, you'll be, you know, it's, it's crazy how far you can come. Awesome,
Jesse (44m 24s): Man. I like it. All right. Last one. As listeners know my personal favorite, first car make and model.
Matt (44m 31s): Oh man. So 1996, my parents gave me their 1989 Oldsmobile Cutlass,
Speaker 3 (44m 42s): Kalai. Hatless elegant. I don't know how
Speaker 2 (44m 47s): It just, it seems so much
Matt (44m 49s): Older than it was, but the best part about it is, is I think I ended up buying myself a new car after that. But fast forward to 2003, I was going to go down to Mexico and study. And my parents were like, oh, if you want to take that old Cutlass Kelly, you can. So I drove myself from Northern California down to Southern California, across to Texas and down into like the middle of Mexico. Good at the row. It was like a 55 hour drive. And I had that old Cutlass that the top, the roof, like the stuff was falling down the car, must've been worth 500 bucks tops.
But I cruise that thing all over Mexico for 18 months. It was it's amazing.
Jesse (45m 26s): I feel like down there, it just be car now because the Cutlass is, they used to just put up that became such a hydraulic, just dubs on it, man. I remember that car he's at my uncle had one of those. Just, just like a, just a steel rectangle going down the street, but awesome. Sweet dude for listeners out there, aside from a Google search of your name, we'll put show links below. Where is the best place to, to go out, to reach to
Matt (45m 53s): You? Yeah. I mean, I think that I've hopefully done a pretty good job. A lot of people don't even know my last name is because I just brand myself as Matt, the mortgage guy. So if you go to Google and type in Matt in the mortgage guy, you're going to find tons of different stuff. Matt, the mortgage guy.com I'm on Instagram as math and mortgage guy CA which is California, not Canada. Sorry. I I'd love to have people check out math, the mortgage guy on YouTube. Cause I think that 450 plus videos, my main it's crazy.
My main thing has always been education. So, so ideally somebody who's looking for mortgage information, you can type in how to escrow accounts, work math, the mortgage guy. Why I get a supplemental tax, bill, math and mortgage guy, all the things that my clients have asked me, you might have a similar question and you type in that question, the math, the mortgage guy, check out the YouTube channel. If there's something that you don't see and you think it's a question that other people might be asking, go ahead and fire off a comment. I'm still it's getting to that point. I think man, with a hundred thousand views a month or something where I'm having trouble keeping up with answering every comment.
But I was, I was bragging like two months ago. Every single comment I respond to and every single comment is me personally responding to it. I got to spend like an hour and a half the other
Speaker 2 (47m 5s): Night. I'm like they just keep coming. That's crazy.
Jesse (47m 10s): My guest today has been Matt, the mortgage guy, Matt, thanks for being part of working capital. That was awesome. Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse F R a G a L E, have a good one. Take care.
Brittany Arnason is a full-time commercial real estate investor and social media influencer, commercial real estate junkie, DIY Junkie, retired power engineer, author and speaker. * Brittany’s Initial steps in Real Estate * Getting into constructing * The power of Instagram and marketing * The ups and downs of DIY projects * How Brittany’s career has evolved * Opportunities for investing in the US * Her investment philosophy * Structuring of self-storages deals * Investment geography * Distribution of team roles * The impact of lockdowns * Mentorship, Resources and Lessons Learned
Useful links:
https://instagram.com/investorgirlbritt?utm_medium=copy_link
https://brittanyarnason.com/
Transcriptions:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesse Fragale. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, welcome to working capital the real estate podcast. I'm Jennifer galley and my special guest today is Brittany Arneson. Brittany is a full-time commercial real estate investor.
And I think you just have to take one, look at horror at her Instagram page to really get a sense of what she does. Commercial real estate junkie, a DIY jaggy, retired power engineer, author, speaker, educator, and investor. Britney. How are you doing today?
Brittany (47s): I'm really good. Glad to be here. Thanks for having me. My pleasure.
Jesse (51s): So we talked a little bit before the show about past guests saying that you have to have Brittany on, you have to have Brittany on, I've been following you on Instagram, on your DIY projects for probably over a year now, maybe longer, really inspiring stuff. So thank you again for coming on. And I think it's going to be a treat today.
Brittany (1m 9s): I appreciate it.
Jesse (1m 11s): So Brittney, on the show pretty standard for us is to have guests come on, take a step back and talk a little bit about real estate in general and how they got into the industry and what their, you know, initial steps in the journey were.
Brittany (1m 27s): Yeah, so I got started super young. I bought my first house at 18 years old and so I've been in real estate over 10 years now. And really I got started when I was even younger than that. Cause my mom owned rental properties and she would get my brother and I to help her out with renovations, but just kind of where you can see that DIY stuff filtering through my Instagram page, but got started with her. She would just, you know, hand me a paint brush and say, get to work kid, help me out. I can't pay people. So I want to just get, so that was fun.
Learned a ton from her. And then I was always really motivated throughout high school and everything to buy my first house. So, but one in Saskatchewan, if anyone knows where that is talking to it, talking to a kid from Toronto. So yeah, totally. All my American friends are like, huh, what's the schedule. It's kind of like in the center of Canada where all those super cheap properties are and have family out in Saskatchewan and notice that the properties were quite cheap.
So got the first house for $25,000 for the property and rents were around 850. So tenants pay all utilities, right? So I'm like, okay, super simple math. You don't need to know more details than that. That makes sense paid off in a few years. So, I mean, it's funny looking back because it was kind of one of those things you'd jump in without knowing a lot, which I think nowadays it is kind of difficult for people because it's information overload all the time. But if you keep it super simple and you don't know all, I didn't know anything, I never looked up anything online.
I didn't listen to any podcasts or books or anything. I just kind of saw an example from my mom. So I'm like, this makes sense, like put money into something and it pays you. Okay, I'll try and do that. So, but not getting too wrapped up in all the details. So it's interesting looking back on that right
Jesse (3m 19s): On. So your first property was the price of a now used Honda civic, roughly.
Brittany (3m 25s): Exactly. Right. The cool thing is too. Like I could still buy properties out there. I kind of away from the single family world now, but there's still properties out there for that price. Yeah.
Jesse (3m 37s): It's funny too. You see all these online, you know, the 1% rule, the 10, whatever gross multiplier, you're like, those properties don't exist and it's like, no, actually that one did that one pretty much worked out like that to have $800. Yeah, absolutely. So are you, are you, you I'm a us citizen or can, or do you have dual citizenship when you purchased it or
Brittany (3m 59s): So, yeah, I'm from Canada. I was born just outside of Banff, Alberta, so super awesome mountain town. And that's kind of where a lot of people where you see the real estate market is just insane. Right? So when my parents moved there in the nineties, everything was dirt cheap. Like it's $40,000 for a house or something. And now it's probably worth over 2 million. It's just like absolutely ridiculous, but so grew up there. And once I started in real estate, I moved out to Saskatchewan and because that's where the cheap properties were and I had some family around there.
So, you know, I just really wanted to be successful in real estate. And I'm like, how can I make this work? And if I'm just starting out, don't have a ton of money and all that sort of thing. So that's kind of where I went because Ken was ridiculously expensive. So got it. Yeah. Get out of that town. But now I have been living in the states last six months and just have a working visa right
Jesse (4m 53s): On. So at 18, I mean, not everybody's thinking about buying properties and growing a portfolio. So you had the parents with the rentals kind of, you know, got the edge from there to where you are now. I've seen, you know, the, the DIY projects that you do. How did you jump into actually constructing and maybe part of that is that a, you are a retired power worker. So arranger, that's what Brandon said on the that's amazing. He would a power engineer, I should say.
Yeah. So, so how did, like, what was that story like?
Brittany (5m 29s): Yeah, so I really got into power engineering because it was a job that I could, I could get my certificate within six months and then get a really high income and I wanted the high income so I could buy real estate. So the end goal was always, I want to get that paycheck so I can buy real estate. But then I worked as a power engineer for six months, which was awesome. I learned a ton and I really liked the hands-on stuff. So it's fixing machinery and all this sort of thing, but working in it for six months, I just, I, for a fact, I already knew this beforehand, but I was like, this nine to five life is not for me.
So I kinda got out of that as quick as I could and jumped into real estate. Full-time so use the advantage of having the W2 income. I always say the T4 or W2, whatever, but use that to get some lines of credits and mortgages and all that sort of thing. And then I'm like, well, I got to get out of this and do my own thing. So, and actually started during that job is when I kind of started my whole Instagram page and started to really get involved in the networking and creating that credibility for myself, for
Jesse (6m 36s): Sure. And I mean, like, just for those that, that are living under a rock, haven't seen your page, I think it's your summit 215,000 followers on Instagram, just as an aside. What was that like just, you know, from you posting your first stuff. Cause I I'm, I'm almost positive. Maybe it was a year or two years, but I don't think you were at that level yet. So what, how did that kind of, how did that evolve that, you know, everything you started posting?
Brittany (7m 2s): Yeah. Well, that's a good question because it is really hard when you first start out because it takes so much time to it's trial and error and it's a lot of consistency. It's hard because you can't really see the long-term benefits when you're first starting out. And you're like, this is just a lot of time and frustrating, right? Because it's not getting the engagement and you don't really know what to post super own. Sure. But for me it was just that trial and error. So I, when I first started, I actually had a mentor. I was at a real estate kind of meetup, super new. I think I had three properties at the time, but a mentor told me, you know, you have to do something as a new investor, you have to do something to create credibility for yourself.
So he suggested, you know, starting a blog or a newsletter or an email list or something like that. And so that's what I did. I started a blog and I called it little investments on the Prairie's. So, cause I was buying these little property. That's pretty cute, but I'm not writing, isn't my strong suit. So I try to take me so long to write up these blogs and it wasn't really gaining a lot of traction. So I started, I didn't have Instagram beforehand, but I thought, you know, I really liked the photos and the videos and that sort of thing. I always kind of had that artistic kind of sense, I guess.
So I started with Instagram and I named, I think I had that name for my Instagram as well, little investments on the Prairie. It was just super long. And I'm like, okay, I'm not getting anywhere with this. And then I saw a girl, her, her handles thought it was girl. And I'm like, how would invest a girl best to grow Brit? And that's where that kind of started. So it was a little, a little bit trial and error and figuring out what works. But I do suggest for people to have their, their first name or something to do with it because now when people type investor on Instagram might have wanted to come up.
So I love having my first name, but also the word investor in there. Cause that's what I'm all about. So yeah. And,
Jesse (8m 51s): And it's, I mean it is, is I think it's topical and it's important. You mentioned where the credibility pieces, because you just see so many people in our industry online, you know, you don't know what I can only imagine at this time, like I started investing, you know, the same, roughly the same age you were, I was 19 turning 20. And at that time you had magazines, you had like a few magazines, BiggerPockets was in its infancy and now there's so much information and you don't really know, you know, what to, what to really go to what's credible.
So having that credibility building, whether it's an ebook or like, like you said, you started a page. I could totally see where you're coming from the blog. I feel like it's a lot of effort with potential, you know, not exactly a lot of, if there's not output from the blog, you'd be like, why am I doing all this? This is a lot of
Brittany (9m 40s): Work. Totally, exactly. And what's good about Instagram is the stories too, where people can really get to know you as an individual and see that behind the scenes. So when I was renovating properties, it's not fun all the time, you know? So I try to show all the ups and downs and, and get in bed to, to invest in. Cause that's relatable. Cause it's the truth about it. It's not all fun all the time and highlight reels. It's actually, no, this is real life and this is hard. So I think, I think that's, that's a good way to go about it, to just be your authentic self and not trying to be any, you know, like show, tell people what your goals are, what you're trying to do and, and just grow your network that way.
And people can really start to relate to you.
Jesse (10m 22s): Yeah. And I think there is something about Karabakh Backman, who was, who was on the, the show last year. She does, you know, has DIY projects as well. I think there's something about just humans in general, when you see the before and afters, regardless of it's, you know, weight loss, or if it's a real estate fix and flips, there's something about that that were like, it's satisfying seeing that. So I think like you hit a perfect niche where, you know, you have a education, you have investments that you're doing, but you're also seeing a product and what it potentially could be
Brittany (10m 52s): Totally. And it's, it's that transformation like any good movie or story or anything it's like, the character is not the same at the beginning as they are end, but you know, it's that real life situation and people are kind of looking for, for some somebody to connect to. And that's why we have our little drugs as real estate investors, I think, cause it's, it's difficult to stay motivated all the time when things aren't going always the right way or, or you want to be able to celebrate your wins with people. And yeah, I think it's a really good way to do it.
Jesse (11m 20s): Yeah. I have a mentor of mine that he's always saying, you know, tell, you know, teach in stories and explain in stories and when you really grasp it, you're like, wow, it does, you know, when you hear somebody talking like that, you initially, you know, you're engaged because like you said, it's a journey. I don't know if it's, I think it's just a human tendency. So you start down this path of doing DIY projects, maybe for listeners, you could pull one of the, maybe not the first one, but a one in the past that you did, that was kind of your first foray into that world.
And what were some of the challenges during that time?
Brittany (11m 59s): Yeah. So lots of the renovation stuff was, and I would go out. So even during the power engineering job, I'd drive four hours out to a property and then stay there over the weekend, renovate it and then drive back home like four hours back. It was a lot, but it was, it was something that I just, you know, is that sacrifice you kind of honestly have to make if you're a new investor and you're just trying to get in the game. It's like, okay, do I have to, because a lot of people also get stuck in an expensive market. So I was looking outside of the market just to see, okay, what makes sense?
This, this house cost $40,000 and it's going to bring in 1200 a month. So, you know, that's go for that. And it was kind of just always looking, not knowing exactly all the answers, but, but finding the ones where the numbers did make sense and then being able to, so it was kind of going and Burr was the main strategy at that time. I've moved more into the commercial real estate stuff now, but, but with the single families, it was all bird projects. So it was get in there, renovate them, build up that equity and then rent it out, pull out that money and then move it on into the next one.
But a lot of these projects too, it was just, you know, how can I make this work? There's always rope, roadblocks and things problems happening. So it's okay. It can get a mortgage for this $40,000 property. But I asked a whole ton of banks and they said, we can't give you a mortgage for this. These are the reasons. But what I can do is give you a personal line of credit for $75,000. I think it was. So it was a $75,000 credit they gave me. And so I was able to purchase the property and get a renovation costs and then refinance after that. So it was, it was good.
Like there's just, I feel there's always a way there's always a partner bank or someone else to talk to, to get the project moving forward. Yeah.
Jesse (13m 39s): I think if, you know, even one of the deals we're doing right now, we're raising capital for, and you know, even when it's on the goal line, you've closed or sorry, your all the deal sort of the APS, the purchase and sale agreements finish, you have your closing date everything's should be smooth sailing. And then there's always something, oh, we have an encumbrance, oh, there's a lien. Oh, we just did title search. And I think it's as investors, you do that once, twice 20 times, you start just, you know, that one thing you can expect is that there's going to be something that comes up that you're going to have to handle.
And if you can't do that, you're probably in the wrong industry
Brittany (14m 12s): And it just gets easier over time. It's like those problems. Cause I think back to those days renovating the property and it was so frustrating, you know, learning how to do these renovations and all this stuff. And then all this pro tenant ruin this flooring or something like that. And then it's so, so overwhelming. And, and then, and then you look back at where we're at now and those problems are small, but you can't see it when you're in it. So I think that's just important for people to know if you're just starting out or you know it, and it's just new, new levels, new problems all the time.
Professional problem solving problems. Yeah, exactly.
Jesse (14m 49s): I was having this like joke or debate with a few of my buddies and we were talking about just, you know, what you would leave for your kids. And something came up, would you leave a property to your kid? And, and we were talking about smaller prop properties if you had a kid. And I was like, somebody brought up the idea of it being a gift. And I was like, honestly, you give a rental property with a bunch of headaches as a lesson to your kid. Not as a gift,
Brittany (15m 14s): That's a good plan because
Jesse (15m 15s): I was, I mean, it was the same for me at, at, you know, 19 20, 21, maybe a couple of years older where you're learning how to do things that you would otherwise not have had to do. What's a S what's a C trap. Why am I doing, why am I mudding? Like everything to do with actually fix, fixing up? Because the reality is if you buy single family houses in the beginning, you are doing things that you can outsource as much as you want at that point. You're, you're going to actively do things in the property. And it sounds like for you, you took it to the next level and you're actually doing the brewer strategy and like going in with the idea, I'm going to add value to this and refinance.
Brittany (15m 52s): Exactly. Yeah. So how has,
Jesse (15m 55s): How has your portfolio, or what you're doing now, you mentioned commercial real estate. How has that evolved over the years, Brittany?
Brittany (16m 3s): Yeah. So got up to, you know, a few single family duplexes and then the last purchase was apartment building. So 27 doors now, and those are all in Canada. So those it's been great. It took a while to get the process of handing everything over to property management and getting bookkeepers. But I read a book called who not how, I don't know if you've heard of that one. Dan Sullivan. I think Dan Sullivan's author Benjamin Hardy. Yeah. So I love that book and that really changed my mindset along with some mindset coaching and stuff like that.
So it's just kind of getting myself, cause I kind of did get stuck in this DIA DIY mentality. And I was like, I just love the work. I'm going to do this every day. But I was kind of just in my comfort zone, but I, I always had this in the back of my head. Like, no, I want to expand. I want to do more. I want to scale, but it's really hard to scale when you're and I was tying myself to the property cause I was building myself into this job of having to do renovations to the property completely. So I was living there. I was like sleeping on the floor and all the drywall dust.
And I was like, okay, this isn't working for me anymore. It was awesome at the time I was so glad I got started in that and learned so many lessons, but it got to a point where it just, you know, I just had to make a mindset shift and I was reading who, how do mindset coaching and all this. And, and it wasn't what I wanted. I was telling myself that, but it wasn't actually truly what I wanted because the main goal in real estate was that time and location freedom. And I wasn't, I wasn't doing that for myself because I was just doing renovations all the time, every day. So I still like to do the DIY stuff and I love that kind of work.
I love being hands-on, but that's more of a hobby now for me, rather than just my main real estate investing strategy. So, but it was really curved. Did Joe or good too, I guess. I don't know. It's kind of funny. It's like when you started real estate and then it was really difficult and then you get to a plateau like, oh, everything's easy. And then it's like, I don't want to scale. And then you could try to get to the next level. So that's kind of what I've been transitioning into, but it's been, it's been awesome. So yeah,
Jesse (18m 9s): I, I think it's for people that have been successful too, it's like everybody, or nobody's immune to feeling comfortable. And even though your comfort in flipping houses, might've been way out of somebody else's comfort zone because they hadn't gotten to that level or maybe didn't want to, you know, that wasn't something they wanted to do, but then you get to that level and you continue to do it for a while. And then yeah, like you said, you get comfortable and you have mentors or coaches to constantly push you and be like, well, what do you really want to do? And I, I totally hear your point of, you know, we talk about freedom and not having a job.
And then all of a sudden we're busy. We're the busiest person we know.
Brittany (18m 45s): I think, I always think it'll always be that way because you get to this point for a reason because you are that way and you're like, let's go, that's progressing, moving forward and, and the trial, and then you just start to, you know, want to do more bigger projects, but you want to be able to have the choice of it. I think that's where it,
Jesse (19m 4s): Yeah, it was just reminds me of the matrix, the illusion of choice. Yeah. So the 27 doors in the great white north tell, tell us about
Brittany (19m 13s): Them. Yeah. So mostly in Saskatoon is kind of the main hub. So I have a few duplexes out there and then kind of just went all surrounding areas where the cashflow made sense because it was just in, and I always tell people this because people do get really stuck, especially Canadians, I think, cause they're such expensive markets like Toronto or Vancouver. And then you really have to kind of look into those other areas like Saskatchewan, cause there's lots of industry there there's, you know, tons of renters and not a ton of nice places to, to rent.
So that was kinda my thought process behind that. It's like, okay, create this really nice rental in this smaller area, but it's, there's never a problem with vacancy and there's no appreciation, so that's the trade, right? Like there's a little bit through the forced appreciation with the renovations and then a little bit of, you know, passive appreciation as well with the market, but it's not a ton. So it's a different strategy between Vancouver and in Toronto and those types of areas, but then still it's solid cashflow. Yeah.
Yeah. So I think that was kind of the thing. It was just kind of looking at these smaller centers, seeing where there is heavy industry, but a lot of the workers, like for example, the apartment building, that's 14 units, there's a ton of transient workers. So they're there for maybe a year or two and they don't want to buy a house because why would they buy a house if they're not going to be there forever? So they're kind of just not committed to buying a house, but they will pay top dollar for rent, like same as city prices, but you know, could buy the apartment building cost 450,000. So for units, and then, you know, now some of the bachelor units are getting, I think it's 850 rent for a bachelor unit.
So yeah. But yeah, and then it takes care of all of it too. So now I'm just like, yeah, free.
Jesse (21m 4s): It's so true though. Like the 450,000 and like, you know, you, you move into some markets and that's how much it is a unit. Like you go certain, especially smaller multi-family in Toronto. It's I tell people that come on the show that if they're from New York, they can kind of understand if they're from San Francisco, any of those really extremely hot markets, Vancouver and Toronto would be in that same category. I'm curious. So last time I was at west, it was no boarding out in Whistler, so I didn't get a chance to stop and, and in Saskatoon, but I'm curious out, out in Western Canada, are we starting to see more manufactured housing that, you know, everybody in the states that comes on my show has either something to say about manufactured housing or is that investing in it?
Brittany (21m 49s): Hmm, no, I don't really do much of that now, especially right now I'm kind of focused actually more on the U S market. So I haven't really been that involved in actually dosing actually.
Jesse (22m 1s): Yeah. Right on. So for yourself, I mean, just on that point, looking at investing in the states, what are, what are some of the opportunities you're looking at right now and what do you think, you know, we have in store in the next year or two, just in, in that regard and opportunities?
Brittany (22m 17s): Yeah. Well I'm really, really excited right now because so through, you know, actually through social media and online and everything I got on bigger pockets podcast. And so that was a few years ago now, but I created some really awesome connections and, and really great friends. Some of my best friends, I met through bigger pockets and going to a Maui mastermind that Brandon Turner hosted. So he just kind of picked 20 people out of his fall or people that he was following on Instagram or whatever created this little mastermind group. And that's where I made some really amazing friends.
And, you know, I have, I started to focus this year, just on my strengths. What am I really good at? And you know, my reach through Instagram and everything like that and partnering with these expert operators because ADA Osborne, which is where I'm at right now, I'm in Boise, Idaho working with AGA Osborne. And he's an incredible operator and industry leader in self storage. So they have, you know, over a million and a half square foot of storage right now and they're just rapidly expanding their portfolio. So I'm kind of on the acquisition side of it.
It's, you know, reaching out to brokers and my Instagram audience and everything, looking for self storage facilities to either do value, add projects with or development site as well. We're working on a big development hero in Boise. So that's going to be started right away. And I'm just really excited about it. So being on a team, cause I was always, you know, focused on is working on like, oh, like kind of doing, I was like DIY everything, all, all of it. But now what I realized is what I enjoy doing.
What I like doing is the collaboration and working with these incredible operators, they already have all their systems. They already have, you know, amazing network, like everything all sorted out. So what, what I'm doing is bringing investors into these projects and helping with acquisition side and everything too. So right now it's been like self storage, everything. So there's a ton of opportunity in that right now. What's cool too, about storage is that the fragmented market? So 72% of the self storage facilities are owned by mom and pops.
So it's funny. Cause I was, I actually had a self storage facility, I think a year ago under contracting in Canada. But what I was doing is just kind of going around cold, calling a bunch of owners and just saying, you know, it's funny cause you call the number, doesn't it don't pick up. Like they don't pick up. And then once in a while they'll pick up like, hello, I'm like, oh hi, I'm looking to rent a storage unit. Oh yeah, let me just call you back. Sure. So that's not managed correctly. And then, you know, you make an offer and go from there.
So that's, that's, what's pretty cool about self storage and you know, a recession recession resistant asset class as well because even through COVID, it's just performing super strong and there's a lot of people moving and there's a lot of people downsizing at this time. So storage is very needed during this time, but it's been one of the, you know, growing asset classes the last 20 years. And there's a lot of, lot of opportunity with that fragmented market if you're able to go in and really expertly turnaround the operations.
So it's immediate value add with the existing facilities with through operations.
Jesse (25m 33s): Yeah. We're seeing a lot of, a lot of self storage. Sorry, sorry to interrupt
Brittany (25m 37s): There. Continue.
Jesse (25m 39s): Yeah, no, I was just going to say we're, we've been seeing, I think it's everywhere. I think a self storage is one of those areas that there's just a lot of attention and I think you're absolutely right. It's there's just a large percentage of mismanagement, I think where there's operations, like you said that you can immediately add value. I'm pretty sure Aja is also speaking actually quick shout out to your speaking at BP con 2021 new Orleans. It is happening. I'm speaking as well. And I'm pretty sure AIG is as well. I think he's on some sort of panel maybe talking about self storage.
So yeah. So there's that there? So as a, as a, I guess in this case, somebody that's investing from outside, cause you're on a visa. Is, is that any different in terms of how you invest? Do you ha are you creating a different structure for the investments when you go in with operating partners?
Brittany (26m 34s): Yeah. So right now I'm on a working visa. So for me it's a little bit different and I still have a company in Canada, but I'm actually employed now by Cedar Creek wealth, which is a data company. So I'm employed through them and I'm able to make my positive investments. It gets a little bit complicated. Like the syndication side is easy. Cause you can invest quite easily as a Canadian. You just have to set up your holding company and then it kind of goes through that way. And then you save on taxes, but I'm not trying to give tax advice. So that's the disclaimer, but that's how people, so I have quite a few Canadians now as I was presenting these opportunities to my audience, like quite a few of them are Canadian.
So it's just, it's, it's awesome because there is so much margin with returns, especially in storage. So I mean there's a lot of opportunity for investors as well and Canadians as well. Cause I mean, yeah, I guess people do, I'm like everybody can join
Jesse (27m 36s): These, the self storage. Cause we've, I mean, we talked a lot on the show about, you know, different syndications, a limited partner, general partner type structures, the self storage are they, are they structuring them pretty much similar to other real estate investments where you, you have an operator, you have multiple limited partners or are you doing something different?
Brittany (27m 57s): Yeah. That's pretty much how it's been so limited partnership. And then it's, it depends on the deal. So we do both right now, the development deal was structured a little bit differently, but then from the existing facilities, but yeah, it's a 60 40 split. And then we have a waterfall structure after the investors for this specific deal, it was after 120% return. And so the investors get their returns and then it splits the waterfall structure happens.
So it's turns from a 60%, the LPs to 40% of LPs. And then yeah,
Jesse (28m 34s): I have a, basically a preferred return built in and with each, each IRR or each percentage return, you have a different split for, for
Brittany (28m 43s): Exactly. And we're getting into it cause so AAJ has not done a ton of syndications that he just recently started to cause they're rapidly growing their portfolio and have so much on the go. And there's so much opportunity right now. So that's when it pretty much just started with the syndication side right now. And that's where my role has kind of been as well. So it's just kind of a whole new thing where we're, we're getting all, we're trying to get all of these investors in because it's so fun to be, you know, providing these opportunities to people.
So I've, I've had a lot of fun with that as well because you know, starting my Instagram page too, I never thought I'd be in a position where I could like provide these opportunities to people and it's like, wow, this is crazy. You're like I have the funnel. I know do these massive deals together. So yeah. Yeah. Definitely fun. Yeah,
Jesse (29m 35s): No, that's really cool. And I think the, just the private placement or the exempt market has been blowing up, it's always, I mean, it's been a big part of the market. I don't think a lot of people that aren't in our industry or say the movie industry or oil and gas realize how so much money is raised through just private placements and, and that's the market that oftentimes that we're dealing with. But I think it's something that is really blowing up. I know for, you know, Canadians the fact that we're hearing about syndications and more and more people doing them up here when we are pretty conservative, when it comes to investing, I think is just kind of an illustration of that.
So in terms of, you said you're in Boise right now in terms of the geography that you're investing in right now, is it focused on one specific market or are there a number of markets that you're looking at?
Brittany (30m 24s): Oh, looking all over, especially with storage, there's opportunity all over the country. So looking for a population in a that's growing 30,000 people plus, so kind of looking at that. So there's lots of options there, but yeah, we're kind of all over focused in Texas, Oklahoma city, Kansas city. Boise's an awesome market. That's where new development project is and it's just growing like crazy, so super hot markets and, you know, looking for that.
And then we, we have a lot of different ways. So I'm, I'm getting actually a lot of people sending me deals through Instagram, we've been in and we're looking for a storage facilities, 60,000 square feet plus, and you know, so and value add. So if there's any problems that we can solve, we're pretty good at solving those problems. And then we're able to turn them around pretty quickly. So that's kind of what we're looking, we're open to really any market, but as long as we, you know, we go in and do our deep dive of course, but it's, that's kind of the general criteria.
Jesse (31m 26s): Nice. So I can only imagine your inbox is just probably hammered on, on Instagram.
Brittany (31m 31s): I know all the VA's and that's like the other part of it. Cause I need to, you know, I'm in the phase of just hiring people out to help with all the organization of everything as well. So that's been really fun cause I'm used to doing everything on my own, but like this past year it's been definitely awesome to have this team around me and people on my side helping me out and to your point, who not, how not, how exactly changed everything
Jesse (31m 58s): Point there, the team, what is the, what does the team look like right now in terms of the investments that you're doing? So, you know, AIJ, you know, in storage, for example, you know, there's the analytical, there's the operator, there's the market like where do you fall in that? And you know, who are your indispensable team members? You don't have to say their names, but just kind of the roles they do.
Brittany (32m 19s): Yeah. So I mean the ADA's team is 35 plus people. So there's definitely a lot, but then there's the construction manager, acquisitions manager and myself, I'm kind of helping with the acquisitions and then syndication side. So that's kind of been my role and just kind of, you know, getting out cause we do a lot of on the education side as well. So there's an inner circle and you know, there's a lot of ways and that's the other part of it too, because once we get so many deals coming into us, maybe they don't exactly meet our criteria, but we're able to completely analyze them and help other investors out.
If there's people who want to buy these, maybe a smaller facility, that's less than 60,000 square feet. So there's a lot of opportunity in that as well, sharing these extra deals kind of with it, that investors. So, but yeah, there's, there's a big team. They're really incredible with their operations and they have everything super streamlined. So taking Wilbur can flip them round super quick and get things on the operation side happening really fast. Very
Jesse (33m 19s): Cool. So we're, we're almost coming up to the time here, but before we, before we kind of get into four questions, we asked every guest on the show. What I'd like to do is talk a little bit about the current environment that we've been living through, you know, from call it the last year and a half. Just what your experience has been like over this time, you know, as there been some, you know, wins or losses and what you think the opportunities over the next few years are going to be, or is there anything you're doing differently as a result of what we've experienced?
Brittany (33m 54s): Yeah, well I think for me, it all my rentals have, I had a few, you know, tenants to work with who lost their jobs here at COVID. And so helping them out, you know, get things kind of a little bit more on track with them. But other than that, everything has been pretty stable and it's been a little bit, you know, it has been a way different year for me, but not really due to COVID. It was more due to my mindset expansion and trying to get into the commercial real estate space and working with expert operators who, you know, they, they know every single little detail and I'm like, okay, I can team up with the people who already analyzing every single little detail about everything there is to know, and if I can team up and help them with, you know, what I'm an expert at, that's where I kind of want to be.
So it's been really fun connecting with these other operators in the spaces, but we're just, there is a lot of opportunity right now. There's a lot of changes happening with, in the states and everything with the 10 31 and there's all the talk of everything, but it's just kind of adjusting and pivoting and, and not being kind of intimidated, but just kind of analyzing and knowing, you know, we can mitigate a lot of risk in that way just with our experience, but yeah, yeah, for
Jesse (35m 10s): Sure. I think it's just a matter of kind of being prepared. There's really nothing we can do if, whether it comes to capital gains 10 31 exchange, which as, you know, we, we don't have here, so we're just roll our eyes. Okay. You're going to lose it potentially. Very cool. So Britney, we ask guests on the show, we've touched on some of them, but pretty much four questions, pretty, pretty softball questions, everybody at the end of the show. So if you're game for that, I throw them at you.
All right. One thing that you know now in your career that you wish you knew when you got started at what was a young age of 18.
Brittany (35m 50s): So I think starting to build that credibility for yourself, you know, getting out there, building your network. I think that was a huge for me and I didn't see it at the time, but now I can definitely see how beneficial that is. So getting out there and starting building your network, you know, there's so many places you could go online and start posting in groups and everything. Even if you're a new investor, just get started now because it's intimidating posting. If you feel like you don't know what you're talking about yet, it's really hard to post. Cause you're like, feel awkward. Like, oh, I'm not an expert yet, but just start as soon as you can because people kind of connect to you no matter what stage you're at.
Jesse (36m 27s): So you touched on it a little bit earlier. I think everybody's on the same page when it comes to mentorship, especially in our space, but your views on mentorship and maybe in the context of, you know, younger people getting in the industry, you know, what would you say to them?
Brittany (36m 42s): You have to prove yourself because I think there's a lot of people that just take, take, take, they want one while all these things, but you really have to get out there and provide. So for me, you know, when I was starting, my, I didn't even have a thousand followers, I don't think. And I was posting on Instagram listening to bigger pop cause I was talking to my mentors and saying, oh, listening to BiggerPockets. This is what I learned on this episode, tag run and take Josh or David or whoever was hosting at the time and, and, and try to provide value for them by just, you know, shutting up their work and being like, okay, you guys should buy their books.
You guys should do this to my little audience that I had at the time. But then that was kind of gaining this attention. And I was just working really hard every single day and mentors and people, they can see that they can see the people who are really trying willing to take advice and actually implement it and put it into action. But mentors, mentorship for me has been everything. And I have a lot of really awesome people on my side, but it's through that hard work that they're, they're going to want to help and continue to. Yeah,
Jesse (37m 39s): For sure. I mean, especially with the social media now, if you're a champion of something that you find interested at, first of all, I think it's shines through, you know, if you're excited about it, but also just with social media, you're able to connect directly with that person. You know, it's something where, you know, 10 years ago, if you really liked a book, you could call the author, but now you kind of, you have everything at your fingertips if you want to take advantage of it. Totally. So in terms of, so question number three for you here, you already mentioned who not how, but is there any other resource or book that you, you know, you're using that you'd recommend to any of the listeners?
Brittany (38m 16s): Yeah. Huna has a really good one, crushing it in apartments and commercial real estate by Brian Murray. He was another mentor of mine and a really awesome friend. He's just the best. So that's been one of my favorite books and that really started to change my mindset from single family to commercial real estate. And I do suggest, you know, getting cut cause it takes a long time. Right. So I read that book two years before I bought my first commercial building, but it was always in the back of my head, like, okay, you know what we're going to get started, but just like getting in that mindset sooner rather than later.
Right
Jesse (38m 48s): On. All right. My favorite question, first car, make and model. What are you strolling around Saskatchewan with?
Brittany (38m 58s): Well, I had a Ford, 1995 work van. So that was that that's a good one because that's like a vehicle plus a house. So, and having just sleep in that for years. So yeah, be creepy if I was driving it, but I guess it's a normal
Jesse (39m 15s): Vehicle and Northern Canada. Awesome for listeners, Brittany, obviously. I mean, you're a Google search away. Like I always say on the show, but if people want to connect with you or see what you're doing, see what you're up to in terms of investment, anything really, what's the, what's the best place that they can go to? W we'll put a link in the show notes.
Brittany (39m 40s): So investor, girl grits, my Instagram page, that's where I post most of my stuff. And then my website, Brittany arneson.com.
Jesse (39m 48s): My guest today has been Brittany Arneson Brittany. Thanks for being part of working capital. Thanks so much for having me. Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse F R a G a L E, have a good one.
Take care.
Mark E. Rose is a CEO of Avison Young Commercial Real Estate. He manages all strategic, financial and operational activities of this full service commercial Real Estate firm, which just so happens the company Jesse works for. After holding executive positions at two globally publicly traded commercial Real Estate firms, he served as CEO of Grubb & Ellis from 2005 to 2008 and was previously a Chief Operating Officer and Chief Financial Officer of the Americas for Jones Lang LaSalle also known as JLL.
In this episode we talked about:
- Mark’s Background
- Leading a global real estate firm
- Diversity, Inclusion and ESG
- The Investor perspective in Real Estate
- So called “prop-tech”
- The health of Real Estate industry
- Coworking and Flex Space
- Interest rates and inflation
- Mentorship
Useful links:
https://www.linkedin.com/in/mark-e-rose-b1447724/
https://www.avisonyoung.com
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Welcome to working capital I'm Jesse for galley. And my special guest today is mark eeros. Mark is the CEO of Avison young commercial real estate.
He manages all strategic financial and operational activities of this full service commercial real estate firm, which just so happens to be the company I work for. Mark joined Avison young after holding executive positions at two globally, publicly traded commercial real estate firms. He served as CEO of Grubb and Ellis from 2005 to 2008 and was previously chief operating officer and chief financial officer of the Americas for Jones Lang LaSalle also known as JLL. Mark, how are you doing today?
Mark (1m 1s): Let's go ahead. Well, Jesse, good to be with you.
Jesse (1m 3s): Yeah, it's great. It's great to have you on, we were just chatting. You're now based in Chicago right now, where you're, where you're coming from. How's everything going down there given the last year and a half? Well,
Mark (1m 16s): You know, the good news is the USA has really driven vaccinations to a pretty high level. We are actually residents of Florida, so that was a COVID feet free state to be in for most of most of the winter. So that was all good, but things are getting better as I'm traveling around the country. I've spent some time in Texas. I've spent some time in New York already, and again, the great news is the things are getting better.
And if you want, you know, if you want to be vaccinated, you can in the U S are vaccines available for everybody
Jesse (1m 55s): Right on. Yeah. I think the takeaway for us too, is things are moving in the right direction, starting to get the first vaccines and honestly have to say in Toronto, we're a little jealous north of the border, seeing us seeing Florida and kind of the, the approach they've taken. But at the end of the day, you know, we live where we live. So mark, what we typically do with guests that come on is talk a little bit about your background in real estate, how you got into the industry. I know you got in at a fairly young age, so for listeners that don't know, maybe we could talk a little bit about that and then kind of take us to where we're at today.
Mark (2m 31s): Sure. Probably the, you know, the driver honestly was being in university of 16 and coming out so early, you know, into public accounting, New York started to work for a lot of real estate clients and really got the bug and fell in love. And, you know, at that point, the person that hired me out of school moved over to the bridge Cole pension fund Reed brought me with again at an early, you know, you know, at a young age.
So over there at 23 and by 26, I was the CEO of the company and writing some strategies that are read across an ocean in the late eighties, you know, yielding 3% with CapEx of, you know, 50 plus million needed that that really should be sold and liquidated. When, when back in England you could repatriate the money and put it to work at 14% risk-free in their own currency at that time.
So it was a pretty simple, pretty strategic view to real estate made sense, took British called pension funds team out of us real estate in the early nineties, which bodes very, very well for them. And then that turned into a career where just loved the business, started my own company, sold it to Jones, Lang wooden, and then merged and, you know, led from the U S side, you know, for JLW the merger to create JLL on March 11th, 1999 from there pretty simple move to Chicago was chief operating officer, chief financial officer, chief strategist, you know, at JLL for the Americas, ran the Canadian business for them.
And 2005 had the opportunity to put Robin Ellis back on the New York stock exchange, raise a hundred million for that bring in 400 people, sold that company in 2007 and started working on merging these Canadian provincial companies called Avison young. And from that point on, it's been history
Jesse (4m 47s): Right on. So I've always wanted to ask you this. And I should pause to note for listeners out there. You know, Avison young is a, is my company is the company I work for. So if you hear the saying your boss's boss, I think mark, you know, we run a different scheme here in brokerage, but that'd be the answer to that. I've always wanted to ask you starting university at 16, what's going on there?
Mark (5m 11s): Well, it was a mess. It was a matter of starting early as early as kindergarten and skipping a grade. And I, I would just say this. I had no issues being sick, being 16 in university. I did have a bunch of issues being 13 in high school. Those are pretty formidable years. And when you're going up against, you know, 18 year old seniors, it's, wouldn't recommend it for everybody.
Jesse (5m 41s): It reminds me of the Malcolm Gladwell. You know, most hockey players in Canada are born in January and February. And I'm just imagining starting university trying to compete with, with gents four years older than you.
Mark (5m 53s): Well, you know what, that didn't turn out so bad because I, you know, as you know, I would, you know, played D three hockey and my freshmen, my freshman year, I was 5 10, 1 55. And my sophomore year, I was 6, 2, 2 30. So went from a fairly flea footed center to having to go back to defense because I had to retrain my whole body with that sort of, you know, with that sort of growth with that said, no one touched my goalie.
Jesse (6m 26s): Yeah, well it reminds me too. Of, we went to high school with Stevie stamp goes, he was a year, a year before me and came into high school very, very tiny under size. Everybody said, no chance, no chance this guy's going to make it anywhere. And you know, the rest is history, but left high school a lot, you know, in different shape for sure. So when you first, when you were at Grubb and Ellis and taking the company public at that point, how much experience did you have in the industry? You know, we talked with Mike Emory who was on the show about how one of the most rewarding and stressful times of his life was taking allied public.
Well, what was that experience like as, as a pretty young guy?
Mark (7m 8s): Well, first you had, you know, I really started with a public company, so the British coal pension funds were read. And so 1987, I was brought in to take a quasi public read fully public, you know, so there was an awful lot of learning and that was 1987. We did have the stock market crash that then scuttled, you know, the public process, you know, at that moment that it, but it turned out to be a blessing. And I would just say Jesse, that I, you know, very, very comfortable.
I have been more in the public domain than I've been in the private domain. And one of the reasons why we wanted to keep Iveson young private was to build a culture based company and to have a private partnership where people own something together and put their imprint together. Public companies are great companies, they just are structured a certain way. And you have to have a top-down approach because, because you're not only need to govern, but you need to be able to report out earnings on a quarterly basis.
And that just mandates a certain amount of structure. So really the Avison young piece was in some ways, the first time I was in the PRI you know, you know, the private domain and, you know, I, I just don't see a whole lot of difference other than, you know, a bit more flexibility and the ability to drive a particular strategy that we were looking for, again, as I said, you know, a more collaborative,
Jesse (8m 45s): Yeah, fair enough. So moving to Avison young today, you know, it's been a, a trying year and a half, the, the company that you've built here recently has gone globally. Maybe you could talk a little bit about how, you know, the process of taking a company with the geographical footprint of ax and, you know, multiplying that. Yeah.
Mark (9m 8s): Well, again, you know, let's just say it was a passion of mine because again, growing up in the us at JLL working and running the Canadian businesses and the south American businesses, but starting out in Europe, particularly in the UK for British coal, and then for JLW having exposure to Europe, into Asia, it was really a passion and an understanding of the power of platform, but in a specific way.
So the specific way is it gets very, it's very difficult if you think about it, to get provincial collaboration from east to west Western Canada. Now think of that Eastern Western Canada multiply it by, by the U S Mexico, south America, moving over to Europe. And what you realized is if, and when you can acknowledge that a global company can build an umbrella set of belief, systems of honesty and integrity, collaboration, empathy, and growth, and let that culture drive the business.
Then it gives you the opportunity to let the sub cultures that are around the world in every different country rise up to their highest potential. And what that gives you is something that we talk about every day, which seems to me sometimes that w w it took the industry a little longer, you know, for those of us who understood it for decades, that is your diversity, right? So it's not just gender or racial diversity, but it's gender diversity, racial diversity, diversity of culture and country.
And so when you do expand, you take best practices around the world. We just think that makes for a better company.
Jesse (11m 11s): Yeah. Kind of like, you know, diversity of ideas, diversity of background geography, like you said, in addition to all those other areas, what do you think is the reason that commercial real estate in general has taken longer to adopt those aspects of, of culture,
Mark (11m 32s): Easy, very emotional asset class. And it's an asset class that has been governed by a specific demographic for a very, very long time. Family owned businesses, institutional businesses, as we all know, it's been predominantly white male driven, and there was no reason to change. Right. You know, again, if, if you have the sameness of, of leadership on something that's quite emotional, everybody's dream as to touch feel and own real estate, we have witnessed where folks didn't want to necessarily let everybody in, but that is changing for sure.
And we've got great leaders out there. I, I see a business, a, you know, an industry that's maturing day by day, you know, and so that that's, you know, you know, that's just something that it takes time, it's change management, it's Trent it's transformation, right. And the transformation, you know, I look to probably we'll see the next change in the next, I would have said five to seven years, pre COVID probably three to five years left post COVID where a certain group of leaders will probably leave the industry as a far more diverse, a far more culture-based set of groups who are tech savvy, ESG savvy, you know, will start to fill positions.
And I think that's our next leg up
Jesse (13m 12s): On that point of ESG. It means a lot of things to a lot of people. I think, you know, a lot of people have started hearing that term only in the last little while. W what does that mean to you?
Mark (13m 23s): Well, first of all, if you haven't been bit paying attention to ESG for years, again, you would have done that at your peril, but what it means to us are some basics of this evolution in this maturity that we're talking about. The quite frankly, I thought we really got to a strong foothold late 20, 19, early 20, 20, only to have, COVID sort of push this aside a little bit, but ESG to us is climate change.
It's sustainability, it's culture, it's DNI or DEI. So diversity, equity, and inclusion. And so the things that we're doing and the things that we care about, you know, and obviously since you're, you know, a valued colleague here, you see this all the time. We were stating a long time ago, that open plans were very good for the CFO to reduce the amount of your occupancy footprint to save money.
But the open plan was not particularly comfortable for top talent, you know, unbelievable talent that might've been suffering from mental wellness issues, you know, saying anxiety that needed to be in a different place. Obviously we have been attacking racial and social injustice, and the fact that there's been a lack of diversity, both from agenda and a racial point of view, but I would also throw in that you have the disabled okay.
And our, and our LBGTQ colleagues, you know, we're really, really starting to come together. And all of that falls under ESG, obviously from a sustainability point of view, we have been working on, on that I would say for four or five decades, but once we started to put names, labels, and awards to it, well, buildings green, you know, green initiatives, lead certification, putting labels to it really have allowed it to take form as people aim for recognition for doing the right thing.
But quite frankly, it's been here for a very long time. It just needed to be moved along. Add to that, that carbon neutrality now is just a tantamount to say, you know, to saving this planet. So in our European business, we've already signed up to carbon neutral 2030. I think north America will be slightly behind that whether we adopt 20, 40, or 2050, that's a conversation that's going on, but we will adopt, we have signed up to support the Paris Accords.
We know that we need to make the difference with building better buildings, managing better buildings, making sure that we ourselves are, you know, are executing to try to keep temperature and climate change under, you know, the 2% increase in these are things that are just critically important to work on. But again, in there is also, let's not forget about people and the people, part of ESG is as important, or we write about it.
We talk about it all the time that nobody wakes up or comes into the office perfect. Every day, you have to be mindful of that. It's normal, it's part of life. And so when you're able to embrace everybody's difference, then you start to build a great culture.
Jesse (17m 13s): That's great. And in terms of ESG, we hear a lot from the company perspective, you know, companies talking about it, and I've heard you speak about the investor's perspective and, and making the point that those things aren't disconnected. W w what did, what do you mean by that in terms of having alignment with investors, not just looking specifically for, you know, the dollars and cents, but understanding that ESG has an impact on those fundamentals.
Mark (17m 40s): Yeah, well, investors and real estate investors in companies, obviously Larry Fink and BlackRock have been very aggressive to promote what they think since they are representing many investors in many companies, you know, but it needs to be heard everywhere. And, you know, our investors are better when we sign up to, as we have to ESG disclosures in our financial statements.
So people can judge us and look to us for first of all, that we've made the commitment, but then what have we done? Are we measuring it? This is now in our financial statements. And that's where again, the world is moving to more measurement, more disclosure, so that investors can choose the companies. They're not, not only making money, but they're also making money and improving the world. And I don't believe those are mutually exclusive concepts
Jesse (18m 42s): Right on. So speaking a little bit about, you know, the commercial real estate being a little slow to adopt certain things the last year and a half as GE has basically pushed a lot of people that otherwise wouldn't use technology to the extent they do now using it that way, in terms of real estate and prop tech, what are you seeing that, you know, you're, you're really finding, encouraging in the industry and where do you think we're going technologically, when it comes to commercial real estate?
Mark (19m 13s): So there are a few things in there. The first thing is if you haven't focused, your company transformed your company to be tech enabled or tech led, you are falling behind everybody else. I would say not because we've done it Avison young, but during the pandemic, when revenues were down, because our clients really had put the pause button on transactions and projects that w that, that, that we were building, it gave us the opportunity to focus all of our energy, all of our initiatives into building the industry's leading data platform, data aggregation, predictive analytics, artificial intelligence, over that, as we then continue post the acquisition of trust and September to add the digitization of the visualization of the transaction process, building that into the core powerhouse of Avison young, which is called avant.
And so all those things are happening now, there's far more to come because there are other back office applications, lease administration, things of that sort, but the transaction quite frankly, is going to give way to top talent with relationships, using platform, consultative skills and technology. And that the day of just pure relationship brokerage is coming to an end.
But I want to encourage everybody that doesn't mean brokerage comes to an end. That doesn't mean that transactions come to an end. Our clients are very clear on the value that they perceive and what they want, or strategy and solutions that result in transactions, not just transactions for transactions sake. The other thing here is, as we talk about it, the transformation, the understanding, the technology, we also have to be very, very mindful because you used a word that, you know, I'll tell you right now, I've gotten in trouble with this before, and I'll probably get in trouble with it here, but it's just open and honest and heartfelt to try to help folks there's prop tech and there's PropTech, okay.
Property technology that is embedded in, in your delivery system, or an idea that can transform and create value for our clients. That's awesome. There are thousands of PropTech companies where somebody has a great idea, but limited capital. I am still very concerned about those companies. I'd like to see a process where great companies and great ideas have a place to get funded and keep themselves intact and, and, and on a path to growth and profitability, because what we've seen in the marketplace is bringing great technology to clients, or if it's technology that is quote unquote acquired through prop tech at, at, you know, at one of the end-user levels, it is only as good as the technology sustaining itself and improving itself day by day, too many companies start to sign up a few key clients, but it's still not enough revenue to keep it alive.
And the worst thing that we can do in, in this industry. And certainly the worst thing that we can do as a service provider is bring something that may seem really sharp and really good. But if it's not sustainable, if it can't sustain itself, either through capital or revenue growth, then we're really not helping anyone.
Jesse (23m 12s): Yeah. That makes sense. If we talk a little bit about our industry as a whole right now, mark, maybe starting with the U S and Canada and, and, and kind of going global, you know, again, talking about the last year and a half, what is your view right now of the health of our industry and, and how you see this playing out over, you know, let's call it the, the short to mid term.
Mark (23m 37s): So you have to go. And I, you know, I'm going to ask the credibility for 36 years of this real estate. The real estate period is a gossipy industry. It is a soundbite industry which plays very well to the media these days, but let's take a step back. It is one of the most powerful industries that has ever been created. It is an industry, as we said, it's emotional. People want to own real estate. People use real estate.
If you look at, you know, if there are going to be 10 billion people on this planet next 50 years, if that's going to be the case, and most experts will tell you that, you know, that it is, then we need to build a million square feet of housing everyday, starting today to support that that's a heck of a safety net for the multifamily, the residential business, and clearly support. You know, if you understand the macro issues of population growth, but then you take just the basics, the office, which is the one that everybody's talking about, you know, is the office dead with work, from home work, from anywhere return to the office.
And if you've looked at cycles, and I think the one to look to, if you looked in the us after, you know, after nine 11, it took two years for people to want to come back to trophy buildings. It took two years for people want to be an upper floors. It, it took a couple of years for security to go from the pendulum swinging one way to it coming back to equilibrium. And we are probably in that same place now. And if you just look at our business and let's start short-term right now, anything industrial leasing, our capital markets hottest can be potentially even too hot, but hottest can be multi residential, really good, really, really good, and on a relative basis.
Very, very good. And it's been solid all the way through loan, servicing and debt. Solid people are doing things from that perspective. So what's down while hospitality, retail, and office hospitality. Honestly, there were probably too many hotel rooms right now. If you own a resort hotel, I think you're going to have the greatest summer that you've ever had in your life because people can't wait to get out of it. Their homes and, and resort properties are going to be in demand probably for the next 6, 9, 12 months, hospitality that's centered around the business person, probably going to take a little while to come back.
Okay, retail again, I think overplayed, there are certain areas, you know, again, dip into the U S they were over retailed. Canada was less over retailed, but there also is a change in the difference between showroom space and a fulfillment distribution and et cetera. I do expect that that takes a little bit of time yet. We're starting to see retail capital markets activity. I E some distress coming in that I think can open up the buying and selling of retail.
Although the fundamentals and leasing are still gonna take a little time. So it really comes back and brings you back to office. Long-term rock solid. We're going to have population growth. We're going to have business formation. There's already a massive increase in business. Formation. Midterm looks just like the longterm. That's great. You know what? Short term, we may have another year for people to start to figure out what does the office me, and I'm going to stay on this for, you know, for a moment we have run office space.
Office utilization has been at 40% for decades, and you would quote, unquote, have salespeople they'd come in, but they were never really in the office, but they wanted an office. But when you actually looked at the utilization of seats was 40%. Well, no manufacturer would ever run their business like that. Now I still think there's a need for people to be together. We at Avison young asked everybody to come back the Tuesday after Easter, and we're doing that because we're starting every day. We're getting a little more people back in the office so that when we hit September, most, everybody will be back with a huge caveat where the domain of occupancy used to be either the CFO for cost or the CEO for brand purpose decisions now are even more strategic.
And it's the CFO with the CEO with strategy with HR, and just think about this. Let's say that we all agreed to every Monday, everybody has to be in the office. Every Tuesday. Everybody has to be in the office. Wednesday, you can work from anywhere, be it a satellite office, a flex office. And on Thursday or Friday, you could work from home. Well, think about this. If you came, if everybody came in on Monday and Tuesday, you would have the same 40% utilization.
So I'm not sure that ultimately there's going to be a big change, except for the fact that the big change is how we're going to process this and the strategy that one size does not fit all that city by city company, by company, country, by country occupiers. Now need to say, this is what our strategy is. And we are helping many of those clients from large institutions, stout to smaller occupiers, helping them understand what those needs are.
And as soon as that happens and it's happening, it will again open up for the owners and investors to understand what the ultimate tenants needs are. And that's when everything starts to work its way through
Jesse (29m 47s): From a, a more, I guess, structural level, while we're on the topic of office. Do you see office changing from term lengths? You know, we, we've always seen 5, 10, 15 years as the status quo, even pre COVID. We've started to see more younger users, more youthful companies want flexibility there. Do you expect that that trend to continue or if not get kind of shoved into high gear as a result of the lockdown?
Mark (30m 17s): Yeah, I think, you know what I think in the short term, you will still see headquarters offices and main hubs will still be 5, 10, 15 year leases, depending on what the strategy is. So longer-term leases. I still believe that there will be a subset of, let's just say, older school thinking that other satellite and expansion offices will look like what they've always looked like.
I do think that you're going to see flex used more, the, the hub and spoke thing. I didn't, I honestly didn't believe in it at the very beginning. And I don't necessarily think that's the way this, you know, that this is going to go, will, will businesses accommodate their people with a work from anywhere strategy that could involve flex, you know, touchdown stations.
Could it be that we're going to have landlords that will grant a block of space in any of their buildings for 15 years to, to an enterprise so that you could have certain employees going into a building that acts as a kind of a flex hub for you. All of these things are quite realistic. Now that's really the change. And it will come down to, again, a strategy that the occupier will use as opposed to something that's dictated
Jesse (31m 57s): And further to that. Do you find that this change, this potential change with flexibility is going to run parallel with what we've seen in coworking over the years? Or do you think it'll start crowding out the users in coworking?
Mark (32m 11s): I think that co-working suffered through a year and a half of a pandemic and people questioning whether it's a health concern or not. Okay. So I think coworking has a different view. Ultimately, everybody adjusts. So even in coworking facilities, you're going to have to adapt and adjust what the space looks like to meet the needs of people and their either their anxiety to come in or their once they're in their flex office, I think is something different right back to your question, least lanes.
I mean, like I said, it could be a 15 year lease where you have rights to different buildings in an owner's portfolio, or you might have shorter lease terms with flex arrangements, but I see flex being more of a driver than coworking going forward.
Jesse (33m 12s): Just the, the point on retail, you know, mentioned us, not surprising overbuilt Canada, a little bit more European, but still overbuilt. Do you buy into this idea that there's going to be that creative destruction through, you know, repurposing, you know, older sites into either industrial or residential over the, maybe even the mid to long-term for those assets? Yes,
Mark (33m 35s): Because you have to, there's a change there, there, there there's a change because the fundamentals changed and how we distribute retail properties. And again, I'm just oversimplifying rather than going into the details, but retailers can still grow. Our retailer is going to take more showroom space or are they going to potentially increase their actual square footage, your real estate, but it'd be less showroom space, more distribution and fulfillment space that does look like it will occur.
I think that's a transition and yes, for obsolete retail, B and C malls retail, that's just not placed well for the demographic regions sitting in. Those will need to be repurposed and, you know, life sciences, storage, multi res, they're all fulfillment. These are all possibilities and really smart developers or developers are out there working on this
Jesse (34m 45s): Right on. So in terms of the last time we've had a, you know, a technical recession, whether oh 8 0 9, there was a fundamental difference in that there wasn't capital available than there seems to be capital available today. It seems we see it on the side, on the industrial side. So all these asset classes have to play within this broader economy. What are your thoughts on, you know, we're where rates are right now and keeping them as low as, as they currently are necessity or, or something that we gotta look out, look up
Mark (35m 19s): As, you know, interest rates, having a material impact on, on the real estate industry. I wish we were in to, you know, 2022 already. You know, I know everybody wanted to get out of 2020, but there's equal and equal need to get out of 2021. You're seeing year over year numbers that are significantly above the 2020 numbers. Of course they were, there was a pandemic. We shut everything down in a 20, 20, some places around the world were still shut down in 2021.
When you see the soundbites, the blips, the media clips of inflation out of control, GDP up five, 6% producer prices, more than we've ever seen. Well, yes, those are year over year numbers. Of course they were. We were down because we saw on the downside numbers we had never seen before in 2020. I think once you get to 20, 22 and 2023, you'll see that there is virtually no reason for interest rates to go up.
And it's not just because governments. Well, first of all, governments are going to be hard pressed to raise interest rates based on the amount of debt that has been pushed out there. The amount of liquidity that is in the system is certainly the most I've ever seen in my 36 years. But I also don't believe that after you get past the comparisons of a year, that businesses were shut down as opposed to a year, you know, a year where things open.
It doesn't really look that post that period that there's a ton of inflationary pressures after that. So I'm sure people will take the other side of that discussion, but I'm feeling pretty good that once we get past the initial stage of the, you know, looking at numbers that are big and surprising, which quite frankly, they are big, but they shouldn't be surprising that we will start to see that we are just not sitting in a terribly inflationary period of time.
And that will vote very, very well for, you know, for low interest rates and for alternative investments in the yields that they produce. So, which real estate is one of those
Jesse (37m 50s): Positive for us. I want to be mindful of the time mark, talk a little bit about, you know, what the future holds for Avis and young. But before we do, I just want to briefly ask you your thoughts on mentorship right now, and, and in the context of young people coming into our industry or any other industry for that matter, I can only imagine coming out of school at this time and, and trying to navigate, you know, what you're doing in your career, what are your thoughts on that and what people should be doing?
You know, if they're not already and you
Mark (38m 22s): Know what, you know, again, I'm almost sad that you're asking about is this a period of time that we should have more mentorship? I had the benefit of having a great mentor, one of the most people in the finance industry, and he was instrumental in my career and I have paid that forward ever since, even to this day, I have, I believe 16 or 17 active mentees right now, there are people who are friends and mentees who were working for competitors that I still help out.
And I'm always there for them. And obviously industry wide, you know, I've been involved with most of the organizations and their mentorship programs. So I think they should always have been there. And it shouldn't be a question whether folks should have vermin, you know, you know, a mentor program or not, Avison young, clearly has one. We believe in it. Mentorship of all mentor mentee relationships are, are part of our culture, our women's network.
You know, you know, we focus on making sure that both for gender and racial diversity, that there are mentors in place for, for everyone. You could not be doing more for your people. If you're, you know, owner and occupier, a service provider, you could not be doing more than to actually mentor your people. There's a period of time where the adage that people know what they know, and they don't know what they don't know needs to be filled in by mentors that can help people, particularly through anxious periods of the subtleties, the verbals and the non-verbals to pick up during a period of dislocation.
And there are many people who have forgotten more than others know. And I just think that again, if you weren't doing it decades ago, you should be doing it now because to your point, there is no greater time than a period of uncertainty for those with experience. And those who are, who will commit to mentor, not just be named a mentor, but actually commit to doing what you need to do to mentor somebody and get the mentee to commit as well.
It is the greatest growth driver for a person's development and their ultimate career success.
Jesse (40m 60s): Yeah, couldn't agree more. All right, mark. Well, we're kind of wrapping up here. If there's anything you want to just add here from Avison young Avison, Young's vantage point things on the horizon that you want people to know about, you know, what, what is the world at AYA having store, you know, for those in our industry and abroad?
Mark (41m 20s): Well, you know, Jesse, we've been very good of not necessarily telling anybody what it is that we're doing. We just do it. You know, everything we do is per strategy. There was a strategy built on the day we started in 2008, launching this growth plan into the teeth of the recession. There have been updates to the strategies, you know, over and over again. And I would just say, watch for more of the same from us, we still believe that there are regions that we need to expand our platform into.
There are service lines that we need to continue to fill in. If there are any gaps anywhere around the world, we are very excited about things like working with impact, which was a company started by Nelson Mandela and their commercial real estate division is now part of Avis and young in South Africa. So we've now brought ourselves sub Sahara and to go along with the north American and the European businesses or offices and soul, you'll see us expand throughout Asia.
But the focus for us is very clear. Our clients are demanding value. They will pay for value. They'll pay slightly less for commodity and consulting led and tech led approaches to solving the needs of our clients that are embedded in a people solutions business. It's been very clear what our clients want and we are going to do to deliver the data and the solutions that support the action items to then overachieve the objectives of our clients.
That's what you can be looking for. Okay. And so there's a lot more of everything you've seen us do. There's a lot more of a kind of
Jesse (43m 19s): My guest today has been Mark Rose, mark. Thanks for being part of working capital,
Mark (43m 24s): Jesse. Great to be here with you and thanks for doing this.
Jesse (43m 37s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse F R a G a L E, have a good one take care.
CPI Capital has developed a reliable system for investing in multi-family properties in strategic markets across the United States. Our offer to our valued Investment Partners is an opportunity to invest in income generating properties with considerable value-add prospects. With decades of real estate experience and over $100M in real estate transactions, our team understands the time and effort required to create generational wealth through real estate. Transcript:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Alrighty. Hope everybody is doing well. My name's Jess for galley. And this week I thought we would do something a little bit different. I was a guest on a show called CPI capital a little bit about my background in real estate from student rentals to assignments, condos multi-family and brokerage.
If you find that at all. Interesting, I think you're going to like this episode, I think we touched on a number of things and they had some great questions. Some of them admittedly completely caught me off guard, but anyways, I hope you enjoyed this episode and we'll see, on the other side,
Ava (59s): Everyone, welcome to the Canadian passive investing show. I'm your host, Ava bene Saki, and I'm joined by my cohost August. Muniez we have another great show for you today, please, please like, and subscribe as it helps us build our channel and allows us to keep bringing you great content and expert guest speakers. Our mission here at CPI is to empower investors, to create financial and time freedom through passive real estate investing. And today we are joined by Jesse for galley.
Got it. Welcome Jesse. Welcome Jesse.
Jesse (1m 34s): Hey everybody. How's it going
Ava (1m 37s): Now? Jesse, Jesse is a commercial real estate broker and investor that started with student rental properties at the age of 19 as his passion for investing grew. He started investing in single family homes and condos. Then he transitioned into multi-family apartments. So today he focuses on operating and raising capital for commercial real estate. So we believe Jesse is going to bring immense value to our audience to make strategic investments in real estate. So Jesse, let's just jump right into things.
If you could start off by telling our viewers a little bit about your background and your involvement with real estate investments, please.
Jesse (2m 13s): Yeah, no problem. And I'll, I'll try to hit that high bar there for you guys. I got started in real estate in college or university bought my first rental property, went to a university in Waterloo. It's about an hour and a half west of Toronto. You know, if there are us listeners, it's kind of Canada's Silicon valley. So a lot of good entrepreneurial spirit out there. And yeah, my first investment property was, was wa wa was Walla, was in school. I saw that I was living with a friend that his father and him went in together on the property that I was actually living with.
So w I saw myself and friends of mine paying rent to another friend and started to realize that it was a great area to invest. And I kind of had a, somewhat of a background in that. My father who's also extremely entrepreneurial and my mom was well, they had a family friend that had a number of single family investment properties. So at a really young age, I'd always ask, you know, what does Mikey do? He doesn't have a job. What is, what exactly does he do? And that kind of got ingrained to me really young, so long story short.
That's how I got into it. This is probably now I was 19, 20 years old. So we're talking about oh 8 0 9. So you don't think of oh 8 0 9 as when you're going through it as a significant time. But looking back, obviously we know now it was a, it was a pretty historic time for the economy and yeah, I mean, going back that far, what I was doing was reading Canadian real estate magazine. If you guys remember that magazine, you know, bigger pockets I think was in its infancy, there wasn't resources, there weren't resources everywhere.
And yeah, that, that was my first, first property was a $250,000 student rental property with five female tenants that I pretended were a lot younger than me, but I really was, was young and trying to try to figure it out.
August(4m 8s): Great. Yeah. I guess timing, timing is always important rate too. You know, they say luck, isn't it. Mathematical equation is when timing meets opportunity. So you jumped on it. That's great. And also, also another item is here in Canada. I mean, a lot of information and content comes over from the, from the U S where you could buy a home in Texas or Arizona or Florida for 300,000 or 250,000. And you can rent it for around $2,000 a month. So you're, you're already cash flowing from the day one, but in, in here in Canada, especially in the larger cities, Vancouver and Toronto, their rent to value ratios are very low.
So that, and the kind of also the entry level to, to get into a single family home is very difficult as well. So talk to us about, you know, early on in your career as a, you know, as you were starting in real estate investing, how did you overcome that particular hurdle to, you know, with the, with the high mark of, you know, the high bar of entry with the low rent to value ratios and also the rigid mortgage laws, our mortgage laws are much more difficult than the U S so
Jesse (5m 8s): Go over there. Yeah, it's funny. I just jumped off my podcast with a, a mortgage commercial and residential mortgage broker. And we were talking about some of the differences with Canada and the U S and, you know, we have the portability of mortgages talk to an American foreign concept for them a 30 year fixed rate. They have that foreign concept to us. So a hundred percent to your point about Toronto Vancouver, I think, you know, I say those things together in every sentence on my podcasts that we're talking about expensive markets at that time, the property, I know what just offhand, because you always remember your first property, the gross rent was approximately 2,400, so $250,000, 2,400 in gross rent.
So, you know, if you go use a 50% rule as your expense ratio, pretty decent property, if you found those types of numbers today, especially our markets you'd jump on them. So it was still relatively affordable in certain markets outside of the, like the, the downtown cores, but yeah, a hundred percent, it was something where you really had to go look for value, adds student rentals still to this day. You know, the valuations are a little bit different. Cap rates are a little bit higher.
You can, you can find those deals, but they're becoming harder and harder to find. So, you know, whether you're in New York, you're in San Francisco, you're in Vancouver, Toronto, you really need to think outside the box. You start, you need to start looking at, you know, the 18 hour cities or the cities towns hour or two hours may be more outside of your general area. But I was lucky at the time. Well, you know, nine, there were still a bunch of deals that were still in our Canadian market. And to your second point about the mortgages, I think at the time I was in the five and a half fixed percent range.
And back then, if you guys remember 5% down was still pretty doable, five, 10% down. Now, when it came to student rentals, there was only a few banks that would lend on those. So that's where you had to start, you know, getting more creative with the financing. But at the time I think it was five or 10% down. I went to my dad and asked, so I had a little bit of cash because I worked summers. I said, listen, this is an awesome investment. Do you want to, do you want to sign on this line of credit so that I can, I could purchase it, gave him the numbers.
He said, absolutely not. You know, my, my parents were divorced. So what is, what does a kid do? He goes to his mom and says, dad's not signing this. So for me, that's, that's kind of how I got my first start. And I always tell this story because I feel like people, you know, when they talk about how they got started, you, you it's always fuzzy. How did the money happen? And I just like to say that everybody you go to the resources you have. I, you know, I didn't, don't come from a very wealthy family, but they gave me every opportunity, you know, family, predominantly immigrants, very entrepreneurial.
But what that allowed me to do was she signed on the guarantee for the, for the line of credit, which added to my down payment, which allowed me to get the space. And then when the second one came around, because I continued to invest in student rentals, then I had, you know, I had a case that the next one, when I partnered on one of them with my father, or I could say, Hey, this is, this is how the business has been doing for the last year and a half or two years. So yeah, that's, that's kind of the background and
August (8m 32s): You build that track record and you were lucky enough to have parents who helped one of your parents. And he was like, finished school, finished school, then we'll dock. There you go. And you were, you were 19 years old. So yeah, I was,
Jesse(8m 48s): Yeah, just turning, just turning 20. Like I, when I put the co the offer in, I was 19, when it finally closed, I was 20.
August (8m 57s): Great, great. And if you could expand on, when you talk about student housing, is that the building or the unit or the home is zone for student housing that you can rent it on for two regular tenants kind of idea.
Jesse (9m 9s): Yeah. So it's a good question because it used to be anything that a student occupies and then what started happening in a lot of cities in the states, and in Canada, you would have either municipalities or cities mandate that you have a student license, you know, we're all big fans of the government. And it was basically, you know, a, a tax that you had to pay to have it licensed. Now, I'm not saying that there isn't good logic for it. There would be, you know, fire code, additional things you would have to do to meet that standard.
But it was also kind of like a, you know, a, a taxi medallion system where, you know, they only would, in, in this particular case, they would only give so many of the moats. So yeah, that, that's how they were kind of categorized in Waterloo. And I know another areas in Ottawa, we have, I still have a couple student rental properties where we're towns are, are kind of talking about implementing that type of thing, but not all towns do. And yeah, so that, that's how it, you know, they'd be categorized as student rentals, some were above board and some people were doing just, you know, without the license.
August (10m 13s): Got it. That makes sense. Just getting back to your point, as far as making strategic investments, and you have to find the kind of diamonds in the rough for it to make sense here in Canada, in Vancouver and Toronto, there are deals, but they're, they're, you know, hard to come by. It's not a scalable business model. It's not somebody, you know, in the U S somebody living in Texas making a hundred thousand dollars a year and they can buy a home for 300,000 and they'd be cash flowing from day one. And, you know, if they do some small renovation and even keep the property, they can, they can, then in a few years, just repeat the same process, buy another property and continue to grow their portfolio.
It's very difficult business model to, to do here. And especially doing a part time, having a, you know, a, a, you know, a job or a profession, and then doing real estate on the, on the, on, on a part-time basis to then find those deals, to be able to be an active investor. So that's an great conversation here.
Ava (11m 6s): So we've, we've we, we learned about what started you in single family. Now, I'm, I'm curious what made you fall in love with multifamily? And when did you kind of start getting into multiple
August (11m 16s): Fell in love with it? Maybe he just likes we're
Jesse (11m 19s): We're we're madly in love. Well,
Jesse (11m 22s): What happened was w so I finished university over that time period. I, I purchased, I believe it was for single family. So these, but these were kind of spread out there. One was in Oshawa. So if you know, Ontario Schwann, Waterloo, they're complete opposite ends of Toronto. And what happened started happening is, and I'm sure you guys were aware of Vancouver was similar where pre-construction condos became a big thing, and this was 20 10, 20 11. I started to purchase those. And what, you know, a lot of people call wholesaling now, or just assigning the contracts.
I did a few times. So w what I did was I kind of kept going down the student rental path. I appreciated a decent amount on a lot of these properties, and then sold them pretty much, not all at the same time, but pretty strategically that I wanted to sell these and have a nest egg to move into the commercial space. It coincided with my job, actually moving from working with the job that I got right out of school to actually a friend of mine kept saying, listen, you'd love this real estate stuff.
You know, what are you doing in your current job? You should be in, in commercial real estate. And I finally got a job in commercial real estate for Avison young as a commercial broker. I happen to work in office leasing and investment sales, but it was kind of through that, where you start really opening your eyes to see what people are doing in different areas. You know, my partner, he also works for the company, but he also is an investor in the multi-family space. Multi-family I think the reason I gravitated towards that is it's just more accessible for the smaller investors that when they get their start, if you're going down retail office, industrial, you know, one, one or two tenants, you could really have large vacancy.
You need a lot of cash for 10 and allowances, tenant inducements. And then the other thing is in Canada. And I believe it's, it's similar in the states, whether it's Fannie Mae, Freddie Mac in the us, or it's CMHC in Canada, there, there are financing products that are more geared to apartments because it's still considered residential, even though it's five units and larger, which lender looks at that as commercial. So yeah. Accessibility for, for lending and yeah, that's, that's how I made the transition.
And we've, yeah, we've kind of focused now, just exclusively on building up the multi-family portfolio,
August(13m 44s): Right? So not only your focus as, as investing changed to multi-family commercial real estate, you, you actually switched your profession to also be involved in the commercial space as a broker. Funny enough, Ava and I were looking at a private equity firm and their principles, and just reading about their bio is, I mean, notice every one of the principals had commercial broker on the bottom of their title, even though some of them, one of them had a PhD, but he still had a commercial broker at the bottom
Jesse (14m 10s): Of their bio. It's funny, it's funny. They there's a lot of people in our industry and NAIOP is a great organization. If you're interested, especially in Canada, in commercial real estate or north America, that's, it covers all areas. But so many of the people that have started their own firms that are CEOs of brokerages or workflow, you know, workplace strategy, it's funny how further back in their career. A lot of times they were brokers or, you know, leasing specialists and really seeing real estate from the ground up.
And I think it's a good foundation as investors, or if you want to have a career in real estate. Yeah,
Ava (14m 48s): Definitely. Great. You got your license. I had my license.
Speaker 3 (14m 52s): Yeah. I couldn't wait to get rid of mine for 10 years.
August(14m 59s): So now I want to talk to you about, let me see, I had a question here for you. Oh yeah. I want to talk to you about, you know, we, we w w w in our research, we are in the space we're in, in Canada and in the real estate of real estate, private equity and, and especially thought leaders in this space who put out content, obviously you came up or you came on on our list. I mean, notice that you are a thought leader in this space. Talk to us about your connection with a bigger pockets and how that came about. Especially one of my biggest complaints with bigger pockets is that most of their content and information is, is a director is for Americans.
And a lot of people do read that information. And now have I have wrong information or information that doesn't make sense. They, they believe that 10 31 exchange exists here in Canada, or that they could, you know, part-time be real estate investors and have 20 single family homes or, or, or other also other compliance verbiage that's that's used in the us, which that doesn't mean the same thing on this at our border, and means something totally different. Something like an offering memorandum is a document provided by a broker to someone looking to purchase a commercial real estate, or an offering memorandum here in Canada is a, is a legal document as security emerges exemption that's used.
And it's a legal document. So talk to us about your connection with bigger pockets and how they came about, and what do you currently do with that group?
Jesse (16m 24s): Yeah, for sure. I think it started from, well, I was on the podcast, the BiggerPockets podcast as a guest years ago. I think that was what started the relationship. I, I really, I don't remember exactly how that relationship started, but it did then. And what it ended up happening is we, we continued communication. Obviously I used a bigger pockets as a resource. And just as a side note for Canadians that are on bigger pockets, even if you have a free account, you can go and put a keyword alerts.
And almost always, I have one keyword alert that is Canada Canadian, us Canada. So like you do get chats that are started specifically about CA Canadian investments. You're going to be pulled into those, into those strings, which, or forums, which is great the way I started doing videos for them. I think Brandon and I, we were talking, or I, I had reached out to him a little while after the podcast. And I had said, you don't, you guys don't seem to have a lot of commercial content, whether that's, you know, industrial retail office, larger apartment buildings, it seems to be focused primarily on single family and, and apartments.
And I said, what if would you guys be open to me doing videos? And he's like, I guess at the time, they're like, yeah, absolutely. It's, we're, we're missing that piece. So yeah, for a couple of years, I was doing videos on a commercial commercial real estate. That's commercial loans, private equity. You're absolutely right though. When you say that, you know, there's that us Canadian gap and a hundred percent it's, you know, you have American her Canadians thinking that they should buy us real estate and put it in an LLC. Okay.
Canada, that doesn't recognize an LLC. You know, you have a certain things, like you're saying what the offering memorandum, you keep hearing, they're raising money for 5 0 6 C offerings that doesn't exist here. So there's all these little intricacies that we need to focus on that when we, when we hear about this type of investment in the states, really need to figure out what that equivalent is up here. And that's what I think we were trying to do to a certain extent there. But like I said, ultimately, as a Canadian, there's definitely Canadians on the, on the forums there, you just kind of have to have to search for it.
But yeah, it's a, it's a really good point.
August (18m 40s): Great, awesome. Talk to us a bit also about your, your own platform. So aside from working with bigger pockets, I believe you have your own YouTube show and podcasts. Talk to us about that in the process and how you came about, you know, starting your show and how it was, how is it going? Yeah,
Jesse(18m 58s): No, it's going great. It's, it's a lot more work as you guys know, then, then, you know, you really realize when you go in, I was just a friend of mine just sent me a stat or a couple stats about podcasts. And it was, I can't remember exactly, but, you know, you know, something like 3% of people go pass episode three, you know, 50%, you know, whatever it is, it's just the consistency. I'm definitely more active on working capital. That's my podcasts. It's working capital, the real estate podcasts. You can get that anywhere, iTunes, Spotify, and the YouTube channel.
I just started putting out like a lot of people, the questions you get asked again, and again, and again, a lot of times it's just easier to make a video, send it out and say, you know, this, this answers it. I think that being on the bigger pockets, realizing that, you know, like when you go on their channel, it's like all of a sudden you have, you know, 70,000 views on something and you can't manage comments like that. So I think for me, it was just like, I didn't realize there was that many people out there that wanted this content. So I try to put stuff up on YouTube as, as much as I can, but really the focus for, for myself is more on the podcast side.
And then through there, you know, people can reach out to me, you know, hear me on the show. And if it's about investing in the future, investing in other investments that we're doing that we're raising capital for. That's where I would say the platform is, but it hasn't been formalized in, in a way where, you know, it's, it's my day job and that's, what's challenging about it. Right. You're, I'm still in brokerage and I don't think I'll ever leave brokerage completely, but yeah, that's, that's kind of where I'm at right now.
August (20m 35s): Yeah. Being a broker is like, you know, the bat, the bat sign put up in the sky when they call it comes in. You've got to go. So yeah, it's definitely a full-time
Speaker 3 (20m 44s): Gig. Yeah. Great.
August (20m 46s): Just to touch on podcast a bit more, what is the podcast mission statement? So what, what problem are you solving? What message are you getting across and what is the kind of the, the final call to action or, you know, the, the, the benefits it has not only for obviously your, your listeners, but also for yourself.
Jesse (21m 4s): Yeah. What I wanted to do is have an educational, real estate investing podcast that where we have guests on, we have them from a range of backgrounds all centered around real estate. So, you know, whether that's a cross border lawyer, whether that's a mortgage broker, whether that's talking to people that are investing in self storage, I wanted to get kind of a round picture of what real estate is and the different niches, or as my podcast guests say, if they're American niches, that drives me crazy, but the different niches in our industry. And through that, I'm what I hope to do too, is when I have people on the show and you touched on it earlier as a Canadian, even though half of the listeners are American, I try every time I can, where somebody is like, well, an FHA loan, and then, okay, well, let's just clarify from the Canadian point of view, it's this.
Or, you know, if they say something like a 30 year fixed mortgage at 3%, and I say, well, in Canada, you can do a CMHC mortgage at 1.6. They're like, that's crazy you at 1.6, because a lot of times you hear, they don't believe that our cap rates are 2.9, 3% in some areas like you're in Vancouver and guarantee some of those office buildings are sub three and they're like, well, our loans are three. It's like, no, no, no, no. Your loans are three. Are our loans are not even though it's still crazy low. So there's only all these little like variation.
So just a long, long winded way to say. What I try to do with the podcast is try to be a north American podcast where I can have Canadians and, and Americans listen to the show and, and feel that they're both getting talked to.
August(22m 36s): Great. Great. So now let's switch the conversation here. Emma has a few questions for you, but let's switch the conversation back to being a real estate investor. As we all know, eventually your real estate investors run out of their own money because they've already deployed it. Or they're looking for bigger projects and a time comes to raise private equity. Where are you at in your, in, in your business currently, are you at that stage that you're, you're raising capital and, and talk to us how that all came about and we can go from there.
Jesse (23m 6s): Yeah. So this year, or I guess the end of last year starting of this year is when I first started to raise capital for real estate. It's, it's kind of a scary thing, which I think is a good thing. If, if you are a fiduciary to somebody else and you're managing somebody else's money, I think you should party. You should be a little scared. I think that's natural that you should have a fear of making sure that you're, you're doing the right thing for your investors. So that coincided with a lot of the podcasts I listened to.
And again, the guests that I've had on my show where, you know, you get connected to masterminds where they are teaching, raising capital or fund to fund model, stuff like that. And again, it kind of goes back to your point of the offering memorandum where like, you know, we sometimes call it an information memorandum. That's more of a brokerage thing than I think a us thing. But yeah, the offering memorandum in Canada, you're, you're talking about legal documents. And the reason I bring that up is the mastermind that I was in was a us centric mastermind for raising capital.
So even there it's like, unless you're investing in the U S it's really challenging to justify what you're spending on that, a mastermind, depending on the cost. But anyways, that got me into the mindset of it, like buying your first property, once you do it once you're like, oh, that I can, I can do that. And that's really what it, what it was for us. Once we started raising capital. So this was the first investment raised a million and a half of equity.
So it's not a huge amount, but it was the first time we ever raised capital it, me and my partner. And, you know, the thing is, there's just, you go through these different cycles while you're raising up. Are we going to have enough? Okay, we're good. No, I don't think we're good. And then it got to the point where we're like, you know what, after it's all said and done, you have subscription agreement signed. You're like, I think if, if I was forced to, I think I could do three, I think it could do five. And I think that's the natural progression when you get used to something and you see that it's, it's achievable.
That's
Ava (25m 10s): Fantastic. And Jesse, I'm curious, what structure do you use to raise private capital?
Jesse (25m 15s): So we do a pretty standard limited partnership agreement. So general partner, limited partner with the caveat of having a asset management company, as part of basically the administration that kind of handles everything. So for those that don't know the, you know, the limited partners are all your investors. They have limited liability. This is not legal advice, but they have limited liability in these investments. The general partner in Canada partnership can not own a real asset that they can't own a property.
So you need to have sometimes a numbered company or a GP. The general partner as a corporation oftentimes owns the property has title, but the limited partner has a beneficial ownership of the property. And then from there, Ava, we do a very simple split where, you know, you have a certain threshold of preferred return that goes to your limited partners. So return of capital first, a preference turn of a certain percentage. Then after that a profit split between the general partners and the, and the limited partners, okay.
August (26m 22s): Maybe you can kind of talk to us more about the deal that you had. So for example, here at CPI, our business model is the multifamily value add and because of their, their higher rental value value ratios that exist in the us on a 70, 30 LTV, you know, we're, we're able to, from the rents we collect, we're able to pay our mortgage payment, pay taxes and fees, third-party property manager, and still have a surplus to pay our investors. Those preferred returns you talk of from day one, because the deals we look at are usually 90% occupied.
So they're, they're well above the mark. So now, how do you go about your deals? Are, are, are your deals ground up development? Is it a value add project? Is it kind of A-class talk to us or what kind of deals you guys work on and how are you able to, is there a return given to investors from day one or is there a kind of a capital event where the project has to go through a certain steps before there is any kind of cashflow coming back to the investor?
Jesse (27m 21s): Yeah. So for us, I'm constantly looking for off market deals, you know, as a broker, you know, first thing we think is we're not bidding on deals. So for me, I was actually land registry looking for properties off market calling, Hey, Jesse, for galley. Listen, I want to put an offer in, on your property when you consider one. So what D constantly outreaching for off market deals happen to find an off market deal? A gentleman owned the property for a number of years. I think it was kind of retirement time for them there. They were, you know, ready to sell.
So for me, this just happened to be a class deal. I wasn't searching for an A-class deal, but it was in probably one of the most expensive areas in Canada, in forest hill and Toronto. It just so happened that when we took a look at these rents, we were, we just saw that it was probably at 60% of what market is. So initially when we went into it, we, what we were going to do. And a lot of our clients do this, where they do what they call condo finishes two older apartments.
So you're putting a dishwasher in the apartment in suite laundry and what our initial thoughts were, were to go in, do $75,000 per unit, really higher end upgrades to achieve higher end rents. Now COVID happens. And all of a sudden, Y you know, you have to be careful about trying to just do a class when the market, you know, might not be able to sustain it. So, for us, what we did was we kind of pivoted and decided to do, you know, instead of a $75,000 upgrade, maybe a 40, 45 more conservative rents, and then kind of, you know, turn over three, four suites within a shorter time period.
So the structure of the deal ultimately was it wasn't, it wasn't a vanilla deal. It was a bridge loan for two years, stabilize the asset, do the renovations, renovate the L renovate a lease at these higher rates, then switch to a conventional, or, you know, CMHC loan switch to the L to that loan once you've achieved that rent. So that, that basically the mortgage takeout takes out your bridge loan. And now you have a stabilized income.
And to answer your last question, in terms of the capital event, this, this deal would be like a development deal. And if anybody has seen, you know, limited partnership agreements, when it comes to the development deals, you get your preferred return. And just as an aside, the preferred is not a guaranteed return. It's a preferred return. And absolutely you try to achieve that, but in a development deal, you know, there's no income. So what happens is that say 7% preferred return a cruise. So your one seven year, two 14, you know, some people compound it.
We don't, it's just simple accrual. And then when there is a capital event, say the refinance, then we decide then do we pay investors all back their initial cash, keep them in the deal, or do we sell a property? Has it gained enough that, you know, it looks appealing to sell and pivot or, or buy another asset so that, yeah, we, we, looking back, I would have had a lot, a lot less stress if we picked a more vanilla investment, but that's, that's what we, what we got our hands on.
August (30m 33s): Great. Oh, how many units was this project?
Jesse(30m 35s): So this one was, this one was seven units, but for anybody that's not in a major market, we're talking about 500,000 plus a unit th the, some that have sold on the street or 700,000 a unit. So this is not, you know, you're not in Boise, Idaho, the first investment, sorry, apartment building we bought was actually west of Toronto and Hamilton 11 unit. And it was a third of the price. So it's just a matter of, you can find expense, more expensive assets, but there definitely has to be a value play there because they're just too expensive to buy.
If they're, if they're already stabilized and at full rent.
Ava (31m 17s): Awesome. And the whole time, Jesse, what's the whole time that you guys were predicting
Jesse(31m 21s): For the, for this one that we're purchasing. So this one, what we have is that to your kind of timeframe, to do the renovations. And then for us, really, we talked to investors, the fund, the sort of the partnership is open for you no longer than that. But I personally, if, if things are where we think they will be in two years in terms of where we want to get the rents, I would love to refinance it, get everybody their capital back and stay in the deal together. And then down the road, because of where it's positioned with a lot of over a billion dollar of Provigil funds in transit.
I think we could add another story to it longer, you know, in the long run. So yeah, we have a few options, but I, the reason I bring that up is I hate seeing these investments where somebody says, like paying out their LPs and then buying them out. It's like, you're the reason they got this asset. You can pay them out and then they're not in the deal. Yeah.
Ava (32m 17s): Options are key. That's fantastic. Now maybe we can discuss your nurturing process for your investors as it's obviously a very important component of, of syndicated investments. So maybe you can please tell us how you nurture your investors and get that know like, and trust and keep that know like, and trust going.
Jesse (32m 36s): Yeah, for sure. I, I can't remember. It was actually a guy in the west end. I think Saskatoon, I had on my podcast and he said, this is very simple. He was, he's like, listen, go on your phone. If you scroll all the way down, if you have an iPhone and you're a contact scroll all the way down to the bottom, you'll see how many contacts you have. It's actually crazy when you're like, how did I accumulate, you know, whatever thousand 700, whatever contacts you can upload those to your computer as a spreadsheet. And you could run through those and really look at who's somebody that haven't had contact with that I could reach out to not to sell them anything.
But as a touch point saying, listen, you know, how are you doing? It's been a while, just a general email. So he had like a three-step, you know, general email, a discussion and just not being salesy. And eventually basically telling people, listen, like, you know what I do in real estate, these are the type of investments that I buy. If this is something that you'd be interested at all, when we have one of these under contract or we're purchasing one, let me know if you'd want, want me to share it? And if you don't just let me know as well.
And nine times out of 10 people don't say, no, they don't say like, no, no, don't tell me. And you know, you be somewhat strategic about the people that you're, you're reaching out to. And then I think what people really need to do, you're in so many more networks than you think you are for me. I did my masters at university of Toronto and just reaching out, literally getting the class list for my year and go and reaching out to all of them. Because, you know, if they, if they did that in school, they're probably, you know, doing something that, you know, might be a little bit different.
They they've made a career change maybe later in life. So you have access where I had access to a lot of people that were like, yeah, a hundred percent sign me up. And some of the people that are in the subscription that, that are LPs were from that. So, you know, I've had people on my podcast that were in law enforcement and they left the force and then they, you know, they had their first indication with 20 cops. So I think you got to look at the networks that you're in and, and don't be afraid to tell people what, they're, what you're doing. Like you, you, you two are doing here, you know, people know when they talked to you August and Ava, like yeah, they're, they're in real estate.
So I think being seen as is important, and I know it's not easy for everybody. We're not all extroverts, but it really is an important part. If you want to attract capital and, you know, that's the path you want to take.
August (34m 58s): Great. Awesome. And I'm sure your shows and your connection to a bigger pot pockets is also a great cultivation process for, for bringing awareness to you and, and investors to, to your services, but maybe briefly touch on your nurturing process when the investors do connect with you, if it's from your own list or from, from your marketing campaigns or from your thought leadership platform, as they come into your database, how do you keep in touch with them? Do you know if it's through newsletters or other content that you send to them? So eventually when you do have a deal, because as, as us being in the syndication business, we're not a fund, we're not continuously buying assets and continuously raising capital, we look for a great deals and then we present it to our investors, to, to us very briefly about your nurturing process when for your leads or your contacts.
Yeah,
Jesse (35m 43s): Absolutely. I think for me, part of it is, you know, when you go to working capital podcasts.com and people will subscribe to the podcast, that'll be part of, you know, me reaching out to people and connecting and nurturing through there when it comes to people that I've, I've reached out to that say, didn't sign up for the last syndication, just touch points with them, whether, you know, constant contact or MailChimp keeping kind of abreast of keeping them abreast of what you're doing. And really, I haven't, I haven't formalized it in like to a T for me, it's just been, you know, the list of people that I have that are in my database, on, you know, through my website where we capture all the emails through the, the list that I have when I reach out to people.
And yeah, it's, it's really, it's really like that right now. If we move to something more formalized as we, as we continue, you know, maybe that, that will be the path. Ideally, I'd like to get to a point where we're going to have committed capital rather than syndication where you're chasing the deal, chasing the clock, whereas where you can call capital and you have the fun there. Yes,
Ava (36m 47s): It's cool. Cause you probably have a long list of people who are watching you on the sideline watching you kind of do your first deal and then your next one. And eventually a lot of syndicators say five years down the road, they've been watching us and boom, they just gave me $2 million. Well, I had a buddy
Jesse (37m 0s): Of mine and like really good buddy that I did, that it was in my MBA and he's like, he opted out of the deal and he was just, you know, you know, you get a guy constantly asking you questions like, and then he's like, ah, so, so did that happen? I'm like, yeah, it happened. And he's like, oh, okay. I'll like, I'll, I'll go on the next one. I'm like I told you, man. So yeah. I mean, you just keep in touch and you know yeah, yeah. And it seems
August (37m 20s): Your process is much more up close and personal and hands-on, that's always the best way to go about when companies get bigger. You never even get the CEO on a call with your cases is very kind of up close and personal and that's great. That's great. Awesome. All right.
Ava (37m 33s): Now, Jesse, let's time to have some fun. We're going to start the next segment of our show. So we like to call this the 10 championship rounds to financial freedom. So please just tell us the first thing that comes to your mind and I'm going to get started.
Speaker 3 (37m 51s): All right. I am. I'm set. All
Ava (37m 53s): Right. So who was the most influential person in your life?
August (37m 59s): Cool.
Jesse (38m 1s): Oh, I'm going to get one of the mad probably my father.
August (38m 4s): He didn't give you that money, man. He's, you're attracted to the hard to get.
Ava (38m 11s): What is the number one book you recommend?
Jesse (38m 14s): Oh man. So many, but all I just say, start with no gym camp. Okay.
Ava (38m 20s): If you had the opportunity to travel back in time, what advice would you give your younger self start
Jesse (38m 29s): Early start, start right away. You
August (38m 31s): Started in 19.
Jesse (38m 33s): I think just in general with other things like anything in life that you go, I'll do this. Oftentimes you don't do so. Just, just jump in. If, if you know you, you will, you will regret not doing it. You know, that'll
August (38m 45s): Be the heavier regret when totally
Ava (38m 49s): All right. What, what's the best investment you've ever made
Jesse (38m 55s): In my education.
Ava (38m 57s): What's the worst investment you've ever made. Let me think your
Jesse (39m 5s): Worst investment I've ever made. One, one student rental property. It's tough to call them the worst because you learn from those. But very, a lot of, a lot of mistakes made on that, that, you know, took, took a while to, to, you know, fix and yeah.
Ava (39m 21s): All right. How much would you need in the bank to retire today? What's your number?
Jesse (39m 28s): Nothing. I, I love being active and working and I don't, I don't find what I do, you know, a job job. So
Ava (39m 38s): If you could have dinner with someone dead or alive, who would it be?
Jesse (39m 43s): Well, dad's more fun and morbid. Probably Milton Friedman. I've the economist. I've, I've always found his, his writing's really good capitalism, freed and freedom free to choose. Yeah.
Ava (39m 56s): Awesome. If you weren't doing what you're doing today, what would you be doing now?
Jesse (40m 1s): That's a good question. Probably law. Okay.
Ava (40m 6s): Book smarts or street smarts.
Jesse (40m 12s): After all my education, I always still say street smarts.
Ava (40m 17s): Okay. If you had a million dollars cash and you had to make one investment today, what would it be? I would put it
Jesse (40m 27s): In a fund as the GPS Capitol to show our skin in the game and you know, whatever we can multiply off that with, with investors. Awesome.
Ava (40m 38s): That's a great answer. Awesome. That's great. Those
Jesse (40m 41s): Are so yeah, you don't get asked those every day. Yeah. There
Ava (40m 44s): You go. Kind of puts you on the spot and it's fun footings, you know, first thing that comes to mind occasional
August (40m 50s): As well, right? It helps others kind of think about these questions and kind of helps them with the process. Hey Jay, Jesse, we really appreciate your time. Thank you for thinking. We know you're super busy. We really appreciate taking the time coming and speaking to us, definitely add a lot of value to our viewers and eventually our listeners listeners when we change this show to a podcast and,
Ava (41m 9s): And yeah, Jesse, if you just want to take a quick moment to tell everybody what, the best way that they can reach you, please.
Jesse (41m 15s): Yeah, for sure. I mean, aside from a Google search, Jesse, for galley working, working capital podcast.com, you can go there if you want to subscribe to, to get the show or Spotify, iTunes and yeah. Reach out to me there I'm as a broker, I'm not hard to find. So that's yeah.
Ava (41m 35s): Johnson, Jesse. Thanks a lot for coming today. Thanks so much.
Jesse (41m 47s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse, for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.
Nick Perry is the owner and founder of Want To Sell Now. The largest nationwide wholesaling company in the United States based out of Austin TX. He started in real estate wholesaling properties and fixing and flipping. He has since expanded his real estate business. Nick also runs the 7 Figure Cartel mastermind. In this episode we talked about:
- Nick’s Background
- Nick`s first wholesale deal
- The approach to wholesaling and flipping
- Marketing strategy: postcards, mailing service, PPC, Google Ads
- Running a hands-off business in 2021
- The mental state of Nick while doing Full-Time Real Estate
- Partners or managers in Real Estate?
- Raising capital when buying property
- Construction costs
- Lumber prices 2021
- Current Opportunities
- Oil and Gas Industries in Real Estate
- Mobile home parks
- Triple net lease
- Nick`s areas of interest nowadays
- The transition to educational projects
- Mentorship, Resources and Lessons Learned
Useful links:
https://www.instagram.com/nickperryrei/
https://7figurecartel.mykajabi.com
Adam Batstone is an Entrepreneur with a principal focus on Finance. Adam brings nearly 20 years of progressive professional experience in the areas of Wealth Creation and Investment Management with specific expertise in Private Equity, Private Equity Real Estate, Venture Capital and Alternative Investments. And is also the Founder & CEO at Two Sevens Capital. In this episode we talked about:
- Adam’s Background
- Transition between wealth management and Real Estate private equity
- Raising money for real estate
- Deal flow
- Starting Two Sevens Capital
- Open-ended and closed-ended funds
- Dilution protection
- Risk management
- Current Opportunities
- Geography and regulatory environment
- 2021-2022 tax perspective and inflation outlook
- Mentorship, Resources and Lessons Learned
Useful links:
www.twosevenscapital.com
https://www.linkedin.com/in/adamjbatstone/
Ryan Smith is a Principal of Elevation Capital Group bringing more than 15 years of extensive business experience in market evaluation, property analysis, management systems, due diligence and finance. He focuses on mobile home parks, has a computer science programming background. In this episode we talked about:
- How Ryan got started in real estate
- The transition from single family homes to mobile home parks
- Manufactured houses
- Fundamentals of the storage business
- Outlook for 2021
- Investment vehicles and funds
- Ryan’s Investment philosophy
- Distribution of risks
- Real Estate Market outlook
- Fiscal and Monetary policy
- Ryan’s view of mentorship
Useful links:
https://elevation.com
Transcript Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesse Fragale. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Gentlemen, you're listening to working capital the real estate podcast as usual special guests today. Ryan Smith, Brian is the principal of elevation capital group bringing more than 15 years of extensive business experience in market evaluation, property analysis, management system, due diligence and finance.
And just, if you, if you've heard of him before big focus on mobile home parks and kind of an interesting story in, in his beginnings that we'll talk about today coming from kind of a computer science or programming background. So without further ado, Ryan, how's it going?
Ryan (56s): And I don't go well. It's good to, good to be here
Jesse (59s): Right on. So you're, you're joining us from Orlando today. That's right. That's correct. Awesome. I feel like we're just starting to get our first little bit of sun. So golfing is a, is now in full, full effect up here. So it's, it looks like we're moving in the right direction.
Ryan (1m 16s): It's great. Well, come on down. We've got no shortage of sign down here.
Jesse (1m 20s): Yeah, actually, it's funny. You mentioned that we're actually looking at a couple properties right now in, in and around the Orlando area. So I'd like to come down sooner rather than later. I think I still have a ticket to Miami that's a year and a half old that I'm gonna have to redeem with this pandemic special. I think, I think the 24 months is the max.
Ryan (1m 41s): Well, yeah, I do look us up. We'd love to see you. Right.
Jesse (1m 44s): So for listeners, you know, this is probably the first time we've had somebody that specializes in mobile home parks on the show. And I wanted to give listeners a little bit of a background for yourself. So maybe for listeners that haven't heard of you, you can kind of start at the beginning cause you kinda got into real estate in a unique way to say the least.
Ryan (2m 6s): Yeah. It's, it's not your typical story. Although I don't think there is any typical stories. I think they're all unique and, and as they should be, but kind of to treat topic for the sake of your listeners grew up in a real estate family, you know, trenched, scraped, you know, did all this stuff I should do as a kid gravitated into analytics, learned to code, taught myself how to code ended up, you know, coding and antsy, see object oriented, C Orland, c.net S you know, so baby eyes and get a lot of different things.
So got into coding, ended up building an analytics tool for real estate investors. With the focus of it being my bad use. He used it, liked it at work. We were all shocked, which if you've ever coded anything that's that's, it's, it's, it's God's grace that anything works. So it worked. I found a market up having about 140,000 or so users of my software globally, mostly mom and pop real estate investors. So, but you know, made quite a bit of money from that ended up making probably a million, 2 million or something like that box as a, as a, you know, to a degree, a teenager got drafted professionally, but baseball I'm six foot eight at the time I was 250 pounds.
You can't tell that via zoom, but, you know, anyway, I was, I was a ballplayer got drafted by the Baltimore Orioles and Anaheim angels played all the way through college, had a real choice, you know, kind of, you know, brains versus brawn moment, you know, which, which do I pursue. And I took the, I took the brain path, which may lead you to question the integrity of the brain that chose the path, but that's the path I chose. So coming out of college, I, you know, I had capital, thankfully I had an awareness that real estate was a good place to play.
My wife is incredibly talented. She works just right down the hall with me here for, I should say I worked with her she's she's brilliant. So anyway, we started building a business together, bought about, I'd say about 25 single family houses pretty quick came to the realization that it wasn't as scalable as we had hoped and looked for a better path and basically landed through analysis and research on self storage and mobile home parks. And we had two different kinda thesises around both of them.
We liked each one of them for different reasons, but we also liked them a lot together. There's, there's some interesting things that happened there. So anyway, to really fast forward, went out and build a portfolio. Now almost 15, 20 years later, we ironically we still just buy mobile home parks and storage facilities and we we've bought, you know, more than 150 assets and more than 30 states and continue to kind of go and grow.
Jesse (4m 55s): Yeah, that's great. So for the, on the baseball front, you were a pitcher, right?
Ryan (5m 1s): Yeah. Okay. Arguable or accurate. I threw really hard and whatever direction I was facing,
Jesse (5m 10s): Let's say you're getting drafted. You're a, you're throwing some heaters in the nineties. No doubt.
Ryan (5m 14s): Yeah. I, I, you know, I think my best day I was 96, 97.
Jesse (5m 19s): Wow. Yeah, yeah. You know what, just on that point, just to kind of, cause you hear this story so much, you know, whether it's an investing in brokerage and real estate in general athletic backgrounds or team backgrounds, what do you think that is that, that common thread that, that people just gravitate towards our industry or, or maybe it's the other way around that, you know, the come from an athletic background and then pivot well into, into our industry.
Ryan (5m 46s): Yeah. You know, I think there's a lot of commonality. Baseball is such a unique sport and pitching even more so. And that it's, it's, it's kind of a singular part of a collective like pitching you're really alone on the mountain. So you have to have, you know, determination belief, you know, all of those things, but within a team construct. So I find there's a lot, you know, a lot of parallel in business, you know, we have a saying here, we all take out the trash, you know, I take out the trash with, with, with anybody else.
So I, I, you know, I think that, you know, a lot of what it requires and takes to be successful in sports that a lot of that translates into business beyond just the obvious talking point of it. So yeah, I think, I think you're right. I, I do see a lot of correlation and there's a lot of ex athletes that I come into contact with, you know, in, in the business. So yeah, it's interesting.
Jesse (6m 41s): Yeah. And it's, it's kind of like you, a lot of what is done in our industry and in, in athletics is behind the scenes. People see the end result oftentimes and, and really, you know, a lot of the work is done where nobody's watching.
Ryan (6m 55s): Yep. For sure. Yep. It's it's not, it's definitely not glamorous. Yeah. Or yeah,
Jesse (7m 2s): You're building, you're building the software program for your father. And I think, I think in one of the previous podcasts I listened to with, with you on it, it was, you talked a little bit about how your, your father kind of pivoted it was from like roofing and then actually building a portfolio of his own. Right?
Ryan (7m 20s): Yeah, you're exactly right. I mean, my, my dad grew up dirt, basically dirt floor poor cause my grandfather was a church planter, which he was, he was not in the denomination where that was profitable to be profitable. So my dad grew up a really dirt floor, four and you know, to put himself through college worth houses, which is a very tough gig. And then he came to the realization at, at, as a teenager that, you know, the person who made all the money was the one who owned the roof.
So to say not the one on the roof. And so, you know, he, he really came to that realization and jumped off the roof and started buying houses. Although he's still roofed his own houses that they, you know, when I was, when I was born, there's a photo of me. I think it was, I don't know, four or five months old in a crib, on a roof, a slanted roof, by the way that my dad was roofing. So anyway, it tells you a little bit about my upbringing.
Jesse (8m 14s): Yeah, yeah, absolutely. So the, the apple doesn't fall far from the tree. So you start, you start going into real estate and you know, I'm assuming it's something about mobile parks that the scalability, as opposed to single family, how did you, did you initially get into that a vertical or did you transition into it like, like a lot of people do when they start with single family,
Ryan (8m 37s): You know, so we started with single family and we really just jumped cold Turkey to mobile home parks. And the reason was it was, I mean, there was scalability there in that, you know, now you can buy one asset with 50 units as opposed to, you know, 50 separate transactions plus, you know, managing those over disparate, you know, so there's more inherent scalability that we thought, but really the compelling feature. I mean, Jamie and I, what was, I think kind of unique was we sat down and I, I remember it, we sat down and basically created an underwriting model for every asset class we can think of, you know, so as opposed to just deciding this asset class sounds nice, we're going to go do it.
We kind of sat down and, and kind of programmatically thought three asset class created a model and our thought was we would throw all the models on the table, let the models do get out. And then we would pursue the ones with the most merit along the lines of what we were seeking to accomplish. And we had four very specific objectives that we were wanting, and those were cashflow capital appreciation, wealth creation, basically low correlation, low beta. You know, we wanted off the rollercoaster ride as much as possible.
And then we want to tax benefits. So those were the four things we wanted. And the two best asset classes by our determination were storage and mobile home parks. And interestingly enough, all these years later, they have been, so we were right or directionally, right. They had been actually number one in number two or for really all real estate. And we think there'll continue to be. But the thing that attracted us most to mobile home parks or manufactured housing communities was the moat. The aspect of the moat that I saw, I saw a fairly significant moat hiding in plain sight in, in the modes really, really, really simple.
I, I just saw the fact that, you know, mobile home parks I thought were in high demand. I thought demand would continue to grow, but I thought supply would be constrained by the stigma surrounding the asset class. And more than just the stigma of mobile home parks. I don't like them. I don't want them near me or this kind of this negative bent emotionally towards them. There, there is a reality that is, they're not efficient for producing tax revenue. So most municipalities don't want them either. The residents don't want them for whatever reasons, you know, perception of crime or property values or whatever, but municipalities don't like it because the density, they can't get any good, you know, they can't get good density sufficient to produce tax revenue.
So we thought the net effect of all of that would be demand, would grow. Supply would be constrained. And, and we thought that barrier would protect our capital. And, you know, I think that the story has been told,
Jesse (11m 20s): It looks like it's worked out. So in terms of the, I want to jump into manufactured housing, but just on the storage front, just because I feel like storage, it's, it's a very particular area in real estate. And I don't think a lot of people kind of understand the fundamentals of it. So when you were initially getting into storage, was it you buying existing? Were you developing? What was the approach
Ryan (11m 43s): Existing? Yeah, we, we're not, we have developed storage out of the ground predominantly in Denver, two facilities there, but we prefer to buy existing if we can. And what is it about storage that you love? So the trends, I mean, all that, I mean, there's really a lot of tailwind long-term trends and that COVID has only helped accelerate. So, you know, just, I guess from a macro view, you have back in the nineties, there was about three feet of storage per person was demand.
So demand was around three feet of storage. So if you had a hundred thousand people in an area, you have 300,000 feet of storage and that might be six 50,000 foot storage facilities. Or so today, by the way, when it was three, nobody thought I'd ever before that it hit four, but it never hit five and hit five, six, seven. Now we're nine. And the projection is that we'll be at 12 by 2030. So that same market of a hundred thousand people, you know, if that holds true, we'll need now 1.2 million feet of storage, let alone the consideration that that market may have gone from a hundred thousand to 200,000, if you're investing in a growing market.
So there's, you know, you have increasing population multiplying by increasing usage, you know, more, I guess, a couple other high points you have baby boomers going from big to small, you have this trend of new home starts being smaller. I think the current kind of I'll say inflationary, you know, commodity price inflation or reflation or whatever one wants to consider it, I think will only accelerate that trend of smaller, you know, for, for the purpose of affordability.
So more, more, more people need, you know, storage as a, as a garage primary or secondary. And then lastly, I guess just, you know, in saying in America about 10% of Americans use storage one in 10, but interestingly enough, millennials there's data that suggests about 30% of millennials are current users of storage one in three. So it looks as, as new populations kind of rise in America, that the adoption rate is growing significantly of storage as a, as a, as a tool in the tool belt, so to speak.
So there there's many other things to mention, but we're, we're, we're pretty bullish on long-term storage
Jesse (14m 5s): When you're evaluating storage, as opposed to, well, whether it's a manufactured housing or a apartment buildings, you know, what are you looking for in terms of how you're evaluating? Are you doing it on a, on a payback period on an IRR? How does, what does that look like?
Ryan (14m 21s): So we're, we're long-term holders of real estate. So we, we don't think of it in IRR terms because really we want to buy, it takes, well, first there's only so many good assets out there. There's not an unlimited supply of quality deals. So if you come across one, it doesn't make a lot of sense to quick flip it, you know? So for us, we want to buy quality well located manage well and hold for a long-term. So, so yes, we want to, I mean, just some bullet points, the number one question on both asset classes we have, number one, is, is it molded?
Is there, is there something about that asset in that location that gives us a competitive advantage? So that's, that's the number one question from an economic lens? You know, we want, we want to buy where people are moving to, not from, we want the asset to be well located, where it's very difficult to compete, so that there's a supply demand imbalance, which gives us the ability of positive price pressure over time. So we want to be able to grow our, we have a pathway that we think we can grow our net operating income incrementally for a very long period of time.
We'd like to buy an institutional quality asset in a market that institutions are interested in owning in which you know, could contribute to a lower cap rate higher, multiple on NOI, you know, some of those things.
Jesse (15m 39s): And do you find just given the fact that, you know, pivoting to the manufactured housing side, as we kind of see a convergence of, of, you know, class, a assets, class, B and C, how that the, the spread between cap rates and interest rates we started, you're starting to see that converge. Do you find that this area kind of where it sits is one that's more, let's say resistant to market fluctuations, or like you said before is kind of beta more, you're looking for beta and less volatility.
Ryan (16m 12s): Yeah. So I think the way we, you know, when you look at mobile home parks, for example, to your point, there's many different qualities, there's a lot of different business implementations, for example, do you own all the homes and rent the homes and the land you own, none of the homes and you just rent the land and everybody owns their home, which by the way, is our preference. We don't want to own the mobile homes, but we to, you know, so there's different implications depending on the quality of the location, the model you're executing as to the stability and, and, and basically the risk adjusted return, you know, and, and maybe, you know, beta as well for the asset class at large, it's fairly low beta.
I think mobile home parks generally are in the 0.3 to 0.4, you know, beta range. So, you know, sub one, you know, so pretty, pretty good there, you know, throughout COVID I noticed, and this is anecdotal, but it tended to be that if you owned all the homes and you rent the homes and the land, that there were more delinquency issues in the peak of COVID, because there was this sense where I'm running the home, I've got an eviction moratorium. I'm not going to pay. Cause, you know, I might have for six months and you know, I'll just go to the next part, but with our model where everybody owns their home, their skin in the game, because if you don't pay eviction, moratorium will one day be lifted and you could lose your home.
Right. There's, there's a significant amount of skin in the game. So I think we have one portfolio for example, of about, so I'll say roughly a thousand units, geographically dispersed, I think at the peak of COVID we had about five delinquencies at the peak, you know, and that's because we had, you know, we PR quality asset, well located. They own their home and they have skin in the game. So we think our model is more resilient to fluctuation. And then lastly, I guess to your point, there has been this trend lately where, you know, due to social media and kind of the jobs act where in the, in the United States, at least the jobs act allows people to generally solicit for the purpose of raising capital.
And it's, it's gotten in my opinion, pretty frothy and, and how, how, and, and how that's done. But what you typically see is you see this bent towards cashflow as the kind of the marketing tool. So people will advertising, you know, cashflow. And so that really forces them up the cap rate ladder or down the quality ladder. So you've actually seen a fairly significant amount of capital aggregated by kind of these newer upstarts. And they're deploying that capital in the lower quality for the purpose of generating, hopefully greater cash flows, which is actually compressed to your point, you know, the, the, the variance between the highest quality and the lowest quality.
So in our, I mean, for, for our point of view, we, we, we think there's far more reason to execute our model today, which is to buy quality well located because what you're, you know, I'll give you, I guess the last point we're, you know, we own mobile home parks that we bought a decade or more ago that are, you know, I would say two, two and a half star quality, which is, you know, kind of downstream and quality. And we may have bought them for 10 to 15 cap when we bought them as a range today, those are trading in the five, you know, could be in the five to six cap rate range.
It's, you know, anyway, but I would not be a buyer necessarily of that at five gap, but I might buy a property in Washington, DC at forecasts.
Jesse (19m 41s): Yeah, for sure. It's, it's definitely, at least for, for the markets in our area, it's been very much this, this game of you're starting to go more and more outside the downtown, you know, the CBD and you're starting to not really find the returns that you'd expect if you're going to non-core assets, even, you know, further down the line. So it's, you know, this last year has been a unique one to say the least, but even before that, we were all just like in, in our position, you know, w what are you buying right now? And where are you cash flowing?
So the deals that I found that were appealing were those ones where they're just, you know, there's something there, whether it's a it's management issues, it's not leased up. And then you kind of have to have some sort of value add play.
Ryan (20m 25s): Yup. For sure. Our next acquisition, which will probably be three, four weeks from now, it couldn't be, I mean, it really could not be better located it's in Washington DC, and it could not likely be more poorly managed. I don't think that same cleaning solution since the year of my births, but to your point, we liked those deltas. Yeah.
Jesse (20m 45s): Just think just on that point, Washington DC friendly, are they from the landlord perspective?
Ryan (20m 52s): Yeah. So this property is actually in Virginia, Alexandria, Virginia, and this is storage. So this one's a self storage asset, so yeah, w we don't have any concerns and we already own through other entities in the area. So we, we, we know the market fairly well.
Jesse (21m 9s): Right. So was it something where, you know, throughout your career that you were buying a manufactured housing at the same time as buying storage? Or did you kind of start with one and then the other one came after? Sure.
Ryan (21m 21s): A really good question. I actually started with mobile home parks. So we started with that kind of cut our teeth on that, and then had a chance encounter. As you know, I think happens, you know, over most of our lives, get to meet that one person that was random and he had he, or she had a huge impact that you didn't expect. And so that happened to us and, you know, around, I think it was 2006, 2007. I met a gentleman named Brian Dawn, who at the time was the fifth largest owner of self storage in the U S privately pretty significant individual.
And, and so he, he made a huge impact on my wife and I, he, he threw us, I, he gave us advice, I think in part to get rid of us, like, like just, okay, I'm doing my friend a favor, I'm talking to you, but you know, like little did he know those? The, the, the, the crumbs he gave us, which were invaluable to us, we actually went out and did something pretty significant with them, which blew his, blew him away, blew his mind. And, and all these years later, we're, we're actually partners in the business.
So we brought the mobile home park side, he brought the storage side and we're doing both together and it's been, been a great,
Jesse (22m 32s): Yep. That's great. You know, when I hear a storage, it's something that I I've always wanted to get into. And part of it too, is, you know, we, the city that we invest in, for the most part, very heavy regulations, very in favor of the tenant, you know, not, not going to argue the, the political aspect of that, but I always see these guys that are in storage where, you know, it just seems like it's just something that they don't have to deal with. And that just seems like it's, it's one of those things where it just make your life a lot easier.
Ryan (23m 2s): Yeah. I know. It's, it's, you really don't get into the regulatory melee typically. Cause there's the sense that I'm not saying it's right, but there's this kind of broader sense that, you know, if the tenant has some issues, they should, they're hoarders anyway. Kind of, they're not, there's that, well, that's, it's, it's very different than, you know, where somebody lives.
Jesse (23m 24s): Yeah. For sure. You're home and yeah. There's definitely a different emotion and connotation to it. I want to talk a little bit about the vehicles that you used or you use for these investments. Maybe you can talk about when you were first acquiring and if that's kind of moved into whether it's, you know, you kind of touched on this, whether it's a syndication or fund and yeah. You could talk a little bit about that.
Ryan (23m 48s): Yeah. So for the, I'll say it's been a very long arc and we we've done a lot of different things and iterated over a long period of time. But in short, you know, really the first, you know, call it seven, eight years of our business, we really just deployed our capital for ourselves. It wasn't fun structures or raising outside capital. It was just us for, for the benefit of us. We built the model and so on and so forth. And then in 2010 know, we started looking and basically said, there's a lot of opportunity to buy good assets, you know, at fairly low prices at that time.
And we didn't have enough capital to take advantage of all the deals we were seeing. So we formed a fund called fund one, or unbelievably creative with our naming schemes. We're now on fund eight and there are two, three, four, five, six, seven, and now eight, but so fund one was a reg D five oh six B as in boy offering in the states, no general solicitation, you know, friends and family kind of thing. And we raised $2 million to buy six properties that have now gone full cycle.
And, and that was, I'll just, I'll mention this because to me, anybody who's watching this, that's thinking about raising capital. In my opinion today, things are pretty fast and loose. And I say that, I'll give you an example of what I mean by that. I talked to a guy recently. He said, you know, I, you know, he was, I think he was, he had another job in a completely different industry a year ago has been doing real estate for less than a year is about to launch his first fund. And he said, you know, but it's a small fund. I'm only raising $30 million.
I it's it's there's, I don't even know where to begin on that comment. You know, I mean, we not saying everybody, but, you know, we were, you know, call it seven, eight years with our own money before we started a $2 million fund. And we're, I mean, to say we were freaked out by the $2 million raise just by the responsibility of deploying that. Well, you know, anyway, so we did our first stack. And so then, you know, 2013, September, I think it was September 23rd of 2013, the jobs act was passed.
We could do a reg D five oh six C as in Charlie offering. So our funds three, four, five, six, seven, and eight have been rightly five or six C we've iterated. Every single fund has had improvement structurally over the previous fund. So there's just every fund is, you know, we try to find a way to do things better. So, but currently,
Jesse (26m 19s): Sorry for, for listeners five oh six C for, for anybody in the, the U S that's going to be your kind of prospectus exemption, right. That you're going to have, I'm assuming accredited investors and family, friends that you can market to.
Ryan (26m 33s): Correct. It's it's only accredited investors and they have to be third that the onus is now on us then to verify them as accredited. So it, whereas a, B you could do a fattest station, you can say, yes, I hear by certified that I'm accredited with, with a C you actually have to prove that you're accredited. And we have to have that proof on file the clients from
Jesse (26m 55s): Say their accountant or lawyer that, you know, a certain net worth or incomes achieved.
Ryan (26m 60s): Correct. Yeah. Opinion letters. We can rely on those. Yeah. We just have to, we have to take what are reasonable steps to know. Okay.
Jesse (27m 10s): And you used that for the, the following sort of the following investments that you did. And then is that if I was six 60, kind of where you play today, is that a, is that what you typically use
Ryan (27m 22s): Right before C is where we're at? Yeah. So
Jesse (27m 25s): For the general solicitation where you see, and I, first of all, even the backup a second, I couldn't agree more with you on, on the market. And we talked about this on the podcast before it, it reminds me of oh eight oh nine, where you heard every friend of yours has flipped a home. And you're like, I thought you were in a software or something. And, you know, they got five hosts or something. It's kind of that you're starting to see that again, where everybody you talk to is it seems, and maybe I'm siloed because I'm in this industry, but it just seems like a lot of people that haven't done anything substantial in real estate before are jumping into raising capital, which like you said, for myself, the first time you raise capital, you're, you're scared as hell.
Or you should be, it's the first time you're not using your own money. And you're just, you know, you're basically, you're the, the trust vehicle that you now have other people relying on you. So, absolutely agree with that. I, in terms of, so when you go into the fund model for, you know, for listeners, the distinction between where you make the jump from, say, syndication or asset specific raising capital, and you move to something where you have deployable capital, what, you know, what did you find was the, if any of the, you know, the jump or the, the nuances of moving from one to the other.
Ryan (28m 41s): So we really didn't do single assets indications. You know, we just kind of started with a multi-asset syndication or a fund, which is fun one, and we bought six assets. We've learned more as we kind of have grown. And I guess maybe it would be helpful to kind of, you know, I can give you my, kind of my 2 cents on what I think the differences or the benefits of beach. But I, I really think that there's benefits to having a mini assets in one pool.
For one, you have a better, you could potentially, depending on how it's executed, have a better balance sheet, that's geographically diverse, by the way, we do it across many asset classes, many assets, you know, in that could potentially open up opportunities for different type of debt options that a single asset syndication with kind of a one-off balance sheet wouldn't have. So 10 assets under one on one balance sheet, you know, might be better than 10 separate balance sheets with different control structures, different splits, all of that.
The other thing that's an interesting kind of nuance is if you have one asset, you know, that's, that's solely owned by an entity. You know, when you're looking at your reserves and you're budgeting for cash reserves, you really need to set it aside. You know, let's say it's 5% or whatever that is by that asset. But the benefit of having, you know, kind of a bigger balance sheet and multiple assets is you can actually bring that down because if one, if one asset needs cash for a specific function, it could actually draw on cash from another asset.
So you, you have some benefits there, so you can keep more of your capital working, you know, plus you just have the diversification play multiple assets, multiple states, multiple asset classes, so diversification to a degree. But so
Jesse (30m 35s): Anyway, did you find that being that you raised the fund for the first time, like I've always heard the way I've always liked to described as like the fund is really that trust vehicle, like you, they trust you. Whereas with the syndication single asset, at the very end of the day, they can walk up to a building in theory and, you know, knock on a brick. So was it, was it challenging to have people buy into this idea that, you know, there's this pool of capital we're going to invest it. This is our investment philosophy, and these are the type of assets we're going to look for.
Ryan (31m 7s): So to me, I don't think it, I agree wholeheartedly that the currency of everything is trust wholeheartedly. And the challenge investors have is you can't jump to trust. No, no investor trusts you when they invest with you the first time. And they, and they shouldn't because I haven't, I haven't earned that. They hope I'm telling them the truth, but hope is not trust. They hope they can trust, you know, and then our job is to, to bridge that by, by performing in line with their expectation. But I, I guess, you know, I don't want to say I'm unpopular for this, but it's, it's an unpopular point of view in the way that we raise our capital.
We do not use performance and models, and that's not what you said, so I'm not putting words in your mouth, but I do see that often kind of be kind of your comment where an investor can go see and touch the bricks. Hmm. That's not saying performance and modeling, but at the end of the day, okay, so the property exists. What does that mean? You know, you still are relying on the person. So when we raise our capital, we try to remove all the shiny objects in the room and allow the investor to focus on where their greatest point of risk is.
And that's me and that's us, the management team. We are the great, if you, if you don't trust that we will, you know, put your interests before our own and, and work our tail off with excellence on your behalf, we'll run, you know, don't invest, no projected IRR should change that. The problem is I actually suspect that some of those projected IRR is do potentially draw the focus off the question. Do you trust the operator? Which is why I think they're out there. So, you know, if you're, I guess if one of your listeners is looking to raise capital or is thinking about syndication, the, the part that's encouraging, please, you can raise this capital with, without doing all of those, I guess, riskier mechanisms to raise capital.
You can raise capital by, by doing it, you know, in a more conservative way. So we're, we're pretty big on that.
Jesse (33m 8s): Yeah. I couldn't agree more with that. It's funny too. Cause I know you're naturally a kind of inclined towards finance and kind of the analytics of the deal, but w the last deal that we bought, we just had a lot of investors that it was the first indication that they're investing in. And with when we initially did the model, a lot of it was, you know, your typical stuff, cash and cash IRR. And then what I found with just cut through the fat for people was just your, your equity multiple, you know, like, what am I putting in? What do you think it's going to be valued at three, four years?
Cause even if you're, you know, obviously there's going to be variants, but at least that's something people can graphs and, and it can look okay in this market. Is that probable, is that in the realm of possibilities where when you see 23% IRR leveraged IRR, what does that mean? There's so many things that you could have, you could manipulate, whether it's, you know, getting cash out on the end, having a cap rate, that's, you know, this, you know, different scenarios for cap rates. So yeah. I completely agree with that.
Ryan (34m 8s): Yeah. And then to your point, I mean, I've, I've seen IRR, but the, you know, to the hundreds, you know, it, the way I look at it is from an analytical standpoint is a hundred percent of all performance are, will be wrong. A hundred percent. There's a 0% chance. It will be right. So the question is, is that a reasonable marketing tool? You know, and I'm like, for us, we, we just say, no, you know, you know, people will ask, do you have a performance? The answer is, yes, we do.
We just don't use it for marketing. We have one internally, but we don't use it for marketing, you know, and we can talk through our assumptions and what we think might happen and that person can then create their own model and Excel and kind of projected out on their own. But we're not, we're in the last, I guess the reason kind of, you know, for me, we're a conservative bunch, or at least we would contend that we're conservative in the way we use 50% leverage where, you know, we're, we're kind of, I would say in some ways, crotchety and conservative about how we do things, but I see some groups out there that are really aggressive in anything but conservative in how they raise their capital, but then they tout themselves as being conservative in how they operate the assets.
So to me, and maybe I'm just, you know, find humor in odd things. But to me, I find it humorous to say, okay, I'm going to raise, I'm going to raise capital, being incredibly aggressive. And then as soon as I get your dollar, I'll never do it again. It seems in-group. So anyway.
Jesse (35m 39s): Yeah, for sure. Well, I think just kind of simplifying it, but at the end of the day, the real estate, the language is going to be through the finance of the deal. So yeah. Yeah. I definitely have been in the background, but I think, you know, I've talked about it before on the show where Howard marks has a great diagram for risk and, you know, you can just Google Howard marks and basically it's, you know, you're obviously, you're, you're kind of risk return a line starting from the bottom left, going to the top. Right. But every point on that line is this new distribution of risk. So you kind of go to different segments that, you know, just cause you're going to have an asset in a certain area, it's not necessarily correlated with risk, it's correlated with the expectation of, of risks.
So I think at the end of the day, though, you're right, the person that's investing for the first time, that's all just kind of shiny objects. It's really do I trust you? Can you lead me down a path where I can trust you in the future? On, on that point, I want to save a little bit of time because I heard you on a podcast on this debate, which I found fascinating on, on interest rates and inflation and where we kind of think we're going. And it's so funny when it comes to like interest rates or inflation, both of those topics is that you can have geniuses on both sides and completely disagree with where we're going.
So maybe you could give a little bit of background kind of where you stood in that debate. And if, if, if that's still the case today.
Ryan (37m 3s): Yeah, no. So with this debate, so you unders I guess, so your list can understand the construct of the debate. We were given hunter and I were on a team were given the position that we had to take. So it wasn't it. So our position was we had to argue for the case that interest rates would be at, or the app the same or lower than they were in February two years from that point in time. And then Neil and John took the opposing argument and it was, it was, it was a lot of fun.
And, and to your point, I'm not, you know, there aren't many successful financially successful economists kiddo. There's not many of them that, so I don't, you know, I, I don't have a crystal ball, but the, the point I made on that, on the, on the debate, even to the position that Neil and John were arguing is I actually hoped their position. I hope for their position, that that inflation does come to a degree that interest rates do go up, that the fed does take action that, you know, cap rates may rise.
That that's actually more compelling for me. Long-term inflation is that is a wonderful thing for real estate. At least it has been historically. So I, I'm not, I'm not the person who, who wants things to continue to go down in the hopes that this, this cap compression opportunity might continue, you know, in the, in the same, in the same way. So, so anyway, there's a whole discussion around inflation and I'm happy to go down that path if you want, but I'll, I'll take a breath and see where, where you want me to go with all this.
Jesse (38m 38s): Yeah. So I think what we're hearing, and this is something I hear from people that don't participate in, in, in investing real estate, people that are in the industry. And it's one that, whether you're in the U S or Canada, that we have now leaned on the fiscal aspects of our policy leavers so much now that how can we have a situation that in a year or two from now that doesn't incur some sort of amount of inflation and then, you know, the Corolla is like, w you know, what does that mean for, for, for real estate?
Ryan (39m 14s): Yeah. Yeah. I mean, there's the challenge that it's true and it's, it's a reasonable position. When you look at how much, you know, supply money supplies, you know, all the different, you can go through all the different component parts, but the interesting thing is it hasn't happened yet. You know, I think the peak peak inflation over the last 12 years, I think in the us, it hit 3%, one time for six months. And that's the highest it's been, you know, on the, on the average, I think the average us inflation rate over the last decade, it's been about 1.1% where the Fed's target is two.
So certainly, you know, there there's an aspect that something has to change. And then the question is why, because it has to, because it has to, because it has to, and, and that's, that's the question of, of, of when that happens, but rather than to me kind of going through the, the, when it, and how it might happen to me, there's a point where inflation will avail itself. And, and I think that's really positive, you know, for, for owners of real estate. And so I'm, I'm the sooner that that happens to me the better.
And it's actually, it's a question I get regularly now, probably, you know, several times a week from this, this kind of, this point of view, which is what if interest rates do go up, you know, won't bat crash, your model, so to speak. And, and, you know, to me, the way we see it is, you know, obviously the fundamental definition. And while I'll say by my determination of a good business, as one that can pass inflation onto the customer, if you can't pass on the place and you've got a really bad business.
So I, you know, real estate has historically demonstrated itself as a pretty decent, if not better than decent hedge for inflation. So the question is for my storage and mobile home park business, can we pass inflation onto the customer? And if we can, that inflation actually serves a pretty, pretty, you know, a pretty compelling role in the model because you know, the, the people, a lot of times people will say, well, okay, let's say you buy a property today at 3% interest, which is what we just borrowed for recently at 3%.
And let's say, you know, five years from now, interest rates are 7% and you're jumping from three to seven. How can you afford that, that Delta, but you, at the end of the day, if I can pass inflation onto the customer, if my rates, my biggest expense in the business is debt and it's fixed. Okay. If I borrow today at three and inflation comes tomorrow and I can pass it onto the customer that inflation I'll have five years of arbitrage, right? Where my cash flows just growing and going.
And, and to the point where, when I refinance five years, or whenever I refinanced, I should have more of something in a lie fueled by inflation, potentially valued at a lower multiple, I'll be at a higher cap rate, also fueled by inflation. My overall value. Shouldn't change all that much if at all, you know, and then there'll be some it's not entirely part of, there'll be some imbalances, but in the long run, inflation is largely positive.
Jesse (42m 21s): Yeah. I'm not going to lie. I sound really smart that day when I finished that podcast and somebody saying, I'm like, you know, you can pass it down to your customer. That's a good investment. And I was just telling my buddies, like, that's, it was a great way to think about it because you don't just think about it from you get yourself out of real estate and think of the business, what businesses have the ability to do that. And then, you know, the thing, another thing where you said in, in the debate, and just now where you're like, I'm actually bullish on inflation. If, if it happens for us, especially like, why are we in real estate? If, if, if inflation hedging is not one of those aspects and, and NOI can go up, I want to be mindful of your time here, Ryan.
So we have four questions. We ask every guest as we wrap up here and your view on mentorship in the industry.
Ryan (43m 9s): Yeah. I, so I, I'm a huge fan of mentorship. It's, it's an incredibly paradoxical process in that the people who you want to mentor you as the ones you can't afford and would never except for the dollar. So how then do you find those people, you know, at glaze that's, that's, that's, that's the way I look at it, but yeah, I think it's, it's, it probably offers more value than any other thing that you can pursue, right.
Jesse (43m 37s): On most impactful book, real estate or otherwise,
Ryan (43m 42s): Oh, man. So many, there's a book written by a dear friend of mine who I, I think is back to mentorship. He's mentored me and he doesn't even know it, but it's a book called right away and all at once. And his name is Greg Brennaman and Greg was the president of continental airlines with Gordon buffoon and took it from worst to first and 40 X, the Capitol, which formed TPG. It was David Bonderman and deal. And then he went on his current director for home Depot.
He was the CEO of Quiznos and burger king. Anyway, he's reporting. Yeah.
Jesse (44m 20s): Right on. I haven't heard that one. I'll check that out. Something that, you know, now in your business or your career that you wish you knew when you started out,
Ryan (44m 29s): You know, I guess there's so many different things, but one is just, and this was the sound I rolling and kind of insert Yon here, believe in yourself. And what, I mean, I guess more specifically, as in every iteration of things that we've tried and done, there's always risk that will it work? Will it not work well, people like it, will they not like it. And, and I'll just say, we have not yet fallen flat on our face. So, you know, trust your instinct, believe in yourself, implement, but your best, your best product, your best service, your, your, the best version of what you can offer out there.
And, you know, that's, that's good enough
Jesse (45m 10s): Right on. And this one, as listeners know, inspired by a masters in business, on Bloomberg, you'd take yourself back to Ryan on the mound, a young guy, throwing heaters, first car, make and model.
Ryan (45m 23s): Oh, my first car make and model. Gosh, I think it was a 1988 Chevy blazer, right? W no interior and an unbelievable feature that when you hit the brake, the horn hot, which one is popular at spotlight.
Jesse (45m 44s): Yeah, absolutely. Especially a senior guy. You said you're six, eight. I probably wouldn't want that guy honking at me in a Chevy blazer.
Ryan (45m 51s): I had to pull up to the light with my hands out the window. So I wasn't Hawking
Jesse (45m 58s): Right on Ryan for, for listeners. If they want to hear more, see what you're up to aside from a quick Google search, where were they working? They reach out.
Ryan (46m 8s): So I'm on LinkedIn, Facebook, our website, which is elevation funds.com and anybody where we're, we're really easy to get ahold of. So reach out anytime if we could be helpful.
Jesse (46m 20s): My guest today has been Ryan Smith. Ryan, thank you for being part of working capital. You bet. Thanks for having me. Great, Joe. Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse, for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse Fragale, F R a G a L E, have a good one.
Take care.
Long passionate about markets, Kevin grew up in a household where his father was an equity research director. Being exposed to market talk as long as he can remember, Kevin's true love was always macro. In fact, his first trade was in the US dollar index which promptly went limit-locked against him. Not deterred, Kevin persevered and got a job on institutional equity desk for a big Canadian bank in the 1990s. Kevin moved into a proprietary group where he was in a charge of the equity derivatives book. Kevin had a ringside seat for the madness of the DotCom bubble, but in 2000, with a new young family, and the desire to no longer work for a bank, Kevin set off on his own. For the next 17 years, Kevin would solely trade his own account with another former co-worker from the bank and a full-time computer programmer student they hired. Since then, Kevin has joined a well-establish prop group. In this episode we talked about:
- Kevin’s Background
- The current state of the economy
- Central banks in the post covid world
- Types of inflation
- Fiscal policy
- Monetary policy
- MMT
- Globalization
- Real Estate outlook
- How to deal with inflation in Real Estate
- The Rental market
- Working from home
In this week's Just Ask Jesse I discuss my thoughts on the future of commercial real estate. The last 18 months has impacted various businesses and as a result CRE as a whole. I give my two cents on changes I see in retail, office, industrial and multifamily.
To ask a question feel free to email me: jessefragale@gmail.com
Lance Pederson has worked in the middle-market real estate space for more than 13 years and has helped over 180 entrepreneurs architect pooled investment funds. He is the Founder and Managing Partner of Verivest, an end-to-end real estate investment platform designed to bring transparency to middle-market investing. He’s also a principal of Fairway America, a private equity real estate equity in Portland, Oregon. Lastly, Lance is the host of the ‘The Real Estate Risk Report,’ podcast, featuring conversations with real estate sponsors around the topic of risk mitigation In this episode we talked about:
- Lance`s background
- The transition from hard money lending to private equity real estate
- The structure of the company
- Role of the operator in a deal
- Fund model
- Verivest, how do they help companies?
- Operators: control, validation, trust
- Personality types of investors and team members
- Risk mitigation
- Track record
- Catch-up mechanism in private equity
- The process of sponsorship investment
- Mentorship
Jon Love is the founder and CEO of KingSett Capital, Canada’s leading private equity real estate investment business co-investing with institutional and ultra-high net worth clients. Jon was formerly President and CEO of Oxford Properties Group. In 2018 Jon was appointed a Member of the Order of Canada and for those who are outside of Canada that is a fellowship that recognises the outstanding merit of Canadians who make a major difference to Canada through lifelong contribution. He has navigated through several recessions in his career and now draws from those experiences as we find ourselves in a unique time - 2021 today. In this episode we talked about:
- Jon`s father and his impact on his career today
- Filling the shoes of your mentor. How does it feel?
- Transition from retail stock broker
- Sale of Oxford Properties Group
- Transition from Oxford to KingSett
- Aspects of KingSett that John would tackle differently
- The idea of thinking globally first for Canadians
- Interaction with provinces
- The response to the pandemic
- Obligation of business people to engage into political debates
- Jon`s view on where the economy is heading
- The future in terms of the Canadian outlook for Real Estate. Areas with opportunities over the next year.
Richard Epstein is the Laurence A. Tisch Professor of Law, at New York University, the Peter and Kirstin Senior Fellow at the Hoover Institution , and the James Parker Hall Distinguished Service Professor Emeritus and Senior Lecturer in the University of Chicago.
In this episode we talked about:
- Richard’s background
- Eviction moratoriums
- Covid, dealing with crisis
- Rent control
- Richard’s book “Simple rules For a Complex World”
Bridger Pennington is the Founder of Bridge Black Holdings and an Investment Fund that has done 300 deals in the last over 3 years. Bridger runs Investment Fund Secrets, which helps others launch their own funds without Ivy League credentials or Wall Street experience. In this episode we talked about:
- Bridger`s background.
- Challenges while raising money
- Syndication vs Private Equity
- Operating a real estate company
- How profits are distributed
- His YouTube Channel
- Fund Structures
- Mentorship
- Investment Fund Secrets
Many of you have sent me questions relating to real estate. As a result I will try to put out bonus episodes to try to directly answer questions. In this AMA I discuss real estate syndication fees and profits. Aside from the fees discussed here...there are many others that you may come across such as: financing guarantee fees, refinancing fees, equity management fees, due diligence fees etc. To keep things simple I go over some of the most standard fees and the 'promote' or 'carried interest'.
For any other topics you would like me to cover...reach out via email or instagram @jessefragale
Lauren Cohen is an International lawyer, realtor and cross-border expert. Also a bestselling author and global speaker. Lauren is the only globally acclaimed legal and Real Estate business advisor. Lauren Cohen loves Real Estate and fills many shoes. She is often working with first time investors introducing them into the World of Real Estate and helping them form a new path of income stream. At the same time she also works with experienced investors helping them buy properties, not only in their countries, but across borders. In this episode we talked about:
- Lauren’s background
- Lauren’s path towards Real Estate
- Eight steps of Investing across borders
- Deal analysis: how to conduct it
- Geography
- Substantial investment
- Qualifying for visa
- Holistic approach in Real Estate deals
- Immigration and green card
- Investment of non-residents
- Mentorship
Useful links:
https://crossborderinvestmentlawyer.com
Https://immigratethroughrealestate.com
Https://ecouncilglobal.com
Https://Laurenesq.com
Here are the Links to subscribe to Lauren`s podcast, Investing Across Borders: Apple http://apple.co/34V79tM
https://www.google.com/podcasts?feed=aHR0cHM6Ly9mZWVkcy5zaW1wbGVjYXN0LmNvbS9hYVFoWG80Yg%3D%3D
Here’s the gift - a link and coupon code for my e-book, Real Estate Investing Across Borders:
http://bit.ly/REAcrossBorders
Coupon code: REI4FREE
Brian Burke is President & CEO of Praxis Capital, Inc., a vertically integrated real estate private equity investment firm. Brian invested over half a billion dollars into the real estate including over 3000 multifamily units and more than 700 single family homes. Brian is also the author of “The hands-off investor” - an insider`s guide to investing in passive real estate syndications and is a frequent speaker at Real Estate investment Forums and Conferences across the country. In this episode we talked about:
- The changes in real estate over the last 6 months
- Recovery from pandemic
- Pros and cons of funds and syndication
- Importance of diversification
- Property management
- Brian’s background and his first steps in Real Estate
- “The hands-off investor” book. Why did Brian write it?
- Passive investment
- Limited partnership
- Brian’s thoughts on interest rates, inflation and economy of 2021
Resources and Links:
https://www.linkedin.com/in/praxiscapital
Kent is a Managing Director with Birge & Held Asset Management, a multifamily private equity firm with over $1.4 billion in assets under management. Kent's skillset as a multifamily operator draws from a successful career as a management consultant and a startup owner. Now he applies that skillset to transform apartment buildings and create modern affordable housing for America’s workforce. In this episode we discuss:
- How Kent kicked off his real estate career
- The role of the deal sponsor
- Geography’s impact on real estate
- Kents initial investments
- Preparation before Kent's first deal syndication
- Mentorship
- Investing out of state
- Real estate in the midwest
- Founding of Kent's own company and its market niche
- Structure of deals
- Key principles of investment
- Current state of economy and safety cushion
Trevor Oldham is the founder of Podcasting You, a podcast booking agency that helps people to grow their influence and income through podcast guesting. Because of his success with Podcasting You, Trevor was able to pay off $91,795.10 in student loans in one year. In this episode we talked about:
- How Trevor got into real estate
- Investing in mobile home parks
- Use a podcast as a tool in real estate
- How to create value for clients out of being on podcast
- The biggest challenge when dealing with podcast
- KPI tracking and how it is presented to clients.
- Methods of increasing landing page conversion.
- The on-boarding process of individuals.
- Mentorship.
- Resources, books and podcasts to share with the listeners.
Bill Manassero spent the last 11 years of his life serving with his family as missionaries to orphans, abandoned, and at-risk children in Haiti. Before Haiti, he spent over 20 years in business, both in corporations and as an entrepreneur. He was also a professional musician who toured the world singing children’s music. Now that Bill and his family are no longer in Haiti, they need to take care of themselves. Bill has decided to go into real estate investing, to buy rental properties to create income to take care of their retirement years and to have something to leave their children. Bill has decided to share his journey through his website and podcast In this episode we talked about:
- Bill`s background, what brought him to real estate investing.
- How to teach kids to run businesses and instil in them entrepreneurial skills.
- Diversification
- Mentorship .
- Formula for success in managing a real estate business
- Geography of investing and analytical approach as a key factor of success
- Something Bill knows now that he wished he knew at the beginning of investing career.
- The book that listeners would find valuable
- And much more!
Neal Bawa is CEO / Founder at Grocapitus, a commercial real estate investment company. Neal sources, negotiates and acquires Commercial properties across the U.S., for nearly 500 investors. Current portfolio is over 2000 units, projected to be at 3000 units in 12 months. Neal also serves as CEO at MultifamilyU, an apartment investing education company. He speaks at events & meetups across the country. Nearly 5,000 students attend his multifamily webinar series each year and hundreds attend his Magic of Multifamily boot camps. Neal is the co-founder of the Multifamily Investing Meetup network, a group of investors that has over 4000 members.
In this episode we talked about:
- Neal`s background in real estate and how he got into this industry
- What cities make the most amount of money in real estate?
- An eye-opening experience of building six campuses from scratch
- How did he get 50 thousand people's attention?
- Failures while dealing with multifamily housing
- Cashing out- when is the best time?
- Generational wealth
- Neal’s favourite real estate book
Ep. 44 Sheila Botting Sheila Botting recently joined Avison Young to lead the Americas Professional Services practice, and is a member of Avison Young’s Global Real Estate Executive. Through her executive real estate career, Sheila has led a number of multi-disciplinary real estate teams and assignments across the industry with owners, investors and corporate occupiers alike, earning the reputation as one of the “go to” commercial real estate advisors across the Americas. For Avison, her mandate is to accelerate growth across the Americas for our professional services platform including corporate real estate, consulting, project management, valuation and real estate & infrastructure advisory. The firm’s recent integration of GVA in Europe provides a substantive platform from which to accelerate Americas growth and marketplace opportunity.
Botting has 25 years of real estate advisory experience, delivering consulting work to corporations, real estate firms, investors, governments, and others. She was previously a senior partner and Canadian real estate leader at Deloitte, where she spent nine years and served on the global real estate executive team. Prior to that, Botting was an executive managing director at Cushman & Wakefield and an executive vice president at Royal LePage Commercial.
In this episode, we talked about:
- Sheila’s real estate journey
- How she views real estate as an asset class and as an investment
- Kind of deals she had
- Working space and setup for Deloitte Canada
- She’ll also share a discussion and presentation about Avison Young X-factor
- Thoughts on how technology can help the industry amid COVID
- Advice and mentor tips to younger aspirants
- And MUCH MORE!
Relevant Links:
https://www.avisonyoung.com/x-factor
Connect with Shiela
Michael Emory is a graduate of Queen’s University (BA, Hons., 1977) and the Faculty of Law, University of Toronto (JD, 1982). Prior to entering the real estate business in 1988, Michael was a partner with the law firm of Aird & Berlis, specializing in corporate and real estate finance. Michael is the founder, a Trustee and the President & CEO of Allied, a leading owner, manager and developer of (i) distinctive urban workspace in Canada’s major cities and (ii) network-dense urban data centres in Toronto that form Canada’s hub for global connectivity. Allied’s business is providing knowledge-based organizations with distinctive urban environments for creativity and connectivity.
Allied went public in February of 2003 with assets of $120 million, a market capitalization of $62 million and a local urban-office portfolio of 820,000 square feet. Allied now has assets of $9 billion, a market capitalization of $5 billion and a national urban-office platform of 14 million square feet.
Michael is also a Director of Equitable Group Inc. and Equitable Bank.
In this episode, we talked about:
- How Michael transitioned from law to real estate
- Living through the real estate collapse in the 90s
- How Michael approached his first capital raise
- The recovery of office space after the COVID-19 pandemic.
- What was difficult about Allied’s IPO.
- The importance of Environmental, Social and Governance (ESG)
Relevant Links:
https://www.alliedreit.com/
Tim is an active-duty Chief Petty Officer in the United States Navy and has been serving his country for 15 years. Now stationed on shore duty in Pensacola, Florida, he is fully pursuing his dream of owning and operating multi-family real estate and helping others realize their financial freedom goals!
Tim has been investing in real estate since 2011 where he purchased his first single family residence with the intention of forcing appreciation and flipping for a profit. That was also his first “house-hack,” and he quickly learned the benefits of long-term buy and hold real estate were much more aligned with his goals.
Through analyzing hundreds of multi-family properties, Tim has built an incredible network of real estate professionals, owns, controls, or has directly been involved in over 1,000 income producing units and looks forward to acquiring 5,000 multi-family units within the next three years.
In this episode, we talked about:
- Tim’s investing journey and career by house hacking while still serving full-time as a Chief Petty Officer in the United States Navy in Pensacola
- Tips and strategies for raising funds for your first deals
- His mission in helping military members achieve financial freedom through real estate investing
- Type of deals he had
- Tim’s ideal structure for investments
- And MUCH MORE!
Resources and Links
https://thetimothykelly.com/
https://www.linkedin.com/in/thetimothykelly/
FREE BOOK: Military House Hacking - How to live for free, earn passive income, and create generational wealth
Ian Formigle is a real estate professional and serial entrepreneur with over 25 years of experience in real estate private equity, equity options trading, and start-ups. Ian is Chief Investment Officer at CrowdStreet, overseeing its marketplace, an online commercial real estate investment platform that has completed over 500 offerings totaling over $16 billion of commercial real estate. Ian is the author of “The Comprehensive Guide to Commercial Real Estate Investing” and he is a contributing author at Forbes.com. Prior to joining CrowdStreet, Ian was VP of Business Development for ScanlanKemperBard Companies, where he managed the firm’s alternative investment platform and served as a senior acquisitions officer. Previously, Ian cofounded and served as CEO of Clarus Property Ventures, a regional real estate private equity firm that focused on multifamily acquisitions. Ian began his career as an equity options market maker and member of the Pacific Exchange.
Ian holds a BA in Economics and a BA in Political Science from the University of California at Berkeley as well as Series 7 and 63 licenses.
In this episode, we talked about:
- Ian’s real estate journey
- Commercial Real Estate’s various asset classes
- Crowdfunding in real estate
- Covid’s impact on real estate
- Co-working space
- And MUCH MORE!
Resources and Links:
Connect with Ian
https://www.crowdstreet.com/
David Toupin is a Top Millennial real estate investor, speaker, and entrepreneur. David is the co-founder of Obsidian Capital, an Austin Texas based real estate investment firm. David started investing at the age of 20 in Michigan where he bought his first property in college, a 12 unit apartment complex. Prior to graduating with a Finance degree at the University of Detroit Mercy, David had acquired $7M in multifamily real estate holdings
For the second time, we have Michael Blank on the show. Michael is a full-time entrepreneur, investor and coach and he is passionate about helping others become financially free. Through his company Nighthawk Equity, he controls over $75 million in performing multifamily assets all over the United States. In addition to investing nationwide, he teaches others how to do their first apartment building deal through tons of free content on TheMichaelBlank.com as well as additional training programs. He helped students acquire over 750 units valued in excess of $27M and they’re on track to do 1,000 units in the next 12 months through their unique coaching and “Deal Desk” program. He is the host of the popular podcast “Apartment Building Investing with Michael Blank” and he writes regularly for the Bigger Pockets and Flipnerd’s REI Classroom.
In this episode, we talked about:
- Asset class
- Raising capital
- Educating people in investment
- Building a real estate platform
- Apartment syndication deals
- How to reach the right people and how to get their information
- Gathering the right investor info
- Strategies in attracting investors and building relationships
- And MUCH MORE!
Resources and Links:
https://themichaelblank.com/
The Apartment Building Podcast
Omar Khan’s global experience has been leveraged across commercial real estate and capital markets. He has advised on over $3.7 billion of capital financing and M&A transactions. Being a seasoned professional in capital markets (capital financing, M&A, sell-side equity research), strategic planning and operations has provided him with a unique perspective. He has helped senior leadership in implementing global data-driven decision-making practices by focusing on relationship development, mentorship and talent management.
In this episode, we talked about:
- Omar’s transition from finance career to real estate
- Investing in real estate internationally
- Types of deals he had
- Raising capital and investing strategies
- Multifamily investments philosophy
- His firm, Boardwalk Wealth which is a private equity firm located in Dallas, Texas.
- And MORE!
Hunny Gawri, he is the Co-Founder and Managing Partner for “RE/MAX Real Estate Centre, My Investment Brokers”, has been involved with real estate investments since the age of 23. With an extensive background in preconstruction real estate investments, cash flow properties, student condos, commercial properties as well as flips & renovations – Hunny has first-hand knowledge of a wide scope of investment options through his personal experiences. The knowledge and experience he has been able to share with his clients is instrumental.
In this episode. We talked about:
- His successful journey into real estate
- The idea and how he started “The Hunny Pot Cannabis Co.”
- How he successfully owned and managed multiple cellular phone & repair retail businesses for over 11 years
- His knowledge and experience that he has been able to share with his clients
- How he created and grew a number of different businesses over a fast few years
- And MUCH MORE!
Jeff Hull is the president of Hullmark Developments Ltd. The company invests in commercial buildings in neighbourhoods like Parkdale, West Queen West and Riverside; their latest project is a new timber office building in Liberty Village that will house Universal Music Canada. Hullmark has grown rapidly over the past 7 years, changing offices three times and growing from five to more than 40 employees.
In this episode, we talked about:
- Their family’s business history – Hullmark, a real estate investment and development team, as it started with his grandfather, now Jeff is carrying their business legacy
- Jeff’s passion about real estate and how he started
- Hullmark’s real estate strategy – hyper urban-focused
- Asset management, development, private equity, tenant experience
- And MUCH MORE!
Resources and LInks:
https://www.hullmark.ca/
https://www.linkedin.com/in/jeff-hull-4503773/
Investors Mel and Dave Dupuis are Speakers and Mentors across North America. They are BEST SELLING AUTHORS and share their secrets on how they solely purchased 12 properties in less than 12 months with none of their own money and now own over 170 units.
In this episode. We talked about:
- Their journey how they become both successful in being seller/owner financing
- Real estate investing secrets
- Their mentality to creative financing, repositioning and
renovating the asset
- Helping others to sell their property quickly compare in a buyer’s market
- How they started in 12 properties to over 170 units now with no partners and none of their own money
- How to become your own boss
- and MUCH MORE!
Resources and Links:
Connect with Mel and Dave
https://www.facebook.com/InvestorMelDave
https://twitter.com/investormeldave
https://investormeldave.com/
Real Estate Investing Secrets (book)
Ellie Perlman is a multifamily real estate investor and a syndicator, who owns over 2,000 units across the US, worth over $200MM. Ellie is the Founder and CEO of Blue Lake Capital, a real estate investment firm specializing in multifamily investments, where she helps investors grow their wealth and get double returns by joining her investments. She is also the host of "REady2Scale Real Estate Investing" podcast, as well as a coach and mentor to up and coming multifamily syndicators through her personal 1-on-1 mentoring program.
In this episode, we talked about:
- Her journey on how she started in real estate investing from being a commercial real estate lawyer
- Her investment philosophy
- Her multifamily properties and passive income
- Advice on building and scaling a real estate syndication business
- Ellie’s vision and future plans
- And much MORE
Connect with Ellie Perlman
Ellie’s Website
Email ellie@ellieperlman.com
REady2Scale Podcast
REady2Scale Mentoring Program
Blue Lake Capital
Over the past 33 years. Art Sobczak has helped hundreds of thousands of sales pros--and those who didn't consider themselves to be salespeople but needed to place calls-- to get more of what they wanted by phone. His processes and techniques are known as conversational, real-world, non-salesy, non-cheesy, and get results.
He has delivered over 1700 training programs in almost all industries and types of sales applications, and he will research your business to address your type of calls.
He has authored five books, including "Smart Calling-Eliminate the Fear, Failure, and Rejection from Cold Calling," which is on amazon's list of the 20 Most Highly-Rated Sales Books of All Time.
In this episode we talked about:
- Proven sales and cold calling techniques
- The evolution of Smart Calling
- The anatomy and steps of Smart Calling
- Why phone cold calling is still in demand
- Social Engineering for sales and Smart calling approach
- And much MORE!
Resources and Links:
Smart Calling (book)
Connect with Art
http://ArtSobczak.Training
As a successful real estate investor in over 1700 units, Gary Lipsky helps friends invest in C-Class Value-Add Multifamily opportunities. Gary typically finds deals in Phoenix and Tucson. He runs several meetups and is a regular on real estate podcasts and at conferences. You can count on Gary for integrity, strong operations and excellent communication, which have been keys to everything in which he’s been a part of.
Gary has always been a self-starter, taking on entrepreneurial endeavors and succeeding in his efforts. At the end of 2016, he sold arc, an after-school program, leadership development and outdoor education company he founded in 2001, which served over 9,000 students daily throughout Southern California. He is a founding board member of the non-profit CORE Educational Service, has been a member of Vistage since 2013 and is an alumnus of the Leadership Southern California program.
In this episode, we talked about:
- Asset management
- How he raises capital
- How Gary went from simple single-family rentals to $17M in multifamily properties
- Multifamily syndication
- Value Add strategies
- Handling tenants
- And much MORE!
Resources and Links:
https://www.aptcapitalgroup.com/podcast/
Connect with Gary
Crucial Conversations (book)
Dave Dubeau is a Real Estate Entrepreneur, Best-Selling Author, Speaker and Investor Attraction Expert based in Kamloops, B.C. Canada. He began his real estate investing career in 2003 doing 18 deals in 18 months. He later switched his focus to client-first rent to own deals, and nowadays he invests in multi-family (apartment building) properties. For the last several years Dave has been the World’s #1 Investor Attraction “Imple-Mentor”. Using his proprietary 5 Step Money Partner Formula™, Dave helps his real estate entrepreneur clients to grow their portfolios significantly and in record time by attracting investors (instead of chasing after them).
In this episode, we talked about:
- Rent-to-own strategy
- Dave’s current deals - Multifamily properties
- Steps in raising capital
- Choosing the right investing strategy
- Managing property
- And much MORE
Resources and Links:
The Ultimate Sales Machine
https://www.daviddubeau.com/
Connect with Dave
Jorge Abreau has been Investing in Real Estate full time for over 14 years. He started in Single Family and small Multifamily properties. He has wholesaled over 200+ Properties, Fixed & Flipped over 100+ properties and developed several new construction projects, over $8M in ground up. For the past 3 years he has been solely focused on large Multifamily properties. Jorge is currently an Active & Passive Full Time Multifamily Real Estate Investor. he has 1,720 Doors on the GP side & over 1,400+ doors on the LP side. He currently has another 850 Doors under contract on the GP side as well.
He is the CEO of Elevate Commercial Investment Group. Also, owns a construction company, JNT Construction, that focuses on helping Multifamily Investors with their full renovations. He is based out of Dallas & currently owns properties throughout Texas & Oklahoma but open to other areas as well. His strong points are Locating Deals, Due Diligence, Executing CapEx & Raising Equity.
In this episode, we talked about:
- Jorge’s move from single family to large multifamily deals
- Portfolio building
- Raising capital
- Asset management
- And more…
Resources and Links:
Three Feet from Gold
Connect with Jorge
https://www.elevatecig.com/
Mauricio is the founder and CEO of Premier Law Group, a premier boutique securities law firm. As a nationally recognized expert on private placements, Mauricio works with elite entrepreneurs who seek to increase and protect their wealth through syndications. Mauricio specializes in Reg D exempt offerings and educates investors from around the world on how to navigate the complex world of securities laws. Known for taking complex matters and making them simple to understand, Mauricio is sometimes, jokingly, referred to as one of the few lawyers who actually speaks English. With over 18 years of experience, Mauricio has previously been selected as a “Southern California Rising Star” by the Southern California Super Lawyers Magazine, recognizing him as one of the top 2.5% up-and-coming lawyers in Southern California. A graduate of The University of California at Berkeley, Mauricio obtained his Juris Doctorate degree from Loyola Law School in Los Angeles, where he was a member of the Scott Moot Court Honors Board. In this episode, we talked about real estate syndication, importance of SEC securities law to real estate investors, Rule 506(b) Versus 506(c) and much MORE!
Resources and Links:
Email: CS@PremierLawGroup.net
www.PremierLawGroup.net
Mike Taravella is a CPA, and he graduated from Michigan State University in 2014 with a Master of Science in Accounting. He has worked 5 years professionally in accounting. He started at Ernst & Young in public accounting and then transitioned into Detroit’s startup community at Rock Ventures.
He began his real estate investing career in 2016 by owning and self-managing investments in Michigan. He also took an interest in real estate development before joining Rand Partners in 2019. Mike is currently an associate that is responsible for underwriting deals, investor relations, and asset management.
In this episode, Mike shares his love for numbers, analysis, single and multifamily deals. We discuss Ratio Utility Billing Systems (RUBS), Internal Rate of Return (IRR), property management and investment philosophy.
Resources and Links:
https://randcre.com/
Jake and Gino episode with Mike
Connect with Mike
Chris Picciurro has been a CPA for more than 20 years, and spent the last 16 years as founder and executive officer of Integrated CPA Group. Since 2003, Integrated CPA Group has grown from a small, one-office operation to a multi-state firm servicing well over 3,000 clients. He is a member of the ProConnect™ Tax Customer Council.
In this episode, we take a deep dive into the tax and liability issues in real estate. Topics include foreign investors investing in the US, LLC formation, tax planning and growing your real estate assets. Enjoy.
Resources and Links:
http://www.realestatecpa.guru/
Connect with Chris
Darin Batchelder started as a CPA with PriceWaterhouse and PepsiCo. He transitioned into sales selling software applications for several technology companies. He then transitioned to institutional loan trading with ABN AMRO, an international bank based in the Netherlands, with main focus on trading large jumbo residential portfolios and multifamily portfolios bank to bank. He then founded TZK Capital in 2007 focused on trading clean credit performing loans to include residential, multifamily and commercial real estate loans bank to bank. He has traded in excess of $4 billion in loans.
In this episode, we talked about his journey on how he got into real estate, multifamily deals, real estate syndications, partnering, raising capitals, how he got invested in over 4,000 multifamily units and much MORE!
Resources and Links:
https://darinbatchelder.com/
https://www.linkedin.com/in/darin-batchelder-8855b620
Justin Kivel is a Real estate investor and founder of Break into CRE, an education platform that helps aspiring real estate investment professionals advance their careers and do better deals through real estate financial modeling and analysis training.
In this episode, Justin shares how he helps real estate professionals who are trying to break into the commercial real estate market. We discuss development, brokerage, private equity and more.
Links and Resources:
Real Estate Finance and Investments Risks and Opportunities by Peter Linneman
Confessions of a Real Estate Entrepreneur by James Randel
Connect with Justin Kivel
https://breakintocre.com/
Charlie and Kristina are the founders of Akras Capital. Charlie Stevenson is an experienced entrepreneur and leader, before Akras, he founded and operated three businesses in the travel and marketing industries in the United States and Europe. With deep experience working with startup and growth ventures as both a founder and consultant, he’s able to recognize and support promising businesses and provide them with the strategies, tools and support needed to ensure success while Kristina Knight brings over 10 years of experience in the capital markets, having most recently worked as a senior investment analyst with portfolio management responsibilities at Longfellow Investment Management Company ($9BN assets under management). In this role, she ran the $1BN Agency Mortgage Portfolio strategy, managing over 30 separate accounts to ensure the client needs and objectives were met. She previously worked in the structured products group at State Street Global Markets.
In this episode, Charlie and Kristina shared their journey in real estate, multifamily deals, growing their portfolio, how to generate passive income and great cash flow, how their bond and partnership has led them to success and their mission to produce freedom in the lives of their investors and partners.
Resources and Links:
Joe Fairless
Matt Faircloth
https://www.akrascapital.com/
https://www.linkedin.com/in/stevensoncharles/
https://www.linkedin.com/in/kristina-knight-cfa-9b592b2/
With 44 years of real estate industry experience, Glenn Mueller is a professor for the Burns School of Real Estate and Construction Management at Denver University, one of the oldest and largest programs in the country. Mueller’s research experience includes real estate market-cycle analysis, real estate securities analysis, real estate capital markets, portfolio and diversification analysis, seniors housing analysis and both public and private market-investment strategies. He is also the real estate investment strategist at Dividend Capital Group, where he provides real estate market-cycle research and investment strategy for Dividend Capital’s Real Estate Securities, Private Real Estate Investment, Private REIT and Real Estate Debt groups. He is also the co-editor of the Journal of Real Estate Portfolio Management.
In this episode, Glenn shared his knowledge on research, analysis, and development in real estate. We also talked about real estate market cycles, growth statistics, employment growth, retail, how COVID affected different industries, supply and demand in commercial real estate and industrial population growth. Glenn also showed us visual data and graphs to make his presentation more understandable and informative.
Resources and Links:
Real Estate Development: Principles and Process
https://www.du.edu/
Connect with Glenn
Mueller's chart
Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment building deals with a special focus on raising money. Through his investment company, he controls over $30 million in performing multifamily assets all over the United States and has raised over $8M. In addition to his own investing activities, he’s helped students purchase over 2,000 units valued at over $87M through his unique “Deal Desk” and training programs. He’s the author of the best-selling book “Financial Freedom with Real Estate Investing” and the host of the popular “Apartment Building Investing” podcast.
In this episode, we talked about his journey in real estate, from house flipping to apartment investing, his thoughts on syndication, he also discussed the process of how to raise money, finding the right properties and eventually achieve financial freedom through real estate investing even if you’re a new investor.
Quotes:
- “In fact, you don't need prior real estate experience, and you don't need your own money. Because it's relatively easy to overcome both of them.”
- “Even people with money will eventually run out of money. Therefore, the art of raising money is really allows you to be a true entrepreneur, allowing you to create something from nothing.”
- “I think there's always an opportunity regardless of what's going on, you have to have your eyes open.”
Resources and Links:
https://themichaelblank.com/
Financial Freedom with Real Estate Investing: The Blueprint To Quitting Your Job With Real Estate - Even Without Experience Or Cash
The Apartment Building Podcast
Christine Beckwith is a leading and award winning mortgage industry executive sales leader. Her career which spans 30 years has her winning on multiple origination & management platforms, levels, and companies while consistently proving time and market does not change her ability to compete & bring sales teams to the very top. She is a sought after public speaker on the real estate & finance circuit. She is the Vice President of Realtor & Sales Management for AnnieMac Home Mortgage & the President of 20/20 Vision for Success Coaching. She's also was the first female news anchor for the mortgage news network and is a best-selling author
In this episode, Christine shared her incredible journey from top loan officer to mortgage executive, how pandemic affects the mortgage industry, her online coaching company, 20/20 Vision for Success and she also answered some questions that every investors wanted to ask about mortgage.
Quotes:
- “Everybody in the world is refinancing”
- “A Financial mindset & good wealth is built off of liquidity”
Resources and Links:
https://visionyoursuccess.net/
Christine’s LinkedIn
Christine’s Facebook
https://wwvmag.com/
https://www.thevision-mag.com/
Clayton Morris is a real estate investor and host of the Investing in Real Estate podcast. He is a former co-host of The Daily Buzz and Good Day Philadelphia on Fox's WTXF-TV who moved to co-host Fox & Friends on Fox News Channel in 2009. He covered consumer technology for Fox and hosted weekly technology segments for Fox News Radio and Fox News.
In this episode, Clayton shares how his father lost his job and downsized everything to survive financially and eventually started investing in real estate. Clayton talks about his early deals, the “Freedom Number”, and his turnkey rental company Morris Invest which helped hundreds of people buy their first rental property. He also shares where he believes the best area to invest are, his tried and tested strategies for acquiring rental real estate and how to build lasting net worth through real estate investing.
Quotes:
- “I think this pandemic has taught us that if I would look at the basics of real estate investing, landlord friendly appreciation, market, low crime, job growth, etc. I want to make sure I'm pandemic proof.”
- “I always grew up with these limiting beliefs around money. You know, money doesn't grow on trees. We're not the Rockefellers. So I always had this adverse relationship with money, I never thought I was worthy of it.”
- “So I think it's incredibly important to switch that paradigm in your brain to really think about wealth creation, as you know, owning a business and wealth creation rather than working for somebody else.”
Resources and Links:
Website
Steve Rozenberg is an international commercial Airline Pilot who turned investor after the shock of 9/11 turned his airline career world upside down and the “safe-secure” job was anything but that. This is when he realized he needed to be in control of his own destiny. Since then he has owned dozens of rental properties as well as apartment complexes, he has also flipped and wholesaled hundreds of properties in Houston, Texas. He has written and published 7 E-books, and his most recent literary creation “Building an Empire: Failing our way to Millions” where Steve tells an in-depth recollection of his own Entrepreneurial journey. He has produced over 100 video seminars for its “Owner Education Series” and “Steve Rozenberg On the Road”. Steve is a member of NARPM® Houston and Ft. Worth, TX, CE certified and is a licensed real estate agent.
In this episode, we talked about how he started in real estate, how he managed to build a cash-flowing portfolio while working as an airplane pilot, the type of properties he had, how he built a huge property management company and how he and his partner manage their company to be efficient and most importantly, to scale.
Quotes:
- “To me, that is the truest form of leverage is utilizing your skillset. And it's the difference of working in the business to working on the business.”
- “A truly successful investor that's educated is a contrarian investor, meaning they're going opposite of what the tides are doing. And so I think it's important to have that ability and education level to make that pivot.”
Resources and Links:
Steve’s LinkedIN
Steve’s Website
Steve’s Instagram
Building An Empire Feeling Our Way To Millions
Michael Bull, CCIM, founder and CEO of Bull Realty, is an active commercial real estate advisor. He is a licensed broker in nine southeast states and has assisted clients with over 6 billion dollars of transactions over his 30-year career.
Mr. Bull founded Bull Realty in 1998 initially with two primary missions: to provide a company of brokers known for integrity and to provide the best disposition marketing in the nation. Now Michael and his brokers provide disposition, acquisition, project leasing, tenant representation and advisory services in all major property sectors. Michael personally leads a team focused on office investment sales.
You may know Michael as the host of America's Commercial Real Estate Show. The popular weekly show began broadcasting in 2010 and today is heard by millions of people around the country. Michael and other respected industry analysts, economists and leading market participants share market intelligence, forecasts and success strategies.
In this episode, Mike discusses commercial real estate, the process of finding properties, how COVID-19 affects the real estate market, his thoughts on capital markets, debt markets, and much more!
Quotes:
- “We‘re confident that we can provide as good or better services than anyone in the world and that's a good feeling.”
- “When you're an agent, you really already own your own business.”
- “Make sure you put in a lot of hours realize you're starting your own new business and you're competing with people that are good at what they do.”
- “I felt like I had to start my own company and so I did.
Resources and Links:
Mike’s website https://www.bullrealty.com/
Mike’s podcast https://commercialrealestateshow.com/
https://www.commercialagentsuccess.com/
John Soforic is the owner of a real estate business and enjoys total financial freedom. He is the author of best-selling book, The Wealthy Gardener a book for his son to distill his own wisdom on money and success. It will teach a lesson on prosperity for anybody and everybody regardless of who you are and your age. In this episode, John shared how he started in real estate, his life as a chiropractor, how real estate changed his life and how he learned to overcome his financial challenges and how it leads him to financial freedom.
Quotes:
- “We got into this the book, The Wealthy Gardener, it took me over three years. It was just he and I pass him (my son) back and forth, back and forth. life lessons, ideas, just a meaningful time in our lives.”
- “And I just felt this deep responsibility to pass along my lessons to him (my son). Everything I've learned along the way, so maybe he would just not start his 20s is unprepared as maybe I was.”
- “There's a lot of every lesson in my book, if you look at it closely, what you're going to see is, this is how you improve that. This is how you get more intentional. This is how you take better actions. This is how you do it.”
Resources and Links:
The Wealthy Gardner - Audible
The Wealthy Gardner website
The Wealthy Gardener book by John Sofofric
Frank Gallinelli founded RealData, Inc. (realdata.com) in 1981 to provide analysis software for real estate investors and developers. He is the author of "What Every Real Estate Investor Needs to Know About Cash Flow..." (McGraw-Hill, 2004; 2nd Edition, 2008, 3rd Edition, 2015), "Mastering Real Estate Investment - Examples, Metrics and Case Studies," (RealData, 2008), "10 Commandment for Real Estate Investors," (RealData, 2012) and "Insider Secrets To Financing Your Real Estate Investments" (Mc-Graw-Hill, 2004).
In this episode, we talked about how he started in real estate, how real estate analysis and interpreting metrics can help real estate investors, the idea behind the software Realdata, Inc., cap rate, income stream, internal rate of return and cash flow and MANY MORE!
Quotes:
- “Income-producing property is its value to an investor is a function of its ability to cash flow. So if you can increase the cash flow of a property, you can increase the value of the property.”
- “But if you're an investor, maybe you want to be thinking not about a point in time, but about the long-term building of wealth and have to look at not only the performance of the property currently but what is the potential performance of the property over time.”
Resources and Links:
https://www.realdata.com/
What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures
Travis Watts is a full-time passive investor. He has been investing in real estate since 2009 in multi-family, single-family and vacation rentals. Travis is also the Director of Investor Relations at Ashcroft Capital. Travis has invested in over 25 passive syndications between 14 different firms. Travis now dedicates his time to educating others in the world of investing and has made it his mission to share passive investment strategies in order to help others achieve and maintain wealth in real estate.
In this episode, he shared how he started in real estate after reading the book “Rich Dad’s prophecy”, his first property in 2009 in Colorado from credits of $8000 from the IRS, type of deals he's done, working 100 hours per week in an oil company, house-hacking strategies, transitioning from full-time employee to full-time passive investor, FIRE movement and MANY MORE!
Quotes:
- “I love the idea of just taking something fixing it up making it better and then be worth more.”
- “We all need to have enough passive income somehow to be able to quit our jobs and retire.”
- “I just find that real estate's a far better vehicle for creating cash flow and passive income.”
Resources and Links:
https://ashcroftcapital.com/
https://www.linkedin.com/in/traviswatts1234
https://www.instagram.com/passiveinvestortips/
Whitney Sewell is the founder of Life Bridge Capital LLC, he began his real estate investing career in 2009. Whitney’s passion is working with investors, helping them secure financial security via the exceptional opportunities that multifamily syndication offers. Whitney hosts The Real Estate Syndication Show, a daily podcast where he has now interviewed over 600 experts providing cutting-edge tools and strategies of the syndication business. Whitney and his wife Chelsea are on a mission to help other families through the process of adoption. They have personally endured the financial burdens that the process puts on families and have committed 50% of their profits to this goal. Whitney and Chelsea have three children by adoption.
In this episode, we talked about how Whitney started in real estate while working in law enforcement, how coronavirus affects the industry, the type of deals he's done, finding deals from the purchase and sale to raising capital to eventually closing the deal, overall syndication, their mission in the processing of adoption, his podcast “The Real Estate Syndication Show” and many MORE!
Quotes:
- “I really realize that so many people have built wealth in real estate and I had no idea, if all these people can do this, I can do it too”
- “It is about the relationship. It is about staying in front of your investors.”
Resources and Links:
Life Bridge Capital
The Real Estate Syndication Show
Never Eat Alone Book
Joe Fairless Book
Brian Burke is President & CEO of Praxis Capital, Inc., a vertically integrated real estate private equity investment firm, which he founded in 2001. Brian is also a member of the Praxis Investment Committee. Praxis operates on multiple platforms, currently managing active syndications for the acquisition of single-family, multifamily and opportunistic residential assets in US growth markets. Over the course of a real estate investment career that began in 1989, the offerings Brian manages have acquired over 750 properties, including over 3,000 multifamily units, with the assistance of proprietary software that he wrote himself. Acquired asset classes include single family homes, self storage, mixed-use and large apartment complexes in multiple states. Brian has arranged well over $500 million in debt and equity for Praxis acquisitions. Praxis’ current portfolio exceeds $200 million of real estate assets under management. Brian is the author of The Hands-Off Investor: An Insider’s Guide to Investing in Passive Real Estate Syndications, and a frequent public speaker at real estate conferences and events nationwide.
In this episode, Brian shared how he started in real estate, his humble beginnings, the type of his first deals, flipping homes, in depth explanation of real estate syndication, its advantages and disadvantages, cash flow and returns. We also talked about his book "The Hands-Off Investor: An Insider’s Guide to Investing in Passive Real Estate Syndications" and many MORE!
Quotes:
- ”If you don't have the money you can't buy the real estate. It's like showing up to the department store and you don't have your credit card with you.”
- “I knew that real estate was the path for me and I just kept persevering in it.”
Resources and Links:
https://praxcap.com/
BiggerPockets-Brian Burke
Sarah Larbi is a Real Estate Investor, speaker, mentor and podcaster. She specializes in helping take the mystery out of homeownership for Canadian’s who thought real estate investing was going to be out of reach. She has earned their trust and respect by having the drive and focus to embark, build and grow a 7-figure, 10 property. 14 door, investment portfolio by her mid 30’s all whilst employed full time.
In this episode we talked about how she started in real estate, deals she had, the main strategy she is using which is BRRRR, her podcast, her coaching program, how she manages her properties, favorite resources and many MORE!
Resources and Links:
https://sarahlarbi.com/
Don Campbell book
Sarah’s Instagram
Rod Khleif is an entrepreneur, real estate investor, multiple business owner, author, mentor, and community philanthropist who is passionate about business, life, success, and giving back. As one of the country’s top real estate trainers, Rod has personally owned and managed over 2,000 properties. Rod is Host of the Top-Ranked iTunes Real Estate Podcast which has been downloaded more than 8,000,000 times – “The Lifetime Cash Flow Through Real Estate Investing Podcast.” Rod is the author of “How to Create Lifetime Cash Flow Through Multifamily Properties” considered to be an essential “textbook” for aspiring multifamily investors.
In this episode, we talked about how he started in real estate, from his humble beginnings to greatest achievements, how he overcame loss and challenges, multi-family business, how he discovered the power of mindset in psychology wherein 80-90% of success on anything is in our minds which he talks about in his podcast and live events, helping and educating people in their focus and how to achieve goals. You’ll surely learn more from Rod in this episode!
Quotes:
- “Do not limit yourself.”
- “The goals are important, the goals will drive you, they'll motivate you, and they’ll push you.”
- “Now is the time more than ever to find your passion, to find something you enjoy doing.”
- “You keep your eye on the goal, and if this one approach doesn't work, change your approach.”
- “Goals don’t equate to happiness, progress equates to happiness.”
Resources and Links:
https://rodkhleif.com/
https://www.facebook.com/rodkhleifofficial/
Connect with Rod
Text Rod to 41411 for free resource
George E. Dube, CPA is a veteran real estate investor and real estate accountant who can help you save taxes, structure assets and protect your business and investments. George works with real estate investors and business owners from across Canada and around the world. He is a frequent guest speaker, who has addressed a variety of tax and accounting topics with implications for business owners, real estate investors, and realtors.
In this episode, he discussed how he got into accounting and real estate, how real estate, in general, has a lot of tax advantages for individuals, especially in investors, his advice to those who want to grow their portfolio, benefits of ownership, various tax structures as well as the answers to commonly asked accounting tax questions relevant to individuals who are investing in Canada and many MORE!
Resources and Links:
Email George: georgedube@bdo.ca
George’s website
81 Financial and Tax Tips for the Canadian Real Estate Investor: Expert Money-Saving Advice on Accounting and Tax Planning
Legal, Tax and Accounting Strategies for the Canadian Real Estate Investor
Matt Faircloth, under Matt’s leadership, DeRosa has completed over 30 million in real estate transactions involving private capital including fix and flips, single-family home rentals, mixed-use buildings, apartment buildings, office buildings, and tax lien investments. Matt has extensive expertise in connecting passive investors to lucrative investment opportunities through syndications, private loans and joint ventures. He is an active contributor to BiggerPockets.com through Facebook Live, teaching webinars, and blogging. He leads the Mentorship Mondays series on DeRosa’s YouTube channel where he answers weekly real estate investing questions.
In this episode, we talked about how he started in real estate, his company DeRosa, high-level deals, house hacking, his book Raising Private Capital: Build Your Real Estate Empire Using Other People's Money and many more!
Quotes:
- “I work with people that view the effort that my company puts in as a pair of pursue relationships.”
- “Everything we bring to the table to make a deal possible is just as important as money.”
Resources and Links:
DeRosa Group
Connect with Matt
Matt’s Book: Raising Private Capital: Build Your Real Estate Empire Using Other People's Money
Justin is the CEO and Co-Founder of JoyHub and was a former CTO and Co-Founder of Realty Mogul. In this episode, we talked about his passion for both technology and real estate, which lead him to real estate, Realty Mogul mission, company’s technical challenges and syndication. He also talked about Joyhub, which provides technology for landlords and tenants to engage in meaningful ways, how it helps them in interaction, engagement, data-driven and decision making. You’ll surely learn more about Justin!
Quotes:
- “Generically speaking from a startup entrepreneur perspective is, maintaining focus is one of the hardest things you can do to do but it's also the most important thing to do.”
- “I know where I’m good at and I know where I am not good at and finding intelligent people to surround yourself really helps”
Resources and Links
Joyhub Youtube
Joyhub Facebook
Joyhub Instagram
Email Joyhub: hello@joyhub.io
Jordan Harbinger has hosted a Top 50 iTunes podcast for over 12 years and receives over five million downloads per month, making The Jordan Harbinger Show one of the most popular podcasts in the world and awarded “Best of 2018” podcasts and is one of the “Most Downloaded New Shows” of the year by Apple. On The Jordan Harbinger Show, Jordan interviews the most successful people on earth, critical thinking and shares their strategies, perspectives, and practical insights.
In this episode, we talked about how he started in the podcast, how he transitioned as a Wall Street attorney to teaching networking skills and how to date, eventually starting a podcast that talks about relationships, self-improvement, stories, secrets, and skills of the world’s most brilliant and interesting people. He also shared how he manages his time and still being productive, his memorable episode guests, his future plans and many MORE!
Quotes:
- “At the end of the day, you have to find something you truly enjoy.”
- “You just have to find a system and stick with it, be consistent and that's easier said than done but it comes with practice and you're never going to get it if you're one of those people who’s only trying to do it when they think they need it.”
- “I'm not really going to get any further with this unless I really focus on it.”
Resources and Links:
The Jordan Harbinger Show
Jordan Harbinger Twitter
Jordan Harbinger Youtube channel
Marco Santarelli is an investor, author, and founder of Norada Real Estate Investments He is the host of the Passive Real Estate Investing show -- the show where busy people learn how to build substantial passive income while creating wealth for the long-term. He is also the creator of DealGrader - a scoring system that measures the investment quality of a real estate investment, giving you an overall snapshot of its profitability and investment risk. He is a licensed California real estate broker and runs a successful real estate investment firm focused on helping other investors build wealth through the power of real estate.
In this episode, Marco shares how he started his journey in his first investment at 18 years old, how he leverages, why he quit his corporate job and go full time in Real Estate. He also shares the lesson he learned from his first investment, his approach and advice to create cash flow, build portfolios, how to be prudent and intelligently in Real Estate objectives, and ultimately achieve financial freedom.
Enjoy the episode!
Quotes:
- “If I could do it at the age of 18, anybody can do it at any age.”
- “The thing is if you just need to build up your confidence by building your competence and there's no excuse not to educate yourself”
- “You should be investing in yourself and invest in those resources to educate yourself because that's how are you going to grow”
Resources:
Marco’s website
Marco’s Linkedin
The Passive Real Estate Investing Podcast
Matt McKeever is a CPA, entrepreneur, Youtuber, and Real Estate Investor. He began investing in London, Ontario in 2010. In 2015, Matt quickly built up his real estate portfolio implementing the BRRRR strategy. Matt also began his YouTube career. His channel has over 50,000 subscribers, and an average of 2000 views a day. Matt teaches viewers how to retire early, invest in real estate, and take control of their personal finances.
In this episode, we talked about how he transition from working as a financial controller in a pharmaceutical company, left his CPA life and moved into real estate full time. In 2016, he shared how he started a Youtube channel on how people can retire early, BRRR strategy, building up portfolio, wholesaling, Matt’s future plans and many MORE!
Quotes:
-
“Real estate was really the vehicle that brought me financial independence”
-
“But ideally I want my reputation in my accomplishments to proceed me to such a degree that I should be able to get into most rooms. I should be able to book a meeting with most people, with anyone.”
-
“If you find yourself in a situation where you can't necessarily pay for education or mentorship that doesn't have to hold you back as a real estate investor, that information is out there. You just need to go find it.”
Resources and Links:
Rich Dad Poor Dad
MLS
Realtor.CA
Matt McKeever’s Youtube
Matt McKeever’s Instagram
Kara Beckmann is from Scottsdale Arizona, she is a Real Estate Investor, an active home renovation, and founder of Beckmann House.
In this episode, Kara shared how she started in Real Estate, from being a pastry chef, working in retail, saved up money, used it to open a bakery and invest in her first flip. You’ll be amazed how her creativity and passion lead up owning her own renovation and design company, Beckmann house, without having any background in construction! You’ll also learn how she maximizes her profit, marketing, managing businesses at this coronavirus time, BRRRR, what made her decide to leave her steady retail job, before and after DIY projects, Instagram engagements, having rental properties, multiple streams of income, why she loves fix and flipping houses and many MORE!
Quotes:
- “I needed something to be creative. Let's fix this up, make it beautiful. I'll sell it and do it again.”
- “It really does help to build a certain level of respect and I’m walking on a job site just giving orders and I'm really interested in what they're doing and I'm interested in learning”
- “So I do think that knowledge really is power and when you have knowledge of how to build your confidence, that’s really important.”
- “As an entrepreneur, it is really important that you constantly evaluate where your mindset is.”
Resources and Links:
Email Kara
Kara’s Instagram
Kara’s website
Biggerpockets
Ed Mylett
Rich Woman by Kim Kayosaki
Jake and Gino are both experts in multifamily real estate investing and have achieved, in just a few years, the sort of financial freedom they always wanted but weren’t sure was possible.
Gino Barbaro is an investor, business owner, author and entrepreneur. He has grown his real estate portfolio to over 1400 multifamily units. He is the co-founder of Jake & Gino, a multifamily real estate education company that offers coaching and training in real estate founded upon their proprietary framework of Buy Right, Manage Right & Finance Right. Manage Right & Finance Right. He is the best-selling author of two books, Wheelbarrow Profits and Family, Food and the Friars, and graduated from IPEC (Institute for Professional Excellence in Coaching) where he earned his designation as a Certified Professional Coach.
Jake Stenziano, MBA is the best-selling author of two books, Wheelbarrow Profits and The Honey Bee. He is also the co-founder of Jake & Gino, the only multifamily real estate investment education company that teaches investors the three pillars of sound apartment investing; Buy Right, Manage Right, and Finance Right. Jake is also the founder of Rand Property Management and co-founder of Rand Capital and Rand Partners. Rand Property Management is the first property management company with a focus on “modern affordability” and vertical integration. As a creator of the multifamily investing framework, Wheelbarrow Profits, Jake is a leading expert on investing in and management of the multifamily space and currently owns over 1500 multifamily units.
In this episode, Jake and Gino shared their story on how they started in real estate, from investing to educating to syndicating, property management, mortgages, how they do everything at once and how their bond, partnership, professionalism help them to reach their financial freedom and building their $100M Real Estate empire. We also discussed how they manage tenants, properties, their company in this coronavirus time, and many MORE!
Enjoy the show!
Quotes:
- “ You as the leader have to show that there's light at the end of the tunnel"
- "For me, a partnership is somebody who takes it to the next level"
- “You have one at a time, you learn how to do it, you grow, and you go to the next one”
- “I'm willing to share what I know and I know in return people are going to teach me a lot”
Resources and Links:
Biggerpockets
Jake and Gino Website
Jake and Gino Honeybee
The Honeybee
Hunter Thompson is a full-time real estate investor and founder of Asym Capital, a real estate investment firm that helps clients build a diverse portfolio around low-risk cash flow production. Since starting Asym, Hunter has raised more than $30million in private capital for real estate offerings. He is the author of Raising Capital for Real Estate: How to Attract Investors, Establish Credibility, and Fund Deals. Hunter is also the host of the Cash Flow Connections Real Estate Podcast.
In this episode, we talked about how to get started with content creation, how his podcast educates audience and having conversations with industry leaders that understand different sectors in real estate in a very high level especially economists that are specifically trained to talk about recessions in crisis, he also explain his tips for real estate entrepreneurs that can make money in these critical times and raising returns in terms of minimum capital with syndication model.
Quotes:
- “You can see that there's always an opportunity in real estate. There's a reason that real estate created more millionaires than any investment”
- “Most people we don't care about the long-term. We want to know if I'm refinancing now, what I am going to get a good deal.”
- “So if you have the opportunity, I would say wait and see how this plays out”
- “I'm a huge proponent of the passive approach to investing because it allows you to leverage other people's time energy expertise and access to capital but still can get favorable returns”
Links and Resources:
Asym Capital
The Raising Capital for Real Estate
Cash Flow Connection Real Estate Podcast
Email Hunter
Biggerpockets
Brandon Turner is an entrepreneur, writer, podcaster and active real estate investor who has been investing in real estate since 2007. He is a nationally recognized leader in the real estate education and has taught millions of people how to find, finance, and manage real estate investments. He has written six real estate books, all of which can be found wherever books are sold and at the top of bestseller charts in the Business section. His recent book, How to Invest in Real Estate, recently won the Independent Press Award. He achieved financial independence at age 27 and currently resides in Maui with his wife and daughter. He continues to write, invest, and host the top rated BiggerPockets Podcast, which has amassed over 65 million downloads to date.
In this episode, we talked about on how he started as a first editor to become the VP of creative content for BiggerPockets to real estate investor, writer and how he contributes in real investing community. After his loan approved in 2007, he had his first single family house, became a landlord and after making some money from it, he started getting rental properties and start flipping houses. He mentioned his strategies about house hacking, managing properties with partners, refinance-rehab-repeat tips, how he focuses and owning more than a hundred of mobile home parks. Enjoy the show!
Quotes:
-
“I want to become the best mobile home park investor in the country. That's what my goal is, and I think everyone should aim for not to be the best mobile home park investor, but to be the best at whatever niche in your market.”
-
“So, the idea being let's get everyone involved because real estate it’s like a hike, like a journey, but we're all in this bike over the mountain together while having a great time with friends.”
- “The knowledge is out there. It’s free. It’s everywhere”
Resources and Links:
BiggerPockets
Brandon’s BiggerPockets profile
The Book on Rental Property Investing
The Book on Investing in Real Estate with No (and Low) Money Down
Brandon’s Instagram