Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host, Charles Carillo. Today, we have Ray Heimann. He is a private equity professional with over 10 years of experience in real estate, private equity, and investment banking. Ray began his career in JP Morgan’s Corporate and Investment Banking team, focusing on US REITs. He then moved to Booz & Company’s corporate and acquisitions strategy desk, where he advised on over $3.5 billion of corporate M&A. After that, he joined Sverica Capital, a lower-middle-market private equity firm focused on driving value through deal sourcing and acquisitions, where he closed over $750 million in acquisitions. Today, he leads Terra Capital, which, with its investors, acquires smaller multifamily properties. Ray, thank you so much for being on the show!
Ray:
Awesome. Thanks for having me, Charles. I appreciate it. So
Charles:
I gave you a little bit of a background there. If you want to give us a little bit more about yourself, both personally and professionally, and kind of brought you into starting your own thing and getting involved in investing in real estate yourself. Yeah,
Ray:
I’ve, I grew up around real estate. My family’s been in it for generations, and the work that I did after school in banking and consulting, private equity is very real estate oriented and, you know, very high level and simple. There was a lot going on in the institutional space that just wasn’t touching the substitutional space and lower middle market. And that’s what Taras invented to do, is to get to the lower middle market and substitutional space in real estate with all of the bells and whistles, features investability that goes along with being an institutional investor. And in the long run institutionalizing the small multifamily space. We, we think of it as, you know, the real hot zone as 50 units and below, but really anything below 200 units is Substitutional doesn’t get the same attention that larger buildings to get wrapped up into REITs do.
Ray:
And what we do is figure out a way to bring that asset class to larger investment funds, larger family offices, fund of funds, and eventually onto a full on you know, institutional buyers for that product. I think the the long and short of it is that in any private equity sector going after the middle, the lower middle market is more difficult, but yields higher returns. And that’s the end goal here. And I think in real estate, the best comparable to this is the single family home aggregator model that nobody bought single family homes as an investment property in 2005. Unless you were doing it on a one-off basis, you’ve maybe bought two or three. And now TPG Carlisle, every large private equity investment fund and tons of institutional investors have direct and indirect ownership of single family home aggregated portfolios. That’s what we’re looking to do and have done to a considerable degree with the, you know, sub, sub 200 unit space. Has
Charles:
That been your strategy all along after founding Terra? Is that all you guys did? Did you, have you modified your strategy at all over these last few years?
Ray:
Yeah, so I think there’s two, two things. So we started off in New York City and in New York City, everything is small, so it’s very hard to get a deal done. That’s like our largest one we ever did is 25 units in New York, much larger than that would just be at huge check size and ridiculously low yield on cost. So the, the one major change we did was go from New York, which has a difficult regulatory environment and very, you know, very good consumer demand trends, but very difficult regulatory environment. That 2019 rent laws made it very difficult. It has a bunch of hair on every deal with rent stabilization, rent control, all that stuff to greener pastures and easier places to operate in. Right now we’re in Pittsburgh, Columbus, and Indianapolis. We really like certain cities in the Midwest that, that do it for us. So that’s, that’s one change that we made was moving from the northeast to the Midwest.
Ray:
We still have large presence in the Northeast but focusing more out there. And then the other thing that I think was an eye-opener for us moving out there is that the, the unit count is only substitutional to the extent that it implies a smaller equity check. And there’s still a lot of assets that fit the substitutional mold that are as high as 200 units. And by that I mean an equity check that is way too low for a large regional or national real estate investor to go to work on. They need to put 15, 20, 20 $5 million to work on every deal. And a lot of the things that we look at are, you know, five to $10 million equity checks on the high end. And it’s a nice place to be in because if think about single family home aggregators as a as an industry, it’s hard to buy a single family home.
Ray:
It costs a lot. We see that in the news all the time. But you could theoretically do it as a random person who works in x, y, Z industry. You save up, you can buy that. It’s very difficult for you to execute on a 50 unit deal if you are a run of the mill person, especially in the Midwest. So it, it works in both ends. It’s grossly unaffordable for local operators and mom and pop groups to do it regularly. And it is way below the threshold of investment for larger groups. And where we come in is buying a lot of those, bundling them to together into a larger, essentially single asset that might be 400, 500, maybe in 600 units. And that’s, that becomes an institutional product. Now, this similar to how you need 2,500 single family homes to become an institutional product. Same, same situation.
Charles:
Yeah, no, starting out as a real estate investor, where I’m from in Connecticut, it was one of those things where we’d have a lot of New Yorkers leaving there and coming to where we were in central Connecticut and buying properties. And you could tell, you know, when you talk to realtors, but also when you’re driving down the street and all the rental signs are 9 1 7, 5 1 16, you know what I mean, of where you’re calling them rented. So I could see that as a common thing where people are jumping out where I am in southeast Florida now. It’s the same thing. You have a lot of buyers that are coming for years and decades, not just since COVID, it’s the decades thing. They’ve been coming down here to buy property. So I wanna kind of drill into a little bit about, when you’re saying a substitutional, which makes perfect sense under 200 units. And with that kind of sweet spot, I guess under a hundred, can you tell us a little bit about what else, other than the unit count makes it not traditional institutional, the, like, so the property condition, the property grade, the vintage, I mean, how do these things play into it in how do you how do you edit your strategy to fit around this?
Ray:
Yeah, that’s a really good question. So the, the first and high level thing is value add. So everything that we do is value add, partly out of necessity. A lot of these properties, especially in the Midwest going through the Rust Belt era, et cetera, were not renovated to the same standard. The properties were in the northeast. So instead of a $10,000 facelift, you might be looking at a 35, $40,000 per unit renovation that includes meps. And partially it’s a necessity and partially it maximizes your yield, right? Like if you’re going into a secondary or tertiary market, then you’re looking at smaller properties, then you’re looking at properties that need a lot of work. You don’t get as much competition at entry. In fact, virtually none. We’re frequently bidding against ourselves. If anybody, it’s a huge advantage. And two, you get to 9%, 9.5%, sometimes even 10% yield on cost, which if you’re in a relatively well located part of any of these markets, the risk adjusted return is best in class for, for multifamily.
Ray:
Obviously you’ve gotta execute on the redevelopment and renovation side of things, which is our specialty outside of sourcing deals. So we like that. But those are the, those are the type of deals that, that get us really excited. I think once you get above the 75 to a hundred unit threshold of fully stabilized fully cash flowing deals you start to butt up against smaller institutional investment groups that are interested in playing at a fully stabilized basis. Pros and cons, right? It means it’s easier for me to sell individual assets that I’ve redeveloped into that range, but it also means that it’s, it’s virtually a no fly zone for me to buy something over 50 units that’s pretty close to being stabilized. There’s, you know, other groups out there that want to do it. And the other thing that’s a great, I mean, it’s one of the, one of the thorniest pieces about the geography that we’ve chosen to go after is vintage.
Ray:
I mean, there’s very little that was built between the mid eighties and the early two thousands in all of our markets for really good reasons, right? You hear about the rust belt, you hear about industry going overseas. You hear about steel leaving America, car assembly and manufacturing leaving America up in the northeast. You don’t see that in Florida. You’re not worried about it. California, Texas, they don’t care. But in the Midwest it’s a really big impact. All of those economies were built on, you know, the backbone of those economies were that. And and as a result, there’s just not that much that was built during the period where that decline was noted since the mid two thousands. Some places in the Midwest have absolutely floundered because they never figured out a way to modernize past the hit of being a rust belt target.
Ray:
And some places have done extremely well. I think Pittsburgh, Columbus and Indianapolis are obviously on the, on the did well list. There’s a couple of other cities in the Midwest that are also very impressive that over time we’d love to we’d love to take a look at as well. But those are the places where you kind of get the best of both worlds. You know, you get the you get the value add and the lack of attention and stuff like that, but you also have a very stable economy. So we’re not worried about operating those properties in the long term, and we’re vertically integrated. We manage. So we don’t want to, you know, just buy and buy renovate and flip. That’s not, that’s not our game. But no matter what, I think there’s a lot of prejudice against older vintage, especially pre eighties and in some cases pre two thousands that has grown up around investing in your neck of the woods and all Sunbelt in Texas.
Ray:
‘Cause There’s so much more product from that era that why would you buy something older when there’s opportunity to buy something newer? And I think our solution to that problem has been a finding the investment groups to back us, which we’ve done that don’t care about that as much. And b budgeting a tremendous amount of money for building level upgrades. So meps there’s always electric, there’s always plumbing that needs to be done. We do a ton of due diligence to figure out exactly what needs to happen and what the price per unit is gonna be, et cetera. And by the time we’re done, it verges on redevelopment and you’re sitting on a building. I mean, we recently bought a hundred unit building that was built in 1935, literally before Omaha Beach, right? Super well built, amazing building just like literally one and a half foot concrete slab at every floor which was a bear to cord drilling through to run new plum lines for in unit washer dryer. And and everything else we need an upgraded electric. But once you do that, you’re sitting on an absolute, you know, bunker of a building and you, if you set aside the money to do that and underwrite it, and you’ve been through that process before, you can make a, you know, mid two thousands build looking, building out of something pretty old. And that’s where there’s tremendous value. Yeah, I think the
Charles:
Problem is when people are buying prod in a product that is, let’s say pre eighties or, you know, pre seventies, whatever it might be, if they’re crunching numbers on just doing cosmetic upgrades to it. So the problem is there is that that’s the wrong way of going because there will be electrical that you’re gonna have to update. There’s gonna be, you know, there’s gonna be old plumbing that’s in there, there’s gonna be different water lines that you’re like, there’s a lot of money that’s gonna have to put in like AK for the bones of the property that have to be done. And when we were buying older multifamily up north, we buy properties that were built in the early 19 hundreds. So all that stuff had to come out and you see like it was patched beforehand and you had to go in there and you just have to make sure your numbers are right when you’re going in there.
Charles:
And and if you’re in there with those properties, I mean, you’d see the old electrical that was in there not being used anymore, like the old knob and tube and all stuff like this. And you gotta put new stuff near it and like, whatever it is, all this work that has to be done in those properties. And I think you have a lot of syndicators that are looking for like light value ads and that’s not where you’re gonna get it. Because if you hold on too long, your whole budget’s gonna be outta whack if you’re not planning on doing it. So like, you have to make your offer and I’m going in there and these are the things that we’re actually gonna be fixing and upgrading while we’re buying it. And I don’t think people put that into the proforma, which gets them, oh, we don’t wanna deal with anything pre 1990.
Ray:
You’ve got it 100%. And that was me in 2014 when I first started investing in real estate directly on my own. You learn that lesson very quickly when you don’t budget for something that’s really important and very expensive and you you never make that mistake again. But I will, I will say that it, there’s, there’s d there’s different types of syndicators and operators out there. I mean, we mostly invest through our committed capital fund now, so we’re not really as much syndicator anymore. But either way, they, there are groups that can handle that stuff and understand it and come from an institutional real estate background where they get the picture and they know what you need to have a fully operating modern building. And there’s the groups you’re talking about that only really understand the, you know, throwing the backsplash on and putting in the stainless steel appliances and jacking up rents 300 bucks and like that. I’m sorry, but that’s not gonna work in unless unless you’re buying something built in, you know, 2010. Yeah.
Charles:
So let’s talk a little bit about eSourcing deals, because this is one of the benefits I see with let’s say smaller multifamily deals. Where are you, are we working predominantly through brokers to get it? Are you going direct to owners if you’re in these three different markets you have on the grounds property management, which is pretty much a requirement for the size of properties you’re going after? ’cause It makes onsite a little bit more difficult. Like tell us a little bit about how you’re really sourcing these deals.
Ray:
Yeah, and I can talk to you for, for five hours about local property management versus vertical integration and all that kind of stuff. But the sourcing of deals is a secret sauce for us. So we buy 75% of our units direct to seller, no broker. We make contact with the seller in the first place, truly off market, not pocket listing, nothing like that. Direct. And then, you know, maybe 10% of our deals are like truly brokered processes and everything else is, you know, pocket listing or, you know, back backroom with a, a broker that we have a good relationship with for x, y, Z reason or they’re, you know, involved in the deal or something like that. So the Midwest is awesome for this reason. What you were saying with the rental signs, being in New York, New York area codes to call for the property management and the rents and stuff like that in Connecticut and Florida and everything like that, you really don’t have that out out here.
Ray:
In, in the Midwest you’re looking at very different type of competition. And because the assets are smaller and lower price per unit, you don’t have a lot of those groups from from New York coming over. And as a result, all the old school off market tactics work like you wouldn’t believe, and they’re not tactics, they’re just reach out, right? So, so we do a lot of you know, monthly data scrubbing and, and, and repoing of data to get all of the addresses that are in our markets that are in our buy box. We do a ton of data research to get contact information for all of those people, which is very difficult to do. And then we focus on mailers, which especially for the older demographic is very, very effective. We do cold calling, but we don’t do that in-house with a bunch of people.
Ray:
We do it with a third party group of expats that are, you know, for, for regulatory reasons and also for cost reasons. It makes a lot more sense. And then we’ve doing, we’ve been doing a lot more cold emailing campaigns that are shockingly effective. We’ve had deals that have closed virtually 100% over email without very much direct seller interaction at all. And because of the geography, you will see that a lot of times we’re the first person to have ever contacted them about that. And a lot of times we’re not competing against another buyer. We’re talking about w does it make sense for you to sell this? Do you even remember that you own this? And if you do, like does it make sense for you in your life to exit right now? Or do you wanna wait a few years and we’ll follow up with you?
Ray:
There’s vacancies in there, there’s squatters sometimes there’s all kinds of issues depending on what’s going on. ’cause You have absentee owners that, you know, they, they snowbird it and move down and haven’t thought about it in forever. It’s not being well managed. They don’t have the wherewithal to put it through a process. Their local manager doesn’t have the wherewithal to help them with that. And we’re their by far, preferred choice. And so the, the off market side of things is really effective. I would say that it’s less about us trying to get really low price per unit, although that totally happens and is effective through off market. But it’s really about us trying to bring these things to market so that we can buy them. Because otherwise they’re not gonna get brokered and they’re gonna continue to sit on somebody’s balance sheet for another five to 10 years and we want access to them today.
Ray:
So a lot of the cold outreach is, is for that. We put together a pretty meaningful tech stack with a, with a handful, actually more like 10 third party vendors on the tech side and on the services side for communications that have allowed this to be an engine. Where all that comes out of it is fairly warm leads that go to our dedicated acquisitions analysts. That’s all they do is put deals under contract. And that process, we started it in New York City and it was effective. It is probably not trying to be overly hyperbolic, 20 times more effective in the Midwest where we serve today.
Charles:
So with, with financing for these properties, how is a, how do you usually capitalize it? Are you coming in with all your own money, buying them cash because you have a fund? Are you buying them with some sort of like bridge finance? ’cause These are very heavy value add deals, it sounds like, from what we’re explaining. So kind of how do you capitalize ’em and what is your plan for, these are long-term holds. You refinance ’em three years out, how does that work?
Ray:
Yeah, I would say that on average our Reno, our our deals 35% of our total development costs. So price plus renovation, all that stuff, 35% of everything we spend is in renovation. So it’s like medium to heavy, probably more in the heavy territory. Sometimes it gets up to 55%, right? We do everything case by case. If there’s relatively little to be done, which does happen, sometimes we will put stable term loan in place and buy it like a normal property. But a lot of work is needed and it’s larger. We’ll go with a construction style loan and if it’s smaller property, 10, 15, 20 units, something like that, which we totally take down on a regular basis still in addition to the, the larger ones then we will go in all cash and once we’re finished with renovations, we’ll just refinance into a term loan. I would say 12 to 18 months is a typical stabilization timeline for us from purchase to having the fully renovated units leased up at performer rents that we underwrote. And at the end of that, we will try to get into long-term stable financing. We’ve been doing this for a while. So we’ve got good partners that are a mix of some, some private, some some regional local banks. A couple nationals actually that will do all the, both the bridge and the stabilized financing with us on a recurring basis.
Charles:
Nice, nice. Yeah, I just see with those like heavy value ads like that, it’s something where you’re usually, you know, going with a construction product upfront and then going into something that’s a little bit more permanent if you’re holding up for the long term.
Ray:
Yeah, I think the we, there’s, there’s two pieces of that that are interesting ’cause we get criticized about this frequently is that we go the full Monty on renovating these properties we put in and budget for replacing everything that needs to be replaced. We’re not in the business of leaving old systems in place that aren’t gonna be good for the next 20, 30 years. And part of that is that when we exit a, the buyer pool that we’re selling into wants clean a hundred percent cash flowing deals that are virtually redeveloped, they would otherwise be buying relatively new ground up, but based on supply and demand, they’re going after redeveloped while redeveloped properties as well. So it’s important for us on the backend to, to do that. And you get paid for for that. There’s a premium on not having to do any work as a new buyer.
Ray:
And the other thing is that we’re vertically integrated property management firm. We bought a property management firm in 2016. We have a bunch of third party business. And when we sell a property, I mean it’s, it’s 100% our intention. You know, if we’re not the buyers and put it in our core fund ourselves and continue to management it is our intention to be the property manager for the new owner, which happens more often than not. And we certainly don’t want to be managing a property that’s got a a thousand different issues and have our new, you know, what, what was our buyer and is now our client turning around and telling us like, Hey, you, you, you didn’t do this, you didn’t do that. What the heck? We want everything to be smooth sailing. And it’s also, it’s just the right thing to do. It’s better for the community, it’s better for the asset, it’s better for the residents. So there’s not constant interruption over time.
Charles:
The tenants is a big thing. ’cause You might have some tenants that are hesitant old moving into an older product. But I mean if it’s, if it’s everything’s new, I mean it’s, it’s like moving into a newer product. W we mentioned those, you, you know, you’re talking about the three different markets that you working with. Can you tell us a little bit about the market drivers or industries you wanna see? I mean these are post rust belt type of situations that have happened in the eighties and nineties and you can you say today kinda what you are looking for to consider them, I guess almost recession resistant. Yeah.
Ray:
Recession resistant, recession resilient is so core to what we were looking for in the first place. One thing I will say is a disclaimer to this is that all three of these markets have dramatically outperformed our expectations since we started in them 10 years ago. To, to a, to a dangerous point, right? It has more attention than we, than we wish it did. We still, for our asset class and everything, a very low competition, but we don’t want to be the next Connecticut, you know. But what we were originally looking for, and what’s very true about these markets and a couple others in the Midwest, is that they struggled a ton. Like we talked about. They, they lost national recognition, they lost attention, stuff like that. So there’s a lot of opportunities in there, but they are sneakily very, very well built up on healthcare and education.
Ray:
There are tons of jobs and tons of development and tons of neighborhood expansion that’s coming from UPMC, Carnegie Mellon, U Pitt, and Pittsburgh largely coming off of OSU, but a bunch of other hospital systems in, in, in Columbus and in Indianapolis, iu, I-U-P-U-I and Purdue Health are massive. And they’re also big school drivers. These are schools that are growing. They’re undergrad and grad programs. They are not gonna disappear anytime soon. They are the low cost, high quality alternative to education in each of these markets. And frankly, in the US I think you get a lot of North Easterners coming to the Midwest for schools like that and Californians, et cetera. They are just bedrocks solid institutions to build behind. And even at the time we were interested in cities that had a little bit of a next gen industry flare. So, you know, we weren’t as interested in Milwaukee and St.
Ray:
Louis and kc, although they, they have strong fundamentals as well. What we, we liked about the three markets that were in was Robotics row in Pittsburgh, the massive VC community in Columbus, which has paid off insanely, I mean, between Intel expansion, which, you know, wil she won’t, she who knows. And and dural and a bunch of other stuff that’s happen mean, it’s just, it, it’s the amount of capital that’s flowed to Columbus. It is not something that we could have predicted. It’s something we thought was interesting, but it’s, you know, it’s greatly outpaced what we thought it was gonna do. And then Indianapolis, relatively low cost and medium cost location for business services and finance and banking for all of Indiana’s awesome thing that is also more of a recession resilient. But their pharma and biotech industries have been out of control. I mean, it’s become a, a, a major hotspot for that.
Ray:
And in the last three years, which obviously I’m not gonna sit here and tell you in 2015, I knew this was coming, but the, the major US producer of the Ozempic alternative Zep bound is Eli Lilly, which is a 100% Hoosier company that’s headquartered in Indiana right outside of Indianapolis and Lebanon. And it, all of their manufacturing, all of their corporate offices and all their expansion recently has been local because that’s the type of company they are. And it’s been a huge benefit. So they have, they have upsides to them, but at the end of the day, it’s the recession resilience. You want to go after those industries and those jobs aren’t going anywhere, but they don’t go anywhere in both directions, right? So like, you’re never gonna see that the, you know, sunbelt level population growth, it’s not gonna happen and we don’t want it to happen.
Ray:
But you will see very steady mid-single digits population growth over time for a billion different reasons, not the least of which, by the way, being data center expansion, which I am I don’t, I don’t love it because it brings a lot of attention, but only brings short to medium term jobs, right? Versus like longer term. But those are the, the, you know, that’s what we’re really focused on is recession resilience. And look, I mean, even through the 2008, 2009 financial crisis, you’d be shocked to look at the stats on on what happened in our cities for multifamily price per unit versus the rest of the United States. I mean, it was like flat
Charles:
Yeah.
Ray:
When the rest of the country was collapsing. So
Charles:
Interesting. Yeah, that’s one thing I always hear from investors. Differing air comparing the southeast with the Midwest is a lot more consistency, you know what I mean? Which is, it’s much easier to plan with that, you know what I mean? So you have to keep on checking your numbers when you’re in an area that’s, like you said, booms and busts and
Ray:
It, and it, and it cuts both ways because some, especially some capital partners are interested in the, in the, in the booms. Right. And that you’re, you’re gonna be cut off to them if, if all you’re interested in is stuff in Indianapolis. It’s a very different market.
Charles:
So as we’re kind of like wrapping up here, I just had one question. I know you mentioned it about property management. It’s one thing that is important to, I, I feel this is one of the main things of why other syndicators won’t go smaller and they only go larger because once you hit that magic number of let’s say 80 units or so, it really warrants having onsite people, right? And when you’re going less than that, I don’t know what the number is, everything’s case by case, but let’s say 50, 70, 60, you’re really having like a full-time, you’re having part-time people, it’s a little bit more messier. So you guys obviously having your own property management company gives you a huge leg up in this stance. Can you just talk to us, just give us a quick overview of kind of how you strategically buy products that properties, I’m saying in certain areas of cities that you work with to make it easier on management or how does that kind of work?
Ray:
Yeah. Well, you, you, you hit the nail on the head in the secret to the, to secret to the whole thing, but it’s called scattered site management. And it is very, very difficult. But if you put the right systems in place and the right resources in place to help coordinate maintenance and coordinate tenant inbounds and do regular property reviews and all that stuff, you can fabricate onsite management if your systems work really well and they break down and you’ve gotta repair them and you’ve gotta replace resources and components to them. But that is the, that is the, the crux of what we, we do to differentiate ourselves on property management. And a lot of our third party is in these smaller properties. And I think a lot of third party managers charge, you know, 12 to 14% property management fee, which is outrageous because they decided not to figure out how to put these systems in place and do that.
Ray:
We charge less than half of that, including to our own portfolio. And that’s because we have the scaled systems to actually go and do it. The normal property management route is to have one guy, Jerry run around with a bunch of, you know, keys, jing all over the place. And everything that’s going on is in his memory is no AppFolio is no nothing that’s normal. That’s not what we do. And when we bought into our property management business, I mean, we picked a good one and they had some good things in place to do scattered site management. But there was a little bit of that going on too. And that was a big change that we had to to put them through to get there. But look, I’ll, I’ll, I’ll say this, which is fundamental to our thesis, but very important for the property management side of things.
Ray:
80% of multifamily units in the United States are in buildings that are 50 units or less buildings, 80%, and within that realm of 80%, so the vast majority of multifamily product, these 10, 20, 30 unit buildings, even, you know, four or five, six unit buildings, the average owner owns only 10 units. So it’s extremely scattered and everyone is doing scattered site management to some degree or another. There’s a huge advantage on the entry side if you can figure out how to actually wrangle these things down and run them well with scattered site management because it’s hard to do and the other managers are very expensive and they’re not doing a good job. So you have an opportunity to come in and pay less than you otherwise would’ve for something that’s more valuable to you than it is to the current owners, which is always where you want to be in a marketplace. But it’s also a necessity to continue growing, building, scaling modernizing that, but not modernizing it too much. You know, we’re not gonna be AI agents everywhere doing anything anytime soon. We have the, the human touch and it’s a, it’s a differentiator for us.
Charles:
Interesting. Yeah, when I built my first portfolio of small rentals myself and my brother, and we, like, we kept it strategically tried to like, I think it was in like 3, 4, 3, something like this, three quarters of a mile radius or something like this to do it when we were building it. And we, we kind of realized that later on, that that was a great way of doing it. But you had other people that are like, oh, and you had that, you know, quintessential Jerry, you know, drive in Home Depot, drives there, drives here, drives there. Now you’re paying all this money to fix like a, a, a faucet. You know what I mean? So it’s, it’s like, it’s completely inefficient with with with how it works. And you, you see people, like you said, I mean the majority of small mom and pop property managers or owners, landlords, that’s just how they manage and it’s just kind of crazy. So <laugh>
Ray:
Yeah, so exactly what you said is, is a hundred percent true. Now imagine doing that in a city with you know, 2,500, 3000 units and then you’ve got 15 different little pockets like that that have critical mass where you can have somebody not really traveling that far, but still doing all of the local work. That’s the power of scale. And then you don’t need you know, a, a maintenance coordinator to cover your a hundred units. You can have a maintenance quarter or coordinator cover 500 of your units, and then all of the vendors that are for replacing water heaters or roof repair or boiler work or whatever it is that those people can be coordinated across the entire city instead of being coordinated just in a little pocket, right? So the, the scale is very real from the PM side and it never stops. Like every time you add density to something there, the marginal cost goes down and it is it’s important. And the biggest risk is when you go to sell, getting an offer that’s so good that you can’t keep it in your portfolio, you’ve gotta sell to somebody else and then them going with a new manager and losing scale.
Charles:
Nice. Interesting. Okay, so one more question before we wrap up and people can learn more about your business. What would you say are some common mistakes you see multifamily real estate investors make over your decade plus of buying property and then also working on the other side of the desk? Institutional?
Ray:
Yeah, I think what we talked about before was going the full nine yards on renovations. And I meant to cover this a little bit before when you were talking about the secret of of pm but picking really good locations for what you’re buying, like location, location, location. Real estate is a cliche, but it’s so true because then you get the best tenants and then all of the management becomes much easier. The the r and m goes down, everything is better. And I would say that that is another thing is that people picking locations that they don’t understand or product types, that it’s not suited to them. So somebody who’s in affordable going after high level free market stuff or vice versa, it just doesn’t really work that way. You have to be tailor made. I think the other the other mistake that syndicators frequently make is they have one skillset that they’re really good at.
Ray:
It’s frequently finding deals and they don’t have the ops or the construction management skillset. I’m blessed. My focus is on finding deals and putting together acquisition strategies. That’s what I’m really good at. My partner is a best in class real estate, former real estate developer and construction manager extraordinaire. So we’ve got those parts covered and then we’ve hired just super quality people on the ops and property management side to really get that going. I think syndicators come in and they see a good basis and they see, you know, I’m gonna put five cap per door and I’m gonna raise rents by this. And the math looks good on an Excel sheet. And then the moment you hit reality, everything absolutely goes bonkers. And it’s because they don’t have the right people, vendors, systems, everything in place to do the, you know, you did the first two months really well, good job.
Ray:
But the next, you know, three years of this product lifecycle, you have completely ignored. And I would say that’s where, that’s where it comes around. And I can’t tell you how many times we pick up deals and they always say never buy from a value adder. I disagree. Some of our best deals have been buying from value adders where they get in and they just realize, especially outta state folks they did not have the resources and wherewithal to complete this renovation project. They underestimated it and then the people that they had to go do it just did a horrible job. They didn’t have a good relationship, they didn’t have any qc, it was bad. And on the property management side, they underwrote 3% property management fee ’cause they’re coming from New York City. And then they very quickly realized that 6% is probably the cheapest that happens in that market.
Ray:
And 12 to 14 is much more realistic for their product type. And if they made a, if they made a really good deal with somebody and that property management firm is absolutely horrible and messes up the lease up and doesn’t do a good job with the post lease up presale period, and they get absolutely hosed on those things. I mean it’s it’s a very simple business. You buy it at a certain basis, you renovate to a certain level and you lease up to a certain level that determines your yield and you want that stabilized yield that you get to, to be as high above your exit cap rate as you can possibly be. And so much of that gap between stabilized yield on cost and exit cap rate when you sell is determined in ops and construction management and not in acquisitions. And you get all, you get the other side too. ’cause You can also be a great renovator and operator and buy stupidly and not buy aggressively enough and get the right price per unit. It’s an important part of the equation. But you’ve gotta have all three or you’re rolling the dice. Yeah,
Charles:
Yeah. I think when you have syndicators that came in value of syndicators, they had very short timeframes and having that’s like, it’s, I think feel one of the most dangerous things when you’re buying multi or any type of real estate. It’s just having short windows because everything has to line up and if it doesn’t line up, you’re out. Whereas if you’re buying something and you’re keeping it, it’s old school investor told me, he called it like the 10 year rule of like owning real estate. It was like if you are planning on you can hold it and you’re planning on it for 10 years, the chances of you losing money on that is very limited. So he is like, if you have a longer time horizon, the chance of losing money. So some things I’ve learned there, but I like that rule. Ray, thank you so much for coming on today. How can listeners learn more about you and your business?
Ray:
Yeah so we are not we’re, we’re a pretty quiet bunch. We don’t have a bunch of stuff going on, but if you go to LinkedIn, we’re semi-regular about giving updates to what we’ve been working on. Our website is super outdated, but on LinkedIn we do that and you can sign up for our newsletter if for whatever reason you so happen to be interested in learning about new stories that affect multifamily in three very specific cities in the Midwest. Our newsletter is about as good as it gets.
Charles:
Okay. Well thank you so much for coming on. We appreciate your time and looking forward to connecting with you here in the near future.
Ray:
Awesome. Thanks Charles. It was a pleasure.
