J Darrin Gross Podcasts -

Real Estate Investor Evergreen Marketing with Trevor Mauch – CRE PN #311

Trevor Mauch 0:00

I know it sounds like work. But the thing I always like to say is, is hamster wheel has worked forever. At evergreen is a lot of work in the first two years, first year, the first two years and then as it builds momentum you stack we call we call stacking bricks. As you stack those bricks, those those sturdy pieces of content they’re going to, they’re going to be up forever, that people are going to be searching those types of phrases for years. Everything starts to build up for you. And you get momentum and about 18 months, two years after you do it, then you look back and go well, I’m getting leads from all the work I did two years ago from the work I did six years ago.

Announcer 0:36

Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from the experts.

J Darrin Gross 0:56

Welcome to Commercial Real estate Pro Network’s, CRE PN Radio. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is Trevor Mauch. Trevor is the host of the Carrot Cast Podcast and the CEO of Carrot, one of the nation’s fastest growing companies, according to Inc Magazine, where they have helped the nation’s top real estate investors and agents plant over 3 million online leads in just five years, closing 1000s of deals with their software and training. Trevor lives in Roseburg, Oregon with his wife and three kids, and is passionate about using business to fuel your passion and amplify your impact that are the impact you want to make in the world. Part of the impact he’s passionate about making is helping entrepreneurs unleash that entrepreneurial dream of finally unlocking that freedom, flexibility, finances, and impact that you’ve dreamed, but have you yet to be able to fully make happen. And in just a minute, we’re going to speak with Trevor about online marketing and how to attract an audience and remain relevant.

But first, a quick reminder, if you like our show, CR e pn radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment we love to hear from our listeners. Also, if you want to see how I answer our guests are Be sure to check out our YouTube channel. You can find us on youtube at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Trevor, welcome to CRE PN Radio.

Trevor Mauch 2:56

Darrin, man, I appreciate you having me on big time and one thing I forgot to mention so we talked a little bit ago. I didn’t realize you’re a fly fisherman is still steelhead fishermen so I see the video there does shoots river fish and steelhead out there. Dude, we’ve got we’ve got a shared shared passion there, man. I love it.

J Darrin Gross 3:13

That’s that’s a blast. That’s one of the great things the Northwest has is fishing. So I figure if you’re gonna live here, you might as well figure that. That’s right. I love it. But hey, Trevor, I appreciate you doing this. I’m looking forward to our talk today. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Trevor Mauch 3:36

Yeah, they’re in some kind of the short of it. Yeah, like you’d mentioned, I live in a small town here in Oregon called Roseburg. And it’s not like the general metropolis of tech companies or real estate investors or anything like that. But that’s kind of part of our purpose and part of our passion and mission. Like we were chatting right before we hit record. And we’ve got this building here. It’s 8000 square feet. It’s a entrepreneur co workspace where a bunch of other amazing entrepreneurs most of us online based companies work out of here and we’re working on like one by one acquiring buildings downtown Roseburg, Oregon to, to renovate get amazing businesses in those buildings. And we’ve just started it with the building next door as well. So that’s kind of like the home where we live, but my company carrot. We’re a team of just shy of 50 employees right now. And that’s a whole different story. And that’s a that comes from a guy who never wanted employees. How is that employees would be you know, a burden versus something that can unleash you. We help about almost almost 1000 real estate investors today. Mostly house flippers wholesalers, a lot of commercial investors as well. I personally use carrot for generating leads for tenants for my rental properties and for my Airbnb ease. But most of our clients generate motivated seller leads motivated house sellers primarily by the tune of hundreds and hundreds and hundreds of 1000s of motivated house sellers every year. Mainly from people going to Google like people do a Google search sell my house fast insert in any city, and then you’re probably going to find a number of carrot sites towards the top of Google and every city in the country, scooping up seller leads. So that’s kind of the high level what we do where we live. And, man, I’m excited to be on here with you.

J Darrin Gross 5:15

Awesome. So, you know, it’s funny, you know, years ago and and, you know, pre pandemic, there were certain cities that were recognized as kind of the the hub of, you know, online or just, you know, more of your kind of centralized cities and stuff like that pandemic, truly proved that you can be anywhere and get work done. And, and a lot of people have made the decision to go anywhere. Yep. So I mean, I would think that in a weird way, Roseburg might have a special appeal to people that are looking for the anywhere that’s got some sort of a hub. And he’s seen any is is there been any inward migration? You know, as of late?

Trevor Mauch 6:00

Man? That’s a really good question. Because I’ve been high. I’ve been high in rural areas for for years. And that’s why that’s why we chose to stay in Roseburg and start this company, right. But even carrot we’re a remote first company. So while we have just shy of 50 full time employees on on the states, we only have about eight to 10 here because some of those types of jobs are a little bit harder. But we do have some employees moving from Metro metropolitan areas to Roseburg, Pete, my head of sales and customer success, he moved out here with his his wife just recently from Baltimore, and they’ve been in Baltimore like their whole lives, and they wanted a slower pace, you know, and I think that’s what a lot of people are looking for right now is, is oftentimes these urban areas that draw them to the urban areas, originally, because of jobs and job opportunities. Sometimes those very things, the buisiness of it, the craziness of what has happened during the pandemic, and all in all of 2020 in urban areas, I think people are looking at they’re going, you know what, I can work from anywhere I want to work now. And let me go do that. So this space here is entrepreneur co workspace, but we don’t have a lot of kind of open space. It’s all dedicated offices, except for one space. And I really see Darren, if you’re in a rural area that is attractive for people to come to because of a slower pace where there are good amenities there. There’s, you know, here, there’s 35 wineries in town, there’s nine breweries, there’s amazing outdoors things, you’re not going to find the most vibrant nightlife, everything shuts down at 10 o’clock, you know, but there’s not a lot of that going on. But if you want an amazing place to raise a family, and that is the inflow we’re seeing, as people that moved out after high school after college, they were away for 789 10 years, they got married, and they’re coming back here to start young families or with their young family for better quality life now that they can work from anywhere. So we’re doubling down on the concept of downtown in rural, we’re doubling down on the concept of CO workspaces, especially in rural, I think those are going to be amazing opportunities for commercial investors next 10 years.

J Darrin Gross 8:02

I love it. So your firm carrot? You mentioned some of the the services or that you you work with a real estate investors and professionals. Can you describe a little bit about what Karen is and how it works?

Trevor Mauch 8:21

Yep, for sure, Dan. So that the original concept was this was in kind of 2000 through 2010, that’s when the internet was kind of getting its feet, the whole the whole call to arms for all all small business. And whether you’re an insurance broker, or you know, the local restaurant, or a plumber or real estate investor, the whole call to arms is like you got to get online, you know, so that’s when you saw GoDaddy pop up and Wix, and Weebly and Squarespace and all of those local mom and pop web developers in town, they all popped up during that decade 2000 through 2010. And when I started entrepreneurship in business, it was right around 2008. And I saw the opportunity for using the internet to really grow a business, not just get online. And, and I started to learn how to make a website actually attract your best clients, you know. And what we found Aaron was, was the most motivated people aren’t the ones that got a direct mail piece that dropped on their on their doorstep, you’re going to activate demand for sure, the most motivated people are seeking out a solution actively. And increasingly, so since 2008, where were people doing it the internet. And then when iPhones came up, you know, everyone pulls out their cell phone to do a Google search for anything that they want. And so that’s the opportunity we saw is we’re like, man, everyone’s online. But their websites aren’t actually working for them. They’re not actually attracting a lot of leads, and then converting those leads at a high rate, because websites were made to look pretty and into setup easily. They weren’t made to perform back then. And so we stepped into that in 2014. And we’re like, what if we were actually just to build websites that converted and actually rank really, really well in Google. So when you sent 100 qualified people to that You would get out, you know, 1520 3040 leads that you could actually work with instead of a few. And that’s what we double down on is it was all about performance, how do we make your websites perform, so you can stop losing leads and deals from an underperforming website. That’s what got us to grow. What kind of is getting us where we’re where we’re going now, is we really hyper focused on what I call evergreen marketing, Darran. And there’s outbound marketing, which works amazingly well, your direct mail, cold calling, you’re knocking on doors, all that works great for any business. The problem with those types of marketing is it kind of keeps you on the hamster wheel. You know, in us as entrepreneurs, we want that freedom, like you’d mentioned earlier on, and you can’t really have the freedom if you’re always on this hamster wheel, where you’ve got to make cold calls today to keep business coming in, you’ve got to knock on doors, you, you’ve got to send out that direct mail all the time. The only way for you as an entrepreneur to get off the hamster wheel is for you to hire people to do it, which is a great option, or fee to choose marketing that actually works for years, not just weeks or days. And so we help people get off the hamster wheel and do what we call evergreen marketing through a Google.

J Darrin Gross 11:08

Now, that’s awesome. I mean, you’re you’re, you know, spot on from I mean, is a guy that was kind of the slow ski, to come to the market and understand just what or I knew, and I know that I need to be online, but the whole, just the everything you described about just the the labor the intensive labor of being online and creating a presence and, and you know, continually updating and, you know, being some social media guy. Yep. I mean, it’s, it’s like all another job, you know, I mean, it really takes your eye off the ball of what you do, you know, if you’re constantly trying to create content stuff. So, let’s talk a little bit about when you say evergreen content, I mean, my if you when you say that, to me, I’m, I’m envisioning something that’s, that’s timeless, meaning that it’s going to be relevant today. And it’s gonna be relevant, you know, three years from today, presumably? Is that kind of what we’re talking about there?

Trevor Mauch 12:08

Yeah. 100%. And so kind of the way that we approach evergreen marketing is this is, is number one, you will work with a ton of real estate agents and a lot of real estate investors, right. The majority of our clients are investors, but the real estate agency years ago, they were taught and educated that social media is the thing, you know, say real estate agents are posting three, four or five times a day on social media, sometimes a lot more. And here’s the thing, they’re like, every single time I talk about hamsterwheel, marketing, like direct mail, cold calling, knocking on doors, you know, social media marketing, it’s nothing that doesn’t work, it works amazingly well. What oftentimes we don’t connect with is the fact that our market actually dictates our lifestyle. If we’re doing marketing that requires us to stay on the hamster wheel, and we can’t get off. Or we’ll we’ll see a downturn, then that that business owns us, like our marketing owns us, instead of us owning the business. And so when I start to look about evergreen content, the first thing I look at is what are you already putting on social media, if you are active on social media? What types of videos are people putting on social media? And how do we just repurpose that to get it over on a website in the right way that Google’s gonna like it, and I can kind of walk through a couple basic steps everyone can do, that’s really simple. But if you post a video or a picture, or a post on Facebook, or Instagram, it’s amazing until 72 hours later, when it’s way down the list, and almost no one sees it. And so you have to post again and always say at the top of people’s feeds, and I can carry out, you know, what if you want to go on vacation, and you don’t want to, you don’t want to do that. And so what we’ll work with people on to say, okay, you know, who’s your primary client? What’s your primary prospect? And what are the situations that they would go through? What are the phrases that they would type in like for you? On the insurance side of things? You and I, are you? You live in Oregon still, Darren?

J Darrin Gross 13:56

Yeah, I’m up here in Lake Oswego right now.

Trevor Mauch 14:00

My old stomping grounds I lived, I lived up right up. Oh, my gosh, it’s been so many years now. It was right by is McVeigh of McVeigh by the river. The 70s nursery, like right behind that is where is where we live for three for three years.

J Darrin Gross 14:15

Yeah, we would have been neighbors almost.

Trevor Mauch 14:17

So it’s funny. So in this example, here, I’m just pulling up Google on my end, you know, let’s say someone was looking for business insurance, or there’s a certain type of insurance in Portland. And I was going to type up, you know, insurance broker, Lake Oswego. And so what I’m doing is I typed it up and Google is give me some suggested searches, right? And it popped up, you know, insurance broker, Lake Oswego health insurance broker popped up there. And then at the bottom of Google, and that’s one thing I always do is what what is the broad topic of what my prospects think I am and what are they looking for? And then I search it and I scroll down to the bottom of Google, and then it’s gonna give me a bunch of suggestions. And this one happens to be a bunch of company names. You know, it’s like business insurance. Sisters, Oregon business insurance Hood River, full heart, Roger biz net, so he must be a big insurance guy, I don’t know. But the cool thing is when you start to put out content, and you do it consistently on your website instead of just social media, and that content is robust, it’s not just 100 words, it’s 7800 900 words. And that’s what Google was gonna look at, you start to build up this authority hub on your website. So Google sees as our amazing robust content, this guy Darren is an authority on insurance in Lake Oswego. And then your whole website’s going to lift. And now you’re going to be in front of that evergreen flow of your most motivated prospects who are closer to the by decision than someone else.

J Darrin Gross 15:44

So let’s talk about that. I get the kind of the the local kind of thing is what do you have that would drive a lot of that presence? Or on the search?

Trevor Mauch 15:53

Yes, so the local part, it makes it easier to rank really well if you’re localizing it. So when we’re working with an investor or an agent, their services are usually hyper local agents, specifically, or hyper local. But we do have a lot of investors who do business in 345 states or they buy they buy houses nationally. And so what happens is, let’s say, let me ask you a couple questions here there. Are there certain cities, in your example, there are certain cities that you do business in, that you’re like, Oh, these are my five favorite cities? Do you have cities like that? Or is it very general and broad,

J Darrin Gross 16:30

more of like the Northwest, I mean, I, I work with clients nationwide. But I would say that obviously, just having a physical presence here, and just, you know, local, there’s, there’s a a significant portion of my business, that is Oregon and Washington, the Portland metro area, so perfect.

Trevor Mauch 16:48

And so that’s a cool thing is it depends on how your your primary prospects search. And so if they’re going online to search local restaurants, of course, they’re probably looking for a restaurant right there where they are, or possibly, maybe they’re looking for a place that they’re going to be in the future on vacation. But with insurance, they oftentimes type their local area, right, this type of insurance in my local area. And what we what we pioneered shoot seven years ago in the real estate investor space, was we would look at companies like loopnet. And then Zillow came to follow and we noticed, man, most of the most of the searches that I do on investment properties for sale, insert any city in the country, you’re gonna see loop net ranked number one, number two, and number three in Google, right? And we started looking at that and say, Well, why is that the case? And then you’d click those links. And it’s almost never their homepage, like their homepage is never the thing that’s ranked there. It’s always a page hyper specific to that location for the thing I was looking for. And we said, What if we can’t take this same concept to the real estate investor space? And how do we how do we amplify that so an investor would launch what we call a location page, or a city specific page, where you can launch a location page for that discipline. And if you’re in business in 17, cities, you should have paid for every single one of those cities for the different types of services you offer. And so for you, if you offer three different types of insurance, it might be a great opportunity to put landlord insurance broker in, in Lake Oswego landlord insurance broker and Beaverton landlord insurance broker in Salem land, you get the idea, right, and create a separate page for each one of those. And so I know it sounds like work. But the thing I always like to say is, is hamster wheel has worked forever. evergreen is a lot of work in the first two years of first year, the first two years and then as it builds momentum, and you stack we call we call stacking bricks. As you stack those bricks, those those sturdy pieces of content, they’re going to, they’re going to be up forever, that people are going to be searching those types of phrases for years, everything starts to build up for you. And you get momentum and about 18 months, two years after you do and then you look back and go, Well, I’m getting leads from all the work I did two years ago from the work I did six years ago. From for me, Darren, we built care at the exact same way. We didn’t do any paid marketing for the first three years. And we said, What if we just went went went and looked at like, what are the phrases were national company? So we said, What if we just looked at the phrases that our ideal prospects are searching in Google. And then we just started to create content around those phrases that was robust, you know, 800 words or more was interesting. It was valuable. And then we started to create one or two those a week. And that was our that was our primary marketing strategy. And it could be phrases like how to invest in real estate, how to wholesale houses, it could be motivated house seller leads, it could be websites for real estate, investors, things like that. And so that might be a good strategy for you as well do the we call it do the localized ones first for your primary business function, you know, investment or investment, property insurance, landlord insurance, whatever it is in these locations, and then we go after the niche searches. What might they searched? It’s more broad that isn’t location based. It could be what type of insurance Should I get if I own a rental property? Right. And that that could be amazing content that you could create and build that authority hub on on your website.

J Darrin Gross 20:12

I love the kind of the timeline, the two things I picked up from what you just said there was the timeline of expectation there anywhere from 18 months to two years. And then also the, the, just the volume of content, the frequency, you know, something from one to two articles a week, and the length of the the art of and then I think the key thing is, this is the key to all of it, if it’s not interesting and valuable, it doesn’t matter which hinders, there’s clearly a lot of people that that tried to game the system, unfortunately, Google got smart enough to recognize the game. And a lot of cases, but just, you know, just if it is valuable, and it’s evergreen, I mean, that that’s, that that works nice. what’s frustrating, and also rewarding in this whole thing is recognizing people that I know that have gotten, I don’t know, say a head start. But they’ve done the work, like you said, they put the brakes in place. And now I see leads coming in and going wow, okay, that really works.

Trevor Mauch 21:19

It’s crazy. And here’s here’s the cool thing is that the reason I even started to dive into this, this type of marketing Darren was before before carrot, I did a lot of damage to marketing. And like I said, it worked, I made some good money by this sort of in 2011 12. In my previous company was online business as well. But our income was kind of boom and bust, you know, where we would have $130,000, one month, one month, and then we then me and my business partner would split $6,000 the next month. And then we lost money three months after that. And then we made another 70. And it’s like, man, at the end of the year, your income statement looks pretty good. But you’re stressed the entire year, because you didn’t know where your income was gonna come from in three months. And, and when that happens, you can’t really plan ahead, you can’t plan ahead well and have confidence to hire an employee Sure, like I don’t know, it’s, it’s so inconsistent. You can’t plan ahead well, and say, You know what, I’m gonna take a month off of work, and I’m legit not going to work at all, or I’m gonna not work as hard or I don’t have to do any marketing this month, because I know it’s coming in or whatever it is. And I kind of had that that dream. I’m like, Man, what are the things in my business that I don’t like. And in 2012, I sat down and wrote wrote down the list and 2012 was this big transition year for me, I figured out how to get a business off, you know, off the off the ground. And what I discovered down is about two to three years into a business, maybe three to four, it’s very common for for us to lose that edge, lose that excitement, lose that fire for that business, we have started, you know, because when we start this business, whether it’s being a commercial real estate investor, or you know, any type of business, you’re usually running away from something, right, you’re wanting running away from a job you didn’t like you’re running away from an income ceiling, you didn’t like you’re running away from some people saying you couldn’t do something and you want to prove them wrong. And then as soon as you make that thing work, and you start to hit that that income level that you’re hoping for, or there’s progression, that fire that you’re running away from is gone. Now that motivation is gone. And we forget to now run towards something. And so now happened to me, in those early years as an entrepreneur, and I started to wake up during the, you know, some days, I’m like, why am I doing this, I’m not excited about what I’m doing right now. I feel like most of what I’m doing is just my energy being sucked out of me, but I’m making good money. So it was hard for me to, to justify it because the outside world was validating me saying, Man, you’ve got what I want. And I had it and I’m like, I’m miserable, though. I just don’t like it. And so during that time, I started to switch my mindset from trying to be productive, and trying to like do productivity hacks to well shoot, how do I just have more energy during my work? How do I can I base my work on energy instead of instead of making a list of what makes me money doesn’t make me money, and crossing out all the things and stuff that doesn’t make me money and saying, I’m not going to do that, and doing more of the things that make me money. I said, Well, what if I just flip the script and I just do a, an energy on it, I call it and just make a list of all the things that drain my energy, and all the things that give me energy, especially the things I’m not doing, but but give me energy. And I go, what if I just changed my work towards energy instead of money, and maybe the income will follow. If I do work that gives me more energy than not. And that’s what led him to evergreen marketing was a sort of look at all the things that are draining my energy was me staying on this hamster wheel to try to get customers to come in. And I was executing on this stuff. And I looked at my p&l in my leads. And I said, Well, there’s this little line item of leads over here. And they were like our most profitable clients. But it was a minority of our income. And I said Man, I barely put any work into that and that was work I did two years ago and it’s still paying off. What if I just did all of that. It’s gonna take a while to transition. It’s gonna take a lot of like transition now for that drip of the instant gratification of You know, paid marketing or things like that. But what if I just made that shift? And what if my whole business was built off of that, and then I could do paid marketing or hamsterwheel, just to if I wanted to, or if I wanted to grow and amplify it. And that’s the shift I made, I’m like, no longer Am I going to build a business that’s inconsistent and predictable, I’m not going to build a business that isn’t fun for me, I’m not going to build a business that that is not based on my unique abilities, I’m going to really dive into and embrace it.

J Darrin Gross 25:27

I love the the energy, thought and because that is just like, you know, I got to do this again, kind of thing. And, and, you know, it’s a grind in, and I’ve worked with various marketing people over the years and stuff and in certain things, you know, produce, like you say, I mean, I’ve done I’ve worked with people making outbound calls and, and outbound marketing, I mean, in the reason why people do it is it works, it works. But if you don’t do it, it’s done. I mean, there’s not like a line of people trying to get in, it’s a matter of Have you got to pay to continue, you know, making the, the outbound calls in order to have the opportunities to to make sales and then and so, you know, how did you when you were sifting through that make that decision of what was giving you energy versus what wasn’t? Because I think sometimes, you know, the, in a sales environment, especially, you know, making sales, you know, or, you know, making money because you’re making sales. Yep. That’s energizing, but, you know, distinguishing between the activity versus the I mean, to realize, really, what was the root of that, you know, sounds like you kind of went through, you know, the different sales you’d made and realized what customers came from what efforts is then kind of what, what you did, or is that I mean?

Trevor Mauch 26:46

Yeah, a little bit, I really took stock and everything, like everything in my life at that point, because, and I think a lot of people on this podcast can probably relate you guys, you guys might be in a spot and you’re in your job right now, or your business right now. We’re like, man, I hit the goals that I thought I wanted to hit years ago, I’ve got the income coming in. But the clouds didn’t part the angels didn’t sing, you know, it’s like there’s, there’s fulfillment is missing. And, and, and it hit me, I had a friend, or I have a friend, who was really successful still is, and he was kind of like the guy at that time that I looked at and said, Man, he’s a man of faith. Like, he’s a father. He’s coaching his kids football teams. He’s got these two businesses, he’s able to go to business number one on two days a week and just do what he wants to do business. Number two, he just does what he wants to do. And I’m like, I’m doing all this stuff, like all this stuff, even stuff I don’t want to do and it feels like it seems like when I talk to him, he’s more energized than not. And I said, Greg, what’s, what’s your secret? And he said, Man, he said, the biggest thing is, you’ve got to figure out what your unique ability is. And he learned that from a guy named Dan Sullivan, with a company called Strategic Coach. And so Greg had talked to me about unique ability. And I ended up actually joining Strategic Coach for a year in 2012, which, which changed the course for me because that one little thing of unique ability unlocked for me, and this, this is where it was this or the energy thing came from Darren was, I was in workshop number three, I think he go quarterly to this, this Strategic Coach thing, I flew into Chicago, every single quarter, and they lay out a plan in front of you, and they make you think about your business and your life. And the whole thing is to win back your time and grow and grow a great business. And the whole the whole unique ability thing wasn’t clicking for me, like I knew that I wanted to find it, but I couldn’t figure out what mine was. because on one hand, get a bunch of very smart people saying your unique ability or your you know, whatever you want to call it your superpower, whatever is things that people will tell you you’re really good at and you get paid really well to do. Right people say you’re really good at you get paid really well to do they’re like do more of that. And that’s what I did for those three years. That’s what got me a pretty good business and made some good money. And it’s also what got me so I completely wore myself out and lost my fire. Because half the things that were making me really good money and people said I was good at completely drained my energy and I did not want to do them. And I’ll give you some examples. I love strategy, right love strategy, but I hate actually the execution of the thing. So like I want to come in and blow up the whiteboard and I’m gonna sit here and then I just want it to be done you know the things to be done. But if I have to sit down and write the emails or do this like ah just sucks the life out of me.

I love love love doing these things. This gives me energy. But what I don’t like is writing content which is kind of funny because that’s what my business is built off of with carrot like even when I started carrot I’m like I’m content forward. And and I found myself wearing myself down writing late at night to get to a deadline to get an article out and go man, I love the Evergreen marketing thing but I don’t like I don’t get energy from the writing. I get energy from the strategy of coming up with the articles and the topics but don’t want to sit down and write. And so for me the energy audit actually became a process that I do quarterly and you guys can find it I’m it’s a free worksheet. I don’t think you have to download Don’t think you have to opt in for it. Just go to carrot comm forward slash energy, carry comm forward slash energy, no opt in Nothing, I just want people to use it and get it. But I took a piece of paper drew a line down the middle. And on the left side, I’m like, okay, the definition of your unique ability from Strategic Coach is you’ll know that you found it when you when you get more energy, when you’re done doing the thing than when you started. You have more energy when you’re done doing the activity than when you started. And it’s something you could be amazing at potentially world class out if you work that hard enough. And so I said, Okay, let me find what those things are. So drew a line down the middle of the paper on the left side, it was drew energy drain on the right side of his energy give. I said, let me just write a list of all the things on an average week that I do currently that drain my energy. It’s like writing emails and doing this or writing blog posts and having these types of meetings and put stuff in your life to write like, this type of chore at home. I don’t want to mow my lawn. I don’t like that. And so all these things on their own. And the right side is what gives you energy, especially the things you’re not doing right now. Okay, I liked working out I wasn’t working out it gives me energy. I wasn’t doing it though, because I didn’t think I had time. Okay, I love strategy, but not like execution of the strategy. I love having conversations like this with smart entrepreneurs. I love dreaming and vision. I don’t like actually executing the vision, right? And there’s the I’m looking at it going, Oh, there’s a lot of things that make me money on the left side. And the things on the right. And like I don’t know how to make money, just having conversation with smart people. I don’t know how to make money, just strategy not executing it. Like how the heck does that happen? And so one by one there and I did this, I said, Okay, I don’t have to know how to do it. But what if I could just start switching energy draining activities for energy giving activities every quarter? And let me do let me kind of take a synopsis at the bottom of that sheet. And let me write down. What percentage of my average week right now is these things that drain my energy versus these things that gives me energy. And at that time during 2012 it was about 70% energy draining 30% energy giving No wonder I wasn’t liking my work anymore. No wonder. I’m like, Oh, damn the answers right there. It’s energy. It’s not productivity, it’s not. So if I can get more of these crappy things done, it’s I’ve seen stop doing those things. And so every quarter, I do that list, and I still do it today, circle one or two of the items that drain my energy the most write down how many hours per week I do on those things, let’s say seven hours on writing blog posts for week, three hours in this other thing, checking email, or whatever it is. And I go cool. Over on the right side, what thing gives me energy that I’m not doing enough or not at all that I want to replace with that seven plus three to 10 hours a week, I’m buying back. And I’m gonna replace it with this other thing over here, even if it doesn’t make any money. Because on the article side of it, let’s say it was seven hours a week, I’m like, I’m not going to do it anymore. I love the strategy side, I’m going to I’m going to lead this strategy, my articles, I need to find someone who’s amazing to write them now. And so that continues that money making activity continues. I replaced it with starting my podcast, because it gives me energy, like I have no clue how to make money from it, I just want to do it because it gives me energy. That’s it.

J Darrin Gross 33:04

I just loved the whole energy essence of it, as opposed to the focus on like, the money side thing or something because energy is something you can feel and you’re like, dude, I remember years ago, I remember I bought a ski boat. And it was just like, there was this passion that was just like it was, you know, every every day, I was like trying to get my work done as fast as I could, because I knew as soon as I’d done like, it’s a Hey, guys, I’m at the lake, let’s go. And there was just, but it was it was it was like kind of the lead of of, you know, whenever I was talking to people, you know, I was like invite them on the boat or there was just like, there was some energy, you know, like he said energy. And just but just to have that that energy. And it’s and it was such a giving thing, even though there was a cost to it that the give was way more beyond the cost and that

Trevor Mauch 33:53

it’s gonna make every other part of your life better. Right. And that’s one of the best that I was making in 2012. there and I said I don’t know if it’s gonna work but what you’ll what what if all of these things over you’re working out doing starting a podcast only doing strategy or mainly doing strategy doesn’t mean I’m only doing that. But I didn’t I didn’t have a team at that time. So I’m looking at this photo shoot. So how am I going to do this stuff? I don’t have a team Well, I once again, I every quarter that was that was the first stuff on my plan that quarter it was it was creative process for this thing, and then find a person to do that thing because I’m not going to do it anymore. Credit press for this thing. We’re just saying no to it. So I hired an assistant. She took over my email, and she took over a lot of those things in her and I still do the energy audit quarterly. Trevor what what did you get back on that energy drain list that that is there. Now that wasn’t before? Oh, what’s this? How much time a week is it taken? Man about this. I don’t even know how I let it slip back in or what it did. And then it’s like I how many hours there what two things? What do you want to add back in? I need to get working out again. Okay, cool. Then she would help me on that and one by one there and it didn’t happen overnight. I started to make that shift and that’s when I really embraced building it. Team because I never wanted to build a team before. It was all it was all about how do I keep the most money in my pocket? Because every employee is reducing what’s new in my pocket? And it’s a burden. Today, almost 50 employees? Is it a challenge? Yeah, it’s a challenge. But I wouldn’t trade it for the world. Because I’ve got my time back, I’ve got my freedom. And we’re making more impact than we ever could have made before.

J Darrin Gross 35:22

I love the the Periodic Review kind of thing where you’ve got, you know, you’re doing it because I think that it’s too easy to get into the routine of the day of the week of the month of the year. And the next thing you know, there’s years gone by, and you’re still at the same point. And to have that kind of periodic review, and just be very conscious about what you’re doing, and where you want to go. Which is, is awesome. I appreciate you sharing that.

Trevor Mauch 35:48

Yeah. And one final thought on that. Darren, just kind of piggybacking off of what you just said, there is for the people listening to this, you might be looking at this going well, you know, Trevor, of course, you can have energy in the software company named for vegetable and like, we have everything in this office is orange, we have carrot dolls, we send out 1000s of them every year, like we do things intentionally that are fun, guys, it has nothing to do with the type of business I have. Because I know plenty of software company owners who have completely boring businesses and their energy is getting drained in it, it was just a conscious decision to say, What is it about business that I want to amplify that gives me energy that I have fun doing. It doesn’t make any business sense that we make a line of dolls that are care, like super carrot and farmer care and all that. It’s just fun to do. And we like it, and it gives us energy. And it happens to be a good business decision, too, because people like it need posts on social media. So if you’re in real estate, if you’re a commercial real estate investor, if you’re an insurance broker, awesome, the energy audit is actually going to be a way to help you enjoy your business better. Because we oftentimes despise our businesses, not because the type of business that it is, but because of what it’s taking from us, because it’s taking our energy from us, because it’s not letting us live those passions. And so, you know, one thing I learned years ago, I thought I had to build a business around my passion. You like boating, like fishing, I love mountain biking, I love fishing, I thought man, I’m gonna have to like start a business in that. And what I realized is no, we have to, we have to start a very intentional business that gives us energy that gives us what we want the business supports us other than rather than us supporting it, and it takes work to get there. It’s not overnight. But then how do we make the business fuel our passion? It doesn’t have to be it. You know, if you love boating, and love fishing, it’s like awesome. How do you bake that into your business? You know, is there a more active way that you can even have annual or monthly or quarterly boating and fishing trips with your clients? And you just do it because it’s fun. And you sell already and post on social media? You know, is there a way that that you can bake in some some other way of purpose or passion into that? And I think this podcast is probably part of it for you too.

J Darrin Gross 37:52

Yeah, no, I think that you’re spot on is you know, it’s part of your life. It’s not like this extra thing. It’s it’s all baked into together there. And indefinitely. When you have a passion and you’re able to live it and share with others. It just shows that and it attracts, it attracts people to come and work with you. So hey, Trevor, if we could like to shift gears here for a second. I mentioned earlier that by day, I’m an insurance broker. And there’s a couple things we do with with clients when we’re assessing risk and trying to turn to determine what to do with it. And there’s three different strategies we typically look to, we first look to see if there’s a way we can avoid the risk. That’s not an option, we’ll look to see if there’s a way we can minimize the risk. And we can’t avoid nor minimize a risk. And we look to see if we can transfer the risk. And that’s what an insurance policy is. And I like to ask my guests, if they can look at their own situation. It can be their clients, investors, market tenants, however you want to define it, or identify. But if you can take a look at your situation. And and, you know, tell us what you consider to be the biggest risk. And for clarification, and just want to make sure you understand I’m not necessarily looking for an insurance related answer. Yep. So if you’re willing, I’d like to ask you, Trevor mock. What is the BIGGEST RISK?

Trevor Mauch 39:22

Man, this is a good question. So four years ago, we started when we do our annual planning, one of the first things that we do, like we’ll set numbers and goals and stuff like that. But then right after that, we do an exercise where it’s like, it’s kind of kind of a SWOT, I guess you could call it but it’s like what could kill us? What What can kill this business? Because oftentimes, we ignore those things that truly could take us out and they take us by surprise. And so the things that the top of that for us are, if since we’re so heavily focused on Google, and not all the leads for our clients come through Google searches, it could be from pay ads and things like that. But we’re very heavily focused on Google, if there was a major change in Google and we got are caught with our pants down, and our websites all sudden, for some reason weren’t exactly what Google is looking for. That would be decently catastrophic. And so we take that go, Okay, how do we make sure that that’s front and center in our product? Whenever we’re looking at anything product related? How do we make sure we’re always relevant in Google, we’re staying ahead of the curve or websites or fast things like that. The second one day, and I’ll just give you two here is being Frank right now in this business. I’ve been building a leadership team, we had an outside company come in, and did a really good audit for three year vision moving forward. So we all kind of knew what were the weaknesses, what were our blind spots, and I had kind of known it. But what what came up is that I am too key on the strategy side in a way to many parts of the business where people from all around the company see me as innocent as necessary on the strategy. And I’m like, Oh, my gosh, I totally didn’t lead well there in those certain spots. Because if I’m that key, if something happens to me, they all feel this thing’s gonna fall apart. And so we got around a table, it’s like, how do we make this not true here? What what’s in my brain? Where do we need to upgrade leaders? You know, keyman insurance, that is an actual thing that we did about a year ago, when we did that, and it’s given me peace of mind for me and my co founder for sure.

J Darrin Gross 41:35

No, again, I appreciate you sharing that and, you know, not only are you talking the talk, but you’re walking the walk and kind of figuring it out and and trying to make it all work for a long time. I appreciate that. For sure. Trevor, where can listeners go if they would like to learn more connect with you?

Trevor Mauch 41:57

Man, there’s a couple spots so I’m really active on Instagram. I don’t post a lot over there. But I answer every every single dm I’ll post maybe a couple times a week, kind of document behind the scenes that my business here I’m also a real estate investor. He also I own commercial real estate, I own some some multifamily and some Airbnb zz as well. It’s kind of my side hobby. But carrot calm as a primary if you want to kind of learn about what we’re doing, we put a ton of content up there for free. So if anyone in your teams wants to learn how to get leads, for sellers, buyers, tenants, things like that, go to Kerry calm lots, lots of free info. I’ve got the podcast called the carrot cast, just look it up carrot cast and Apple podcasts or Spotify or go to carrot cast calm. And about half the episodes are interviews with investors that are out there crushing it some some big multifamily commercial investors as well. And then half of them are literally me and my truck with my cell phone when I’m driving home takes 15 minutes to get there. I call them Trevor truck talks and it’s just what’s on my mind as an entrepreneur not related to real estate at all. And I love doing them yes, we care cast

J Darrin Gross 43:03

awesome well, Trevor, I can’t say thanks enough for taking the time to talk today. I’ve thoroughly enjoyed it learned a lot and I hope we can do it again soon

Trevor Mauch 43:13

there and I absolutely love the opportunity love what you’re doing and hopefully it since we’re not too far away, man, we can meet up for lunch or something Sunday. Let’s do it.

J Darrin Gross 43:21

I welcome it and look forward to it. Awesome. Thank you Darren like an avid. Alright, and for listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real estate Pro Network’s. CRE PN Radio.

Announcer 43:44

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Commercial Real Estate Entitlement Deals with Adam Gilbert – CRE PN #310

Adam Gilbert 0:00

Entitlements can mean a number of things. But specifically, it’s getting approvals from a city or a county or some municipality to do some form of real estate deal or development. And so that can be taking raw land and saying, hey, I want to build eight homes on it, that can be doing, you know, buying a building and then changing the zoning to allow for a different use that increases the value of the building. That can be you know, one product I’m getting a drive thru approved on a vacant piece of land that’s already in a shopping center surrounded by other businesses. So you know, if the land is worth, you know, we’ll make it easy 500,000 and then I can get these plans approved to the city to do a drive thru. Well, now I can maybe sell that piece of land for a million dollars, even though I’ve only invested some time at about $100,000 and architectural fees. So you really have the capacity if you can figure it out. To do these 5x and 10x type deals with minimal, you know, capital, but it is a bit on the riskier side.

Announcer 1:07

J Darrin Gross 1:26

Welcome to Commercial Real Estate Pro Network’s, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. Today, my guest is Adam Gilbert. Adam is the president of the firm commercial, where he leads a team of agents specializing in commercial real estate sales, leasing, land acquisition, development, government relations and value add entitlement deals. And in just a minute, we’re gonna speak with Adam about value add entitlement deals. But first, a quick reminder, if you like our show, CR e pn radio, there are a couple things you can do to help. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome our guests are, and be sure to check out our YouTube channel. You can find us on youtube at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Adam, welcome to CRE PN Radio.

Adam Gilbert 2:46

Thank you. I’m happy to be here and excited to have a chat today.

J Darrin Gross 2:50

Well, I’m looking forward to it. That makes two of us I guess now, the before we get started here if you could take just a minute and share with the listeners a little bit about your background.

Adam Gilbert 3:02

Yeah, definitely. So most of the deals that I do are in Palm Springs, California area, big hospitality area, Midwest endeavor hospitality, hotels and vacations. So I was born and raised here and went to school, I actually became an attorney. And I moved back to Palm Springs to practice law and found this little thing called real estate and real estate investing, which kept driving me away from the law office and out onto the streets looking at buildings and doing deals. So about I guess it’s about six years ago now I left practicing law full time, I started a real estate brokerage. I started a vacation rental management company doing Airbnb, which I sold and now I both run the brokerage helping people find commercial deals and do a lot of investments myself.

J Darrin Gross 3:51

Awesome. Awesome. So you were on the as far as the attorney work, were you doing courtroom stuff or corporate document or what what kind of?

Adam Gilbert 4:01

Yeah, mostly, I mostly did civil litigation. So I would get the file and then go to the courtroom and you know, do my argument or be negotiating on the phone. So paperwork and stuff was never my forte, but getting down in the details and doing transactional stuff. I’m much more of a talker and get things done that way.

J Darrin Gross 4:21

Gotcha. Gotcha. Well, the attorney thing, it’s kind of the you got to have them but it’s always kind of how the sausage is made kind of thing. And I always say I’m a recovering attorney. So there you go. So real estate, sounds like you were doing some investing in some air b&b. And he had the brokerage and and tell me a little bit about how you got started in real estate.

Adam Gilbert 4:48

Yeah, definitely. So I have, you know, ADHD to the nth degree in terms of starting businesses and getting involved in different endeavors, which I think was why Real Estate Investment is so great for me because I can do a few different projects at any given time and move on. But I was practicing law, I sat down for my broker’s license, and I did a deal is like 2012, the market was, you know, just coming out of the pits of 2008. And my uncle wanted to, he wanted to do a flip property. And so he’s like, hey, Adam, like, write it up, you know, you just got your broker’s license. And so I did, it took like, 10 hours, we found the property, I wrote it up, and I get this commission check. That’s like, 25% of my yearly pay as an attorney. And I’m just like, Whoa, there’s like something to this like, thing if I could figure it out. And so that’s kind of where the spark was born. And, you know, I can’t rely on my family to buy all the properties that to keep a career guy. So I had to, you know, hang a shingle create a company. And you know, I’ve been doing this now for about 10 years. And so I’ve been able to kind of mark my way on the brokerage side. And then as I learned from other people getting paid to do brokerage, what type of deals they were looking at, and where they can make money. I got a great education marketing paid, and it gave me the opportunity to start doing deals myself.

J Darrin Gross 6:19

Awesome. And, and so you started off though, kind of like in real estate doing the the brokerage side of things? Yeah. And then started investing yourself.

Adam Gilbert 6:28

Yeah, I mean, I started off, you know, at the beginning, you start off kind of where everyone does, you know, you’ll take any, any, any client that will work with you. So it started off in single family, residential, you know, kind of entry level homes, condos, things like that. And then, quickly, you know, I was able to kind of move into larger scale luxury vacation homes, and then moved into commercial where there’s just very few people, especially in our market, you know, if there’s 5000, residential realtors, there’s like 20, commercial realtors who are doing things, so I’m like, okay, like, if I’m going to do something, I should go into that space. And, you know, just kind of really fell in love with the deal making aspect and kind of all of the, you know, seller carry notes, and, you know, all these different ways to really make commercial deals work. And then I really found value out of title mints, which I know we want to we want to talk about, and that’s where I’ve really carved my niche as one of the very few people who are, you know, kind of doing these types of deals.

J Darrin Gross 7:29

Gotcha. So, let’s talk about the value add entitlement deals. Can you give us some sort of a definition or give us an example of what a value add entitlement is?

Adam Gilbert 7:45

Yeah, so you know, entitlements can mean a number of things. But specifically, it’s getting approvals from a city or a county or some municipality to do some form of real estate deal or development. And so that can be taking raw land and saying, hey, I want to build eight homes on it, that can be doing, you know, buying a building and then changing the zoning to allow for a different use, that increases the value of the building. That can be you know, one product, I’m getting a drive thru approved on a vacant piece of land that’s already in a shopping center surrounded by other businesses. So you know, if the land is worth, you know, we’ll make it easy 500,000. And then I can get these plans approved to the city to do a drive thru. Well, now I can maybe sell that piece of land for a million dollars, even though I’ve only invested some time at about $100,000 and architectural fees. So you really have the capacity, if you can figure it out, to do these 5x and 10x type deals with minimal, you know, capital, but it is a bit on the riskier side.

J Darrin Gross 8:55

Got it. So the the raw land and its use, and the drive thru as a as a, an option. Do you find that most of the the value add entitlement work you do is with raw land? Or is it common to have an existing built out structure? And the the use just be changed from you know, a to b?

Adam Gilbert 9:22

Yeah, I would say when, when talking about entitlement. I think most people default to raw land on that’s how most people think about it. I’ve really got I’ve now in the process of doing my third zone change. And so that’s kind of a little niche, even with the entitlements that I’ve kind of carved out to be able to try to achieve. And you know, every person, whatever town you’re in, you’ve got that piece of land or that building and you’re just like, why hasn’t anyone done anything with that? Or what why is it sitting vacant, right? And so for me that sparks some creativity is like okay, well probably doesn’t work how it is. But if we can change the use and allow something else there, maybe there could be some value that’s created. And so, you know, if you can buy it when it’s not approved for that, and then sell it what it is, there’s the opportunity to create the value add of the entitlement, you know?

J Darrin Gross 10:19

Yeah. So if there is that property that you identify, and and it’s just been sitting there, and the question comes up, why has nobody done something? Where that property? Is you and your own creative mindset that kind of thinks of what the alternatives are? Or do you go to the city and find out what, you know, what the limitations are? And is like, based on what neighboring properties are zoned, or their use? Or how do you how do you approach assuming you can’t go to the middle of a suburban block and in change it to a, you know, some sort of a, you know, way outside of the zoning news, but more of like a corner lot, or something’s on like a busy street or something like that is more of a target for something like this?

Adam Gilbert 11:10

Definitely. And so the answer is all of the above, it really hot, you have to one know what the community needs to you have to make sure that the use you’re changing it to is not going to be a nuisance to the area, it should actually be an improvement, you should be able to get your you know, if you’re trying to change to do his own change that people I mean, people complain about all sorts of things, but is a negative impact on the community to make money, you’re not going to be successful, because they’re going to go to their city council, and they’re going to go to all the levels, and they’re going to complain, and your projects going to get shut down. And then three, you know, yeah, you got to go to the city, you got to make sure it complies with different parts of the of the specific or general plan, you have to make sure that there’s no environmental impacts. I mean, I’m in California, and it’s, you know, we have a very high barrier, you know, in terms of making sure that we don’t have environmental impacts. So you got to be very careful. But you really have to check all of those boxes, and make sure that it’s a project that fits the community and the area.

J Darrin Gross 12:15

So in each one of these scenarios, where you you know, you have a piece of property that’s zoned in a historical way that’s kind of limited its use, nobody’s using it or doesn’t recognize the opportunities, because it’s not available right now. Is there like one, you know, governing body that you have to approach? Or is it a series of bodies that you have to get the checkoff approval and, and go through a sequence? Or is it every property is different? Can you talk a little bit about that?

Adam Gilbert 12:50

Yeah, so each city is going to have their own process. And you’d be surprised if you go to the planning desk of your city, they’re going to be very knowledgeable about this process and what it takes in that very city. Typically, what you would do is, you know, there’s applications to do different things. And if you find out what you’re going to need from your architect and engineer to do this, but most cities have, you know, like an architectural Review Board, which is the first step. And then secondly, a planning commission, which is volunteer people who, you know, review planning projects. And then finally, for like a zone change, you’re going to have to go in front of your city council and Mayor. And, and get those approvals. Now, sometimes, like in my particular jurisdiction, we have tribal lands, here, Native American tribal lands. And so we actually have to get our projects signed off and approved by the statewide tribal authority before we can do them. And sometimes they’ll, you know, ask for certain things. I have one project right now, that’s very close to the airport. And so I had to go through the airport land use commission. So every project is different, every city is unique. But those are the typical steps that you’ll have to go through for most entitlement deals. And sometimes, you know, Planning Commission is the end all you don’t have to go to city council. So it really just depends on the project and the municipality.

J Darrin Gross 14:16

Got it. Now, and you mentioned, you know, the public you know, always has, I guess the opportunity to voice their opinion for usage. Jeannette, do you find that if you are working within the system and and approach to kind of moving through the system into a, and you’re getting greenlights from everybody that public usually goes along, or do you find it that it is or is there something you found that’s like, you know, good luck with that the public?

Adam Gilbert 14:52

Yeah, the public is always the public. So I mean, I mean, you can find the best projects in the world and you’ll find people who will complain about it. You know, and that’s across the board. You know what I tried to do on all my projects, especially, you know, in Palm Springs, it’s very community driven. And we have a large neighborhood, active neighborhood organization groups. And so I, before I did my project, my most recent project, I went to the neighborhood during their, their annual meeting, and I said, Hey, this is the project that I’m proposing, I want to get your guys’s feedback, what are some issues that you’re having? Are you having negative impacts that I can address through my project? And they’re like, Yeah, actually, we have all these trucks coming from ups that blow through our neighborhood early in the morning, every day. And I’m like, Okay, well, maybe I can propose some speed bumps, or some speed humps, or you know, something along those line lines in my project that will alleviate that. And so you know, as a developer, you have the opportunity to solve problems, you can create a lot of problems, too. And so, you know, you have to be aware that, you know, you have an impact in the community, and you’re coming into someone’s existing home or business or, you know, commercial area, and having an impact. So, you know, you can try to kind of sneak through, and a lot of people do that. But it really depends on the community that you’re in. And that’s going to be in the developers discretion as to how they want to pursue it.

J Darrin Gross 16:20

Yeah, I had a little bit of experience with that. And you get a angry mob, and it’s tough to tough to beat on me. Oh, yeah. Yeah. So you identify a property, you kind of you get your creative thinking hat on you, you approach the different bodies that kind of regulate the decision making you get some direction. What What have you found kind of a timeframe. I mean, this is, this is not like, you go down on a, you know, a Thursday and Monday, you’ve got a permit and you’re ready to, to pray or you can sell the property, you kind of say, What, is there any kind of a rule of thumb, do you just kind of like in your head, kind of assume that it’s going to take X amount of time to get something done?

Adam Gilbert 17:13

Definitely. And you know, the old real estate agit adage, it always takes twice as long and costs cost twice as much as you originally expect. It’s kind of the same here. So I mean, if you’re not doing his own change, and you really just want to like get some you say, Hey, this is a great piece of residential land, residential, Real Estate’s going through the roof right now, let’s get some new homes approved. And again, this is California, I’ve heard that there’s other states that are way easier on this. So this is probably the hardest, except for maybe like Hawaii, which I know has their own process. It’s usually about six to nine months, if you’re on top of it to get products like that approved, if you’re trying to do something a little extra, like a zone change, anticipate about 12 to 18 months. But the way that I structure my deals to give me the most flexibility and hold by cash and not get too tied down to a deal is that I structure my purchase to have very long escrows to allow me to do these entitlements, or do an option that gives you a long enough amount of time to be able to exercise that option once you get those entitlements approved.

J Darrin Gross 18:22

Got it? No, I was going to ask you about that as far as the time goes, and how you structure the deal, because I’m assuming that when you identify a property, and you need to gain control of it, so that somebody else doesn’t figure it out, or you know, figure out that you’re doing all this work and jump ahead of you and tie up the property. So step one to be gained control of the property is that

Adam Gilbert 18:48

is that kind of the definitely and making sure that you, you have options to extend as much as you can? You know, because the last thing that you want to do is to all these entitlements to a project, your time runs out, and you can’t sell it or you can’t do anything with it, and you can’t close on it. And now all these entitlements go to the property holder and the owner, right? So timing is always, you know, people talk about location, location, location. My business is timing, timing, timing, and making sure you have enough time. And one of my first deal we actually had, I’d say the fair market value was probably around 3 million, but we sold it at 2.6. Because we needed to close it within 30 days. And so that was a timing issue because we didn’t want to do all this work, spend all this money and get no return. So flexibility is key.

J Darrin Gross 19:44

And is that pretty common with land deals as far as just kind of the understanding of the way the deal works is that you’ve got somebody and the seller I’m assuming there’s some sort of compensation money he goes hard and or whatever, as far as When you write up a deal that there’s a fee that you’re putting down, and then the option fees, and do those options then apply to the purchase if you execute, or can you talk a little bit, then

Adam Gilbert 20:13

Yeah, 100%. So typically, I’ll have a 60 to 90 day initial due diligence period, at which point, depending on the size of the deal, you know, 20, or $30,000, will go hard. From there, I’ll have maybe another six months after that, to kind of do some more due diligence, at which point, I would have to put in another 20 or 30,000, to get another three months. So that there gets you your year, essentially. And but all of those become non refundable, but applicable to the purchase price. So that if you do close that, you know, the those count towards it. But you know, most of the time, with land, it’s just sitting there anyway, so the owner has really not many expenses. And if you give them their price, they’re willing to give you terms if you’re, you know, if you’re trying to come in and lowball them, they’re gonna want you to close really quick. Same thing with a building, you know, when I did the zone change on on that the building that was referring to the 15,000 square foot warehouse, he had it on the market, it was overpriced. And so it wasn’t doing anything, but I gave him his price, but I got my terms, and I got my time to be able to do it, so that I was able to create that additional value.

J Darrin Gross 21:24

Now, this whole kind of entitlement deal thing just makes me think about how many times and I’ve seen something, you know, and that God that, like you see a property, there’s a structure, and there’s a big lot that’s vacant, you know, I’m thinking like God, if you cut that off and sell that, and do this and do that, and and i’m assuming there’s some entitlements, most the time that haven’t been figured out, that’s why there’s no movement, or there’s, I don’t know, maybe there’s just not enough demand or whatever. But it seems to me like a lot of fun, but also probably kind of test your patience just on the on the time it takes to make a deal as opposed to like your first deal with 10 hours of work and a big paycheck kind of thing in it.

Adam Gilbert 22:09

Yeah, it’s, it’s, I describe it as Hurry up and slow down, right. So you’ll have like something and you know, you’ll have this hearing coming up, and you’re working 10 to 20 hours, you know, on that week, getting everything ready. And then you don’t do anything for three months, right as it’s like going through the process. And so it’s a lot like that. And these deals allow me to do them on the side of my, you know, regular business, which is the the brokerage that pays the bills and keeps it going and funds, essentially some of these investment deals. And so, but yeah, exactly to your point, you know, people, there’s always things that can be done, but people either don’t have the imagination, the time, the money or the patience to do it. So if you see that raw piece of land with a defunct building on it, but you’re like, man, I could put a drive thru on that corner and then build a strip center around it, you don’t have to actually build it, if you just get it approved, you know, and you get that like drive thru pad approved, you sell that to a developer who does Carl’s juniors, or Wiener schnitzels, or Starbucks or whatever it is. And if you think about it, and you know, it’s like, Okay, well I paid a million for this land. Well, now I just sold that pad to Starbucks for a million dollars. And though everything else that I’m going to do on it is now gravy. And so that’s how I think about it and not every deal works that way. But you can really create a lot of value if you can think outside the box and then do the work that you know the guy who’s developing Starbucks he’s doesn’t want to learn every city council and what they want and to go through all the meetings he wants to develop Starbucks so if you could become an expert in your jurisdiction of what you’re doing there’s going to be a lot of opportunity for you to create those relationships over time

J Darrin Gross 23:57

No, that’s that’s a good good insight there do you with a knowledge and local knowledge does it help you then kind of look out in the in the community to see where like a path of progress is or identify you know, if there’s a one a new expressway or the one to create a certain zone or whatever it’s give you kind of insight as to you know, if you hunt down that area you find something that’s good this could work or or is it more in your real estate? Business a your you’re familiar with the area and then as you hear these ideas from the I guess the knows a planning commission or whatever, they want to change some zoning stuff that or I guess I don’t know, it makes sense but he is or his or one that leaves the other or like, Is it the the the planning commission that leads or is it just your basic knowledge of the real estate that leads or is it kind of a combination of the both, you know,

Adam Gilbert 24:56

it really is a combination of the of the both, you know, you have to think Long Term about things and not where things are today. But where will they be three to five years from now. And so if you find out that, you know, we’re having an arena built in our in our jurisdiction for a minor league ice hockey team, right, so Okay, well, they’re building an arena. Well, now that’s underserved for fast food in that area, right. And so when, if you pay attention to things that are coming in, you know, once they build they’re in, it’s too late, you know, but if you can keep your eye to the local newspaper, you’d be amazed how many people don’t follow the local city council meetings, you know, I’m not saying that you have to, you know, sit there and watch them because they’re exceedingly long and, you know, boring unless your particular project is on there. But getting a quick update about what the decisions are, or even just looking at the agenda, Oh, wow. Like, you know, this developer is trying to get a chick fil a approved, they’re like, Okay, then I’m going to take a look what’s going on around there are there any lots that I can identify that, you know, I can now try to tie up and, you know, so doing a lot of that work, and just thinking ahead, and being proactive, instead of reactionary, is gonna lead to, you know, in my experience, a lot of success.

J Darrin Gross 26:12

I love it, the just kind of really thinking outside of the box. And I think also, there’s got to be a discipline of time, and just kind of, I don’t think that most people have that sense of time. Yet, or the willingness to wait for something like that, for the payoff, it seems more like I mean, you know, if you’re, if you’re talking, you know, flipping, they’re looking for a payout, you know, right away, or even just as a real estate broker or list sell, you know, get paid kind of thing. But more of kind of that, that long term, in, you know, what we’ve talked about, so far, as you’re not even doing the work, you’re just getting it all, you know, greenlighted so that the work can be done and making the sale. And then there’s the whole nother level of, of getting the permits and doing the work and all that. So I mean, if you had an idea for a party, you know, you tie up a property, you go through your year long process to get it to the point where it can be approved, then whoever buys that property has another permitting process. So you could be an in construction process, you could be literally two to three years from your idea to the actual product that’s, you know, the public is able to see and use and go visit is that pretty terrible,

Adam Gilbert 27:31

Very easily. And that’s why if you can do that first step of getting that pad approved, it makes the, you know, the tension for whoever wants to develop that pad in the future. So much easier. So it’s not a three year process. for them. It’s now a one year process, like Oh, the pad is approved, we’ve got it, now I just need to build my, you know, Etch A Sketch model of it looks the same, and I pop it here in each different place. And you can even get to the point, you know, I can’t even screw in a light bulb, but you can be that you can develop it yourself, you know, be a contractor or team up with a contractor and build it out and lease it out. There’s lots of developers who go the Full Monty, but I really tried to specialize on the, on the first part of the equation. That’s that’s what I like to do.

J Darrin Gross 28:19

Yeah, that’s interesting, as you mentioned, that being the first part, or being you know, near the first part kind of thing is really where the opportunity lies. I know, years ago in college, I remember I was working for a landscaping crew and we were out in these new developments. And I remember that, at every exit ramp off the freeway, the first thing that would go in was like a quick trip or some sort of a, you know, convenience store with Yeah, that was that was the landmark that said there was you know, progress was coming. And, you know, I guess if you would have you know, bought on the other side of the street or you know, put another gas station in or I guess this is you know, it fills in there but just kind of one of those cues, I guess for you know, progress and, and how to recognize them and be you know, something to learn and recognize them and find so

Adam Gilbert 29:13

That’s definitely any and each city or each jurisdiction is going to have their own cues. You know, I know as soon as a chick fil a comes into certain place, you know, like everything blows up around it or in and out is what we have it’s like you get an in and out like boom, your property values all around it up because didn’t know is going to drive the traffic. So if you follow it say hey, look, you know, they’re proposing this or this is coming. You know, you can you can predict the future.

J Darrin Gross 29:43

Yeah, well, it is, you know, it’s a different lens to look through. I think that you know, most people are, you know, when I think of investing in more of a ready, built property, not something that’s ground up for construction or With it, it’s more of kind of a the the surrounding area, kind of the demographics, the ability for people to pay, you know, what, what’s there that’s going to attract somebody to the property and make it make it valuable? And then if you have the opportunity increase rents, or, I mean, typically, when I think of, or when I talk with people about value add, it’s more about how can you reposition the property, from a physical standpoint, or even operational management standpoint, you know, if the sellers kind of tired, and it hasn’t really been keeping up with, you know, the market, or if the property is tired, and it needs to refresh, those are typically the things that I hear from people that are doing, quote, value add, you know, investment strategies, but what I love about yours is it’s, it’s, it’s basically just how, you know, how far can you think outside the box. Now, it does sound like there’s a fair amount of capital you have to have available to, you know, tie up the property. And then exit exercise a number of extensions, if needed, in order to get it. And, like, I’m assuming, you know, either know, somebody like you or be willing to walk through all the steps to get it to the finish line, so that you then can, you know, have that potential sale or so many in that, there’s also the need to have some further conversation with potential investors, buyers, developers that would want to develop a property like that. So it sounds like it’s I mean, there’s, there’s a lot of hats you’re wearing there. And but it’s kind of cool, I like the kind of the way your, your, you know, what you what you go through to get the property to the next stage.

Adam Gilbert 31:47

Definitely, and I know, you always discuss the factor of risk, you know, on your show, and in any given deal. And just to point out like, this is an ancillary part of my business, because the amount of capital that you have to put in, as you mentioned, with the non refundable deposits, with the architect, with the engineers with the city fees, if you are unsuccessful, and getting your entitlement or your zone change, that all goes away, and you have no tangible asset left, because all you had was an escrow or an option. And so this type of work is on the riskier side.

J Darrin Gross 32:25

Right, right. So let me ask you, the question that I do ask people is, what is the BIGGEST RISK? Is that what you? Would you? You would, you know, your BIGGEST RISK would be just that?

Adam Gilbert 32:40

Yeah, I mean, yeah, this is probably on the riskier side of the type of investment deals that I do. So I mean, I have a shopping center that I’m doing a value add facade enhancement on, you know, that’s a tangible asset, these entitlement deals, I would say they’re on the risk there, they are probably the biggest risk in terms of deals that I do. Because again, if I’m unsuccessful in getting the entitlements, I’ve now just pissed away all my money for something that I was able to create no value on. But the if I am successful, then the returns are high enough, you know, 5x 10x, to justify that risk. And, you know, what I equated to is off playing poker, you know, I try to do as much due diligence as I can. And if I’m holding two kings, if I’m holding a great hand, I can still lose, you know, but I’m taking a calculated risk. And knowing that I’m willing to make a bet, because I’ve, I think that this is where this particular property and this project needs to go.

J Darrin Gross 33:45

No, that’s cool. That’s cool. I like that. In your line of work, when you mentioned, like, there’s 5000, residential, real estate agents in the area, and like 20, you know, commercial, or some sort of ratio like that. Yeah. Do you find that there’s even fewer that work in the entitlement place? I mean, I’m assuming not all of those commercial brokers work in the entitlement

Adam Gilbert 34:15

era. Yeah, very few. I’m always surprised how few commercial brokers actually even own commercial real estate. I’m like, come on, man. Like, this is your business like you should be you should be picking up all the best deals, right. But yeah, they’re, I would say even fewer, you know, there are like consulting companies that do this, you know, large usually for larger developers or big corporations. And you know, they’ve got engineers, architects on staff are typically very expensive to be able to, and that’s why projects cost so much, but if you’re building like a Walmart, like me, you know, like hire a big company with like all of the staff and the relationships to do that. What I do is, again, I say I’m not looking for homeruns I’m looking for singles and doubles. I’m looking for small projects that are probably too small for the big guys. But fit right into my little niche of where I mean if I can create $500,000, or you know, to a million dollars on a project and value and that’s usually where I’m going for, I can do a couple of those every year I’m set. You know, that’s, that’s, that’s great. I do one of those in a year that you know, you’re having a great year, but that’s kind of the small niche area that I look into. And there are opportunities there because they’re too small for the big guys. And most people don’t have the knowledge to be able to take it to the next level and do what I do.

J Darrin Gross 35:35

So, well, Adam, where can listeners go if they’d like to learn more connect with you?

Adam Gilbert 35:41

I’m on all the social media platforms Instagram, Twitter, Facebook, I’m either at Adam Gilbert 13 or Adam Gilbert ESQ as an Esquire and feel free to follow me, chat with me. Go to my website, Adam Gilbert, Esquire, ESQ dot com or the firm commercial.com.

J Darrin Gross 36:04

Adam, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot, and I hope we can do it again soon.

Adam Gilbert 36:12

Awesome. I’d be happy to be back any time.

J Darrin Gross 36:15

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio

Announcer 36:34

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House Flipping Investor Deals with Viktor Jiracek – CRE PN #309

Viktor Jiracek 0:00

What’s really cool about flipping is like you’re in, you’re out, you get a big check and then you can move on. So typically, on average, my flips about 30k net profit, give or take some deals are better. Some deals are worse. But that’s typically the average. And what’s really cool about is like you now get this big check to walk away with, with the rental side of things like I would have this big check. With the rentals like I would be on the hook for ongoing maintenance tenants, like I still have to like the property was in the back of my mind forever to take care of with the flipping like you’re in and out, and you don’t have to worry about anymore.

Announcer 0:34

J Darrin Gross 0:53

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today my guest is Viktor Jiracek. is a real estate fix and flipper based in Gainesville, Florida. He completed 40 excuse me 20 flips last year and is on pace to do an additional 30 flips for this year 2021. Ironically, his best flip was a $64,000 net profit deal that almost that he almost backed out up. And in just a minute, we’re going to speak with about what makes a successful flip, and how to get started to do your own flips.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel channel. You can find us on youtube at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Viktor. Welcome to CRE PN Radio.

Viktor Jiracek 2:24

Thanks for having me. I’m excited.

J Darrin Gross 2:26

Well, I’m looking forward to our talk today. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Viktor Jiracek 2:35

Yeah, for sure. So I’m a fixin flipper. So just to give a clear definition I buy property fix it up sell it so I should take ownership of it. Primarily fix and flip I live in Gainesville do most of my deals locally for Alachua County went full time about two and a half years ago I used to work kind of corporate as healthcare full time realize it wasn’t for me for a number of reasons that went into flipping real estate really enjoyed it as to where I plan to stay forever. So that’s a quick introduction on me, but I really fell in love with the flipping process. That’s why I’ve really been focusing on recently.

J Darrin Gross 3:09

Awesome. So you’re down there in Gator Ville or Gator land. Is that right? Go Gators? Yeah, University of Florida. Yeah, exactly. So well let’s talk a little bit about that. So you You said you you were in medical industry and decided that wasn’t for you? How did how did you decide the real estate was more attractive vehicle for you?

Viktor Jiracek 3:33

Yeah, so I don’t know if you can relate to this but I always had like in the back of my mind like a real estate real estate real estate. So it’s almost always like hey, I want to do this thing and then the next thing is once I get some money that I can go into real estate so it’s always like this thing that followed me around for years and years and just you know finally decided to take a leap I it didn’t make sense to me to like okay, let me do this thing so I can do this other thing I figured out like what if I just do a straight shot to what I actually want to do and the rest is history

J Darrin Gross 4:03

So flipping houses, I mean there’s there’s multiple opportunities in real estate, different asset classes and different ways to make money what is it that appealed to you about flipping houses?

Viktor Jiracek 4:18

I really liked so there’s a couple things so the first thing I really like about flipping houses is like you get to see the transformation so you’d buy a house and it’s kind of crummy beat up outdated you paint a you fix it up you make it all nice then suddenly it’s it’s nice modern cool thing everyone wants to live there. Before people saw it before pictures they run away like I don’t even want to be near this place. And then suddenly afterwards like everyone’s running towards like I man I want to buy it. So it’s really cool to see that transformation just to see like it really improve as a property improve the neighborhood to a lot of times we do a flip and then we’re suddenly the house nicest house in the neighborhood from worst to best. So it’s cool to see that. That’s the first thing I really enjoy about the second thing I’d say what’s really cool about flipping a Like you’re in, you’re out, you get a big check, and then you can move on. So typically, on average, my flips about 30k. net profit, give or take some deals are better, some deals are worse. But that’s typically the average. And what’s really cool about is like you now get this big check to walk away with, with the rental side of things like I would have this big check. With the rentals, like I would be on the hook for ongoing maintenance tenants, like I still have to like the property was in the back of my mind forever, to take care of with the flipping like you’re in and out, and you don’t have to worry about anymore. So I really liked that that quick nature of it, where you can move on to the big paydays is really exciting to that, I’ve seen that, especially with a lot of beginners, you know, getting a plus 300 bucks a month from you know, good rental, that’s exciting. But what’s really life changing, as you know, plus $30,000 in your bank account, you start to think differently, start to act differently in a good way, you start to have more options open if there’s a sort of emergency like you can handle it. So that’s what I’ve seen. That’s what I really enjoyed about the flipping.

J Darrin Gross 6:01

Gotcha. And it as far as the the, the actual the the work, the the changes the property from the the worst to the best on the block there. Do you do the work yourself? Do you have subcontractors? How do you go about doing that.

Viktor Jiracek 6:18

So when when I started, I actually did the work myself, like the painting and the flooring, there was a couple things wrong with that. The first was like I didn’t have that much time. So once you start to do more and more volume, like your time becomes an issue. Second thing I’m not very good at those things is when I found out, it’s much better to get professionals in there. So where I’m at now have a project manager and then she hires the people like hires the painter pays the painter hires the flooring person, you know, pays the flooring person. So it makes a lot easier that way. We don’t have to worry about that sort of thing. So especially as you do more and more like if I wanted to do 30 this year, I’d be killing myself working 24 seven trying to fix all these places up. So that’s why I recommend, there’s a lot of different ways to do the renovations. There’s like the Do It Yourself model. There’s the GC model. And it really just depends on the person and their their preference. But it was realized that there was going to be a trade off like time and money. So if you do it yourself, it’s going to cost you time save you money. If you hire it out fully from GC, it’s going to save you time costing money. So it was always that balance to play with as you’re getting into the renovations.

J Darrin Gross 7:21

And speaking of the time aspect, what do you What’s an average time for you from acquire to sale?

Viktor Jiracek 7:32

Yeah, so from closing table, the closing table, I think we’re on average about four months, one month to 45 days is like the actual renovation. Then we spend your we listed it’s a luckily a hot market now. So typically within a week, it’s under contract. And there’s the inspection and appraisal, you know, all that stuff to work through in the closing that typically takes 30 days, 45 days, so typically a four months on average. And then some of them take less someone take more, but that’s what we’ve been seeing recently,

J Darrin Gross 8:01

Got it. And, are most of yours more of a cosmetic flip, or are you getting into roof lines and bumping out walls and changing the floor plan or doing anything behind the wall kind of stuff.

Viktor Jiracek 8:17

I try to keep them as simple as possible. Like we’ve done the full gut jobs. And then we’ve done the cosmetic lipstick on a pig. Sometimes people call it. So we’ve done both. we’ve really done both there. I really liked the quick simple ones were like you’re and you’re out, you can move on. Just because like once you start opening up walls, changing the layout, you know, doing all that stuff, you start to open a can of worms where you open a wall, it’s like, oh, we didn’t realize we have to do this. And now to fix this. And now like you keep adding to your budget for the renovation. So I just really liked the quick in and out paint flooring as much as possible. But you know, I’ll do anything where the numbers make sense.

J Darrin Gross 8:55

So how do you find your deals? What’s the, the source or how do you source your deals?

Viktor Jiracek 9:02

Yeah, I know for sure. So about half my deals I source on my own through like cold calling through, just like Facebook groups, a lot of referrals. And about about half are wholesalers and for your audience. Maybe they know what a wholesaler is. But just to give a good definition. So wholesalers, basically someone who goes out and finds deals, they put it under contract and they can sell you that contract. So I’ve had a lot of luck with them trying to build relationships with them and they send you on they send deals and there’s a whole wholesaler movement taking place where it used to be that here in Gainesville when I started there’s like maybe one, maybe two wholesalers and now I have like 1520 wholesalers on my list. So suddenly it’s like a brand new movement. And that’s great for me. For the most part where they bring me deals I don’t have to do anything. It’s like oh, here’s a deal on a silver platter and it makes my life a lot easier.

J Darrin Gross 9:55

No and that that makes a lot of sense. The you know more bird dogs out there. Finding the opportunities. That’s great. So, funding you mentioned in the beginning, or when we were first talking about, you know that that hurdle of, you know, the way to get a big pile of money together, how do you? How do you do that first one kind of kind of thing? Can you? Can you share a little bit about how you go about funding? Your flips?

Viktor Jiracek 10:26

Yeah, no, for sure. So there’s a couple ways to do it. I’ll talk about the one my first flip where that was, like I was, I had a low 500 credit score. And then I had maybe a couple 1000 in the bank, and I was still able to get the flip down. So basically, what happened. So I found this great deal was a lady as a nurse who was living at a state, and she was tired of the property and got hit by Hurricane Irma. And she was just tired of dealing with it. And her, her mom passed away. So is inherited properties, there’s a couple layers of motivation there, and she just choose one to be done with it. She’s like, Hey, I’m out, I don’t want to, you know, I just want to sell it. So I got the property under contract. What I did Max, it was a great deal. So we’re gonna buy it at 105, we’re going to put in about 25 ish, and then sell for 170 to 200. So that was a plan. So there was there’s room there, there’s a good potential profit there. So it was a it was a good deal. So we got a good deal got under contract, what I did next I reached out to my network, I found what’s called what I call like a money partner. So I found the deal, I would help with the renovations, I would help sell the property, I’d be like the boots on the ground sweat equity, like I would be the one who putting it all together. And they would be more like a money partner. So they would put in all the funds to buy it to fix it up to sell it. And then we would split the profit after that. That’s how I got my first one done. And you’d be surprised like how many people in your network have the funds for these types of deals. It was like plenty of different ways to structure but it gets you started got me started. So I was able to turn that deal into into multiple deals, start doing deals on my own, which is what I’m doing now. So makes it really exciting. But that’s how I got my first deal just using that money partner model and we split the profits. And it just it’s a hell of a start. It’s a great start. Because my first year I did like two then I did eight the last year 20 then this year 30. So like it just gets you going. And that’s exponential from there, which is really exciting.

J Darrin Gross 12:18

Yeah, and that money partner, do you find? The first one is pretty challenging together? How did you go about conveying to your your money partner that you were, you know, able to pull this off.

Viktor Jiracek 12:37

So how I did that, I just basically share the numbers like, Hey, this is what we’re buying. And out, here are some pictures of what it looks like, how much work it needs, and this how much we can sell it for. And then once you share that number, like hey, we can make on that one we made. I think 28k. net, we wanted more. But we always want more, but 28 is what we ended up with. So we split that. So just sharing that like, hey, if you put money into this deal, we can potentially share this, this profit, so you kind of sharing the benefit with them. And then also at the same time, it’s you can mention, a lot of people especially have money just sitting in the bank, and it’s earning, you know, point a 1% interest. So might as well put it to work. There’s a lot of people who want to get started real estate, and they just don’t know how to get started. And when you give them a sort of opportunity, you know, they’ve been sitting on their money for a while, hey, I’ve been watching HGTV I want to get into real estate. So we’re just lines up. And it makes a lot of sense. Not to say typically, your first deal is going to be the hardest, it does get easier over time. So just just to answer your point. So yes, it is going to be a little bit harder the first time but it does get easier once you build a track record and know what you’re doing and all that good stuff.

J Darrin Gross 13:47

And as far as the cost of money for something like that. I know, as an insurance agent, I’ve worked with a lot of flippers over the years and and I think there’s definitely the difference between the person that’s got some sort of a clock in their head that understands they need to get this project done. Versus the person that doesn’t have that clock and it lingers and lingers and lingers. kind of thing. You mentioned your your average time is about four months. Your first one can you tell how long that one took?

Viktor Jiracek 14:22

Yeah, so the renovation took about eight weeks. So about two months. It was listed for about two weeks, then got then got under contract. And then I think to close that one was about 30 days. So that was two plus half. So like in that same timeframe, roughly so three to five months, roughly.

J Darrin Gross 14:39

That’s great. So you were able to keep that that kind of timeline gone. That’s great. And luckily Yes, in when you when you’ve run your budget, you know you’ve got your acquisition costs and your renovation cost. In view, you’ve got your four months Thailand, is there a I mean a carrying cost kind of market rate. What kind of range? Are you seeing for that kind of stuff? You mentioned? Like, you know, if you leave your money in the bank and get around 1%, what what kind of range? Are our money partners? What, what kind of rate? Do they charge for that?

Viktor Jiracek 15:13

It’s going to depend on the money partner. So for some people,

J Darrin Gross 15:17

I guess if you’re splitting the deal to that,

Viktor Jiracek 15:19

yeah, that’s, that’s where they get their benefit. So it’s one of those things, it just depends. For that first money partner, it was, I think it was 70 3070 them 30. me. And again, I was just happy to get that first deal done, which is awesome. So that was the first one. Other ones I’ve done 5050 some of them, it’s been like 5050. And they want like a 6%, like, payment and kind type of thing. where like, they charge 6%. But you don’t necessarily get a bill for 6%. You just at the end, they will get that. So I’ve seen all different ways. It just it’s really person to person. So there’s no correct answer, like whatever both parties are, are open to, again, I’d highly recommend like, hey, just get your first deal done, you’re going to build so much momentum out of that. And you just you’ll be surprised where you’re at. And, you know, a year, three years, five years,

J Darrin Gross 16:12

right? No, I and I totally agree. I mean that the experiences kind of like your down payment, to really kind of, you know, start your business and get really going. So that’s, that’s great. So I think before we started recording, you and I talked a little bit and you’d mentioned kind of a philosophy of do a flip, buy a rental, do a flip, buy a rental kind of thing. Can you talk a little bit about how you see that? And how you encourage people or what what’s your philosophy on on, you know, flip rental flip rental kind of thing?

Viktor Jiracek 16:48

Yeah, no, for sure. So it’s one of those things, I see a lot of beginners make the mistake, like, okay, want to get into real estate. So the first deal is a rental. And the problem with that, at least as how I see it is like you’ll put some money aside, you’ll put that as a downpayment into rental, and they’ll start cash flowing, that’s awesome. Nothing wrong with that. But it’ll take you for you to do your next deal, it’s gonna take quite a long time, you have to save for years and years, save the cash flow, save your income, until you can finally do another nother deal. And that’s gonna be the same story like it’s going to take a couple years to do that next deal. So that’s why I recommend flip rental flip rental, because then like you do a flip, let’s say you’ll make 2030 40,000 awesome. Put that as a downpayment into a rental, and then do another flip. You know, put that as a down payment into another rental. But that way that speeds up that process like now you’re acquiring or like generating capital that you can then put into rentals. So it’s just really exciting that way, where you just basically buy as fast as you can flip houses, you can buy rentals. So then it becomes like, how many properties Do you want to buy? How many flips Do you want to do, then you’re not stuck waiting for long periods of time. So that’s the philosophy behind that. And it doesn’t have to be that specific ratio, it can be like two flips one rental or, you know, three flips, one rental, and I’ve seen people make permutations of that to where it’s like a flip a number or like a flip in a multifamily. But they kind of play around with that formula, but then you can accelerate your real estate, you know, so I’ve taken 10 years to build a decent portfolio. I’ll take you, you know, three.

J Darrin Gross 18:21

What’s an ideal opportunity look like for you?

Viktor Jiracek 18:26

Yeah, so we typically buy so we buy houses, condos, townhomes, mobile homes, so we’re pretty open. If someone’s living in there, well, you know, someone can live in there, we’ll flip it up. And luckily flipping is as simple as buy low, sell high. So even like a mobile home, sometimes you buy it in the like for 50 and put in 10 and sell for 100. And that’s still a deal. We’re just buying low and selling high. Typically how we look at deals is like what’s called 70% rule. So for your listeners here 70% rule 70% ARV minus repairs is your max offer. And your RV being after repaired value is like when you listed retail. Once it’s all fixed up, what can sell for is what the ARV means. So 70%. So just a quick example. Let’s say you can sell a place for 100,000 you to put in about 10,000 into it in terms of repairs. So that means your max offer is 60,000. So that’s the max you can play for pay for a place. So if someone says, Hey, I want to sell you this property for 50,000 Yes, that’s a deal I’m in. If they say hey, I want to sell you this place for 80,000 as an example, it’s like oh, I don’t know those numbers are too tight. That’s not a deal. So it makes it really, really clear. Like what’s the deal? What’s not a deal? Because there’s a million other factors that can go into you know, what’s the deal and what’s not versus just the numbers. So like, what about the neighborhood? What about the school? This is a two bedroom, one bath on a three bedroom two bath, which is what everyone wants? Or, oh, the square footage is a little bit smaller. Oh, you know, like anything Kadima. There’s million variables, but I like just this still up to the numbers, that it becomes super clear like okay, this is a deal. This isn’t a deal. That just makes it much easier to analyze these properties. JOHN.

J Darrin Gross 20:05

So based on the number of properties you’ve done, we’ve talked about some of your your home rounds or your better one. So there was one Nagesh made 64,000. Can you talk about one that didn’t go? Well? Is there any, any that you were happy to get out of? Or have you made money on all of them.

Viktor Jiracek 20:25

So luckily, we’ve made money on all of them, sometimes not as much as we want were set out to make 30,000, we made 10,000 In the end, so that that happens, too. It’s tough to bat 1000 at you know, 30 cage. So one of the less less fortunate deals. And again, I see all these as like a learning experience. So it’s like, okay, cool, I made a mistake, I won’t make that mistake again, after going through that painful process, and then you just grow and improve. So your highs get higher, and the lows get less, less low. So you kind of spiral upwards positively. So there’s a deal we bought here in Gainesville, I was just a normal concrete block house. Standard. The guy was initially what we thought is he said he had some tenants and they were bad tenants. So I need to get them out. So like, okay, ended up he was late on his taxes. And if we didn’t pay his tax bill, like, while in the negotiation process, then he was he was out, like, I mean, he, they were gonna auction it off and, and sell it. So we would pay the tax bill. Great, went through all the closing, he’s kind of a hassle to deal with, to say the least, but eventually closed. And then this is the mistake we made, we didn’t give what’s typically called like a post closing occupancy agreement. He said, like, Oh, I have some stuff in that place. Some tools, give me 30 days, and I’ll get them out. So typically, what we’ve done in that case, like there’s a post coast closing occupancy agreement, like if you’re not out, within this timeframe, there’s some sort of penalty, when you close, there’s like a hold back, you don’t give them all the money, because you want there to be some sort of penalty if they don’t, they don’t comply. For that’s the only property we’ve never done an on. And that’s the one we needed, unfortunately, so he didn’t move out in 30 days, it took us I think, like two or three months to finally get him out. He was on some sort of drugs or something. And then he was even resentful and bitter, like, Hey, I know you guys are gonna make a ton of money on this property I should have, I could have been able to fix it myself and could have made the money myself. And I mean, we saved him from losing the house. So not to say he had to be grateful, but to be negative towards us, was a slap in the face. So eventually got him out, got his stuff out and to keep following up. At one point, he went to jail for about a month and has a lot of stuff there. So we’re kind of waiting for that. And that entire process of venture went through. So we ended up renovating it, fixing up selling that one pretty smoothly. And then we you know, we were done with the deal. I think on that one, we made maybe 12,000 net profit. So not a homerun but still made money. And just a good learning lesson post closing occupancy agreement. If they stay in the property, if they’re moving out, you’re not a big deal, but they’re gonna stick around.

J Darrin Gross 23:06

Yeah, know that, especially with all the landlord tenant laws. I don’t know how they’re in Florida. But I know out here that’s that’s definitely a touchy situation. So , let me ask you. So I know that you’ve been doing this now on your own for a couple years. Yeah. And now you’re also working with new investors that are looking to get into flips? Can you talk a little bit about how you work with your students? Or how you mentor? People?

Viktor Jiracek 23:37

Yeah, no, for sure. So how I do it. So I flipped myself full time. But I also mentor people nationwide on how to flip. So students all over like Michigan and Texas, New York, like any state, I have students there. It’s a pretty, like, pretty involved process. Like they get direct access to me anytime you have a question they ever want to send me a deal to analyze, we can, you know, review the deal together? You know, so it’s pretty involved. It’s not necessarily just like a course, you know, here, good luck. It’s pretty involved with the entire process and trying to help them out throughout that entire thing. Yeah, so it’s exciting stuff. And I just help people. I’ve helped a lot of people get deals, one of my students actually beat my record. So on one flip, I made about 64k. I thought that was really good. And then on her first one, I think she made like 85,000 plus. And it’s, it’s exciting. It’s also humbling, where it’s like, well, wait a second, maybe I’m not as good at this is I thought, but she’s gone on to do other deals. And that’s, that’s great. But that’s pretty much it. I just mentor people throughout the entire flipping process, like how do you get the money? How do you get the deals? How do you run your numbers? How do you hire contractors, like any good thing you could think of a to z. So when I help folks Out With Dad,

J Darrin Gross 24:49

Hey, , if we could like to shift gears here for a second, yep. By day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. There’s there’s three strategies we typically turn to, we look to see if first we can avoid the risk. If that’s not an option, then we look to see if we can minimize the risk. And when we can no on cannot avoid or minimize the risk. And we look to see if we can transfer the risk. And that’s what an insurance policy is. I like to ask my guests, if they can look at their own situation, could be their clients, investors, tenants, the market, you know, however they want to identify, risk, but take a look at their own situation and identify what they consider to be the biggest risk. And for clarity, I’m not looking for an insurance related answer per se. But if you’re willing, I’d like to ask you, Jiracek, what is the BIGGEST RISK?

Viktor Jiracek 25:54

Yeah, no, I think that’s that’s great question, happy to answer it. I’d say it’s all about the numbers. So I always teach and preach. It’s like profit margin, like margin of error, like how much you know, profit, do you have potential in the deal, because if anything goes wrong, like a takes longer than you want, or doesn’t sell for as much as you want, you have to go over repairs, like that’s all going to eat into your profit margin. So the more profit buffer or profit margin you have, the better. So again, it’s all about the numbers. And there’s been a lot of deals where like we set out to make 30 40,000. That’s, that’s great. And then one issue came up, and then another issue came up and another issue came up. And then we walked away with 10,000. But luckily, we had that initial, you know, profit buffer to work with, or else we would have been in the red. So with that same example, like if we initially wanted to make, we said, like, Hey, I just want to make 15,000. Like, if I can make 15,000 on this, I’d be happy. And then the issue comes up in that issue, another issue another issue, and then suddenly, you’re in the red. So that happens a ton. So that’s why I recommend in terms of risk, like just protect yourself, like if you buy any, any property for the right price, like every single thing can go wrong, and you can still be profitable. But again, it’s you make money when you buy is, is the segue from that. But it’s really like profit margin buffer, just in case anything goes wrong, and it will go wrong. That’s the other thing. It always takes longer than you want. And it always costs more than you want. So

J Darrin Gross 27:22

The truth! Yeah, now I’ve had many projects where the budget was x and, or where we built a place. And on day one, the builder was calling me telling me like, I didn’t know there’s so much dirt on this, you know, he’s gonna burn through my whole contingency on day one. Like so. Yeah, you’re absolutely right. So that’s great. So , where can listeners go if they’d like to learn more or connect with you?

Viktor Jiracek 27:52

Yeah, so for sure. I’m very active on Facebook. And I have a free Facebook group called six figure house flippers. So folks want to get you know, get hold of me there. join the group again, it’s free. I go live on there and do deal breakdowns that I’m working on. Like give free tips you know, there’s there’s a ton of great stuff and it’s all free in there. So if you look me up on Facebook , your check, I’m a unique name Luckily, so you’ll he’ll find me pretty quick. And then I also have that free Facebook group. And yeah, this community if you want help on mentorship, great, you know, I’m happy to help we can have that discussion. If you just want the free work resources. There’s nothing wrong with that. But that’s that’s accessible to everyone. https://www.sellyourgainesvillehometoday.com/

J Darrin Gross 28:28

Awesome. , I can’t say thanks enough for taking the time to talk today. I’ve enjoyed our talk, learned a lot, and I look forward to doing it again soon.

Viktor Jiracek 28:39

Awesome. I appreciate it. Thanks for having me.

J Darrin Gross 28:41

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 28:59

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Self Storage Investment Opportunities with Joe Evangelisti – CRE PN #308

Joe Evangelisti 0:00

I started out looking into multifamily development thinking that might be the way to go. But again, multifamily is just a variation of single family, it’s just bigger, right? So I still have to pick all that stuff out, I still have to, you know, manage the construction of stuff where there’s multiple design elements and, and, you know, so forth. So when I get into Self Storage, you know, it’s concrete and steel, you know, it’s so simple. There’s no you know, there’s not a lot that goes into we’re building boxes, you know, and so it was a simplified version of that. However, it’s it’s also a very, very stable industry. If you look back over the last 40 or 50 years, Self Storage really hasn’t shaken.

Announcer 0:35

J Darrin Gross 0:55

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. Today, my guest is Joe evangel. St. Joe is the executive coach with over 5000 hours of experience under his belt, as well as the CEO and partner of one of the top Self Storage development companies in the country. And in just a minute, we’re going to speak with Joe about the opportunities in self storage and what you can do to level up your investment game. But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome our guests are, be sure to check out our YouTube channel. You can find us on youtube at Commercial Real Estate Pro Network. And while you’re there, please subscribe with that on Welcome my guest Joe Welcome to CRE PN Radio.

Joe Evangelisti 2:20

Absolutely Thank you for having me.

J Darrin Gross 2:23

Well, thanks for doing this I’m I’m looking forward to our talk today. Before we jump into it if you could take just a minute and share a little bit about your background.

Joe Evangelisti 2:34

Sure, absolutely. You know my whole life I’ve I’ve been in construction I started from from a kid my dad was a drywall contractor return general contractor in my teens and by the time I was out of high school he was building houses and you know I just remember from that from the earliest age you know walking around those job sites being about three and a half feet tall and holding on to his leg and you know, just just experiencing being in the in the construction and the building of it all and from that part, you know, I just I fell in love with it. You know, quickly out of high school I went into the US military the US Navy seabees and a lot of people never heard of the seabees but you know that’s it’s the construction battalions of the Navy and so go over where by air we go over you know, we stay on land we physically build just about anything we do runway repair and building construction and there’s equipment operators and you know, so just about anything that can be built seabees can build and I had an amazing tour did that for six years and inevitably got into real estate started doing what I’m doing today.

J Darrin Gross 3:37

Awesome. So let me ask a the intro there as written self storage. Sounds like you you your dad was building homes. In the Navy you were kind of I’m assuming doing all things that they needed like said runways and that Yep. How did you arrive or settle on the the asset class of self storage?

Joe Evangelisti 4:05

Well Darrin, it was it was a 12 year journey. I mean really it started I I tell people I was lucky enough to get into real estate in 2007 and I say that because it taught me just about every lesson I think I could have learned in a condensed period of time instead of you know having time to experience it but you know we first got into 2007 and we started flipping houses back then and you know I was just out of the fresh out of the military and I had a little bit of savings saved up and I thought you know what, I’m going to double down I’m going to invest in this real estate and then I bought it the traditional way we put money into a pot we went and paid 25% down got bank financing and you know we thought we were gonna crush it we thought we were gonna do three, four or five flips a year and I get rich and the opposite happened. We got stuck right we got we got into a couple flips. We did them all. We did them all by hand. I did the nights and weekends while I was holding down a job. And you know about a year and a half into it. We had three or four going at that Time, I think we could sell them in the market really started to soften and end. And inevitably, everybody knows crashed. And so it forced us to really what we call what I call course correct or pivot, you know, back then I didn’t know what it was, I just knew I had to find some other way It means to make it work or, you know, like, give up and quit and file bankruptcy, right. So, you know, we Luckily, we took the the former and we made, we made some adjustments, and we ended up putting tenants in place and refinancing the properties and keeping them long term as holds. And, you know, as, as things started to shift in the economy and loosen up a little bit, we inevitably started buying houses and flipping them. And over the course of that, you know, following 10 to 12 years, we did about 1000 of those single family fix and flips. And, yeah, we’re proud of that. But you know, I had, I had a brokerage business going on, I had the flip business, I was a landlord, I was doing multiple things. But in that, in that course, of there somewhere, I did get, you know, massively stressed out and massively worn out and, and, and found myself chasing, you know, 10 different rabbits at the same time. And, you know, I’m sure a lot of your listeners felt that way, at some point in their life where, you know, you feel like you’re doing the right thing, you feel like you’re being successful, you have money, and, you know, things are coming together, but you just can’t keep up. And that’s really where, you know, I decided I had to make a change. And I had to do something differently and start to create more efficiencies and effectiveness, since it’s streamline and really build businesses that were built for my lifestyle, and not building my life around my businesses. And, you know, that ultimately led us to self storage development and where we’re at today, and we’ve never looked back, it’s been amazing.

J Darrin Gross 6:37

No, I appreciate you sharing that the journey is often paved with a lot of painful lessons there. But they typically, you know, they make you much more wise to what’s coming. And like you said, pivoting i think that’s that’s an important lesson, period. I mean, some of the most successful investors, I know, they make money when the markets going up, they make money when the markets going down, they make money on the west coast on the East Coast, southeast, you know, it doesn’t matter. They’re always looking for the opportunity. Whereas I think, you know, too often, myself included, have such a local finite view of the of the asset or the the opportunity, and when it’s not going to shoot, the opportunity is gone. And that’s just not the case. In real estate, there’s always an opportunity.

Joe Evangelisti 7:26

There is Yes, absolutely. Yeah, it depends where you have to look. And I know I love that word opportunity. Because I think one of the one of the best traits of successful entrepreneurs is turning problems into opportunities, right? We could, we can focus on the issue and say, oh, man, this is going to be too tough, or we can focus on what is this issue causing me to do that allows me to expand? How can I take an issue and turn it into an opportunity? And I think that that’s one of those core values that a lot of successful business owners have.

Got it Well, let’s talk a little bit about self storage. So you, how long have you been doing the Self Storage,

So we’re a little over three years into, into self storage. And that’s, you know, me doing research in the market and me learning a whole bunch of stuff the hard way, but also, you know, what I what I kind of think is one of my unique abilities is really building amazing teams of people. So over the last three years, two years, but leading up to this, we were just doing research, figuring out the right markets, figuring out who we want to work with, figure out who we want to have on our team. And now for the last little bit over a year or so we’ve been doing it, we’ve been going ahead with it. And it’s been awesome.

J Darrin Gross 8:36

So let me ask you, I mean, you know, self storage as opposed to housing, I think housing you can you can go to a marketplace, and you can identify that there’s inflow or there’s growth, and there’s, you know, there based on lack of starch or lack of supply that, you know, there’s there’s a, there’s identifiable demand, and how do you how do you arrive at the, you know, recognizing there’s a demand or an opportunity for self storage? What are where some of the, I don’t know, the tells are the key indicators that you look for in a marketplace?

Joe Evangelisti 9:17

Yeah, well, I’ll take you back to when we were doing single family and trying to decide what was the next move, right. I knew at that level, I wanted to find something that was more scalable, something that I could more easily control effectively control. You know, we were doing single family fix and flips. We were doing 80 to 100 a year scattered all over the all over our region 50 miles and needed a direction, right and different price points and different subcontractors and tons of cash flow in and out and different projects and closings every week. And so it just got a lot to handle and manage. So I said okay, well if I want to start to continue to do construction and development, how do I do something that’s replicatable How do I do something that’s designed once or you know, just modified slightly each time but we have a right we have one big one And on it and we don’t have to pick out tile and toilets and kitchen cabinets for every single one, right? We know that this is our, this is our box is what we build. And so I started out looking into multifamily development thinking that might be the way to go. But again, multifamily is just a variation of single family, it’s just bigger, right? So I still have to pick all that stuff out, I still have to, you know, manage the construction of stuff where there’s multiple design elements, and, and, you know, so forth. So when I get into Self Storage, you know, it’s it’s concrete and steel, you know, it’s so simple, there’s no, you know, there’s not a lot that goes into, we’re building boxes, you know, and so it was a simplified version of that. However, it’s it’s also a very, very stable industry. If you look back over the last 40 or 50 years, Self Storage really hasn’t shaken. You know, we had a massive downturn in the 80s Self Storage really didn’t go anywhere, we, we had a massive downturn and await Self Storage really didn’t go anywhere. In fact, it started to creep up because there’s always been a demand because it’s a, it’s a very broad tendency, right? You know, we have people storing their, their their home goods, we have contractors, we have, you know, attorneys and insurance companies storing files, there’s just a very variation, a lot of the tendency and occupants. And then to add to that, you know, we’re managing in a particular site, we’re spreading our risk over seven or 800 tenants versus, you know, if I build 100,000 square foot facility with 800 units, I have 800, tenants paying me 75 to $150 a month. If I do that same thing with an apartment building, I don’t know how many apartments I get out of that maybe I get, you know, let’s call it, let’s call it 50. Right? I got 50 tenants, and nothing really, really pushed us across the finish line more for us than COVID when, you know, tenancy rights, and you know, eviction holdings, and all these things started to happen during COVID. Nothing like that affected the storage industry, right? Nobody’s no one’s being told that they don’t have to pay their $75 a month to store their stuff. So, you know, with all that, and all that being said, it’s really a lot of the drivers that make the industry really solid.

That’s, that’s a, a beautiful point to make the, you know, lack of eviction, moratorium or kind of just all those those dynamics we’re still dealing with. In fact, I’m here in Portland, Oregon. Just looking on the paper here. I think they’ve extended to February of 22 for tenants to pay back the rent that they haven’t paid, I’m like, wow, this is a little too far.

Yeah. And the reality of it is, is is that ever gonna happen? You know, I mean, we have, I still have a couple, I have over 100 single family rentals, just from building a portfolio over the years. And, you know, we have three or four tenants that haven’t paid since March of 2020. You know, there was 15 $20,000 or more, and, you know, someone who’s used to paying paying 15 $100 a month, you know, and barely making their rent all that time, what were they going to come up with? $20,000? How is that going to happen? You know, and they’ve been making, you know, a lot of them have either been on unemployment, or they’ve been working the whole time, they just chose, hey, this is a better road, and I’m not going to get I’m not going to have to pay so why would I pay? It’s unfortunate, and I don’t know that those corrections are those those those laws, really, I’m sure they affected some people, but for the majority of people, it’s just if, you know, if you have bad tenants, they’re going to take advantage of systems when they’re put in place like that.

J Darrin Gross 13:20

Yeah, no, I think there’s definitely some missteps and in kind of what we’ve done here, and it’s unfortunate, and and sooner we get through it, the better. But, but as far as your situation with the Self Storage, like you said, You’re not affected by that. If people don’t pay their their bill, what’s the what are the? I mean, isn’t it an eviction? Or is it just basically a claim against their stuff to where you can sell it? Or How’s that? What’s the process there,

Joe Evangelisti 13:52

You know, it’s fairly simple, it changes a little bit in each state, depending on how you have to, you know, announce that there’s going to be, you know, if you’re auctioning off the items or stuff like that, but for the most part, you know, it’s simple. And if your rent is due on the first and you have a $75 month payment, you can’t get in after on the third or fourth, like you can’t get through the front gate, he can’t unlock the code. So if you want to get access to your stuff, you got to become current on your rent. And so you know, like I said, every facility is gonna be managed different, but you know, some some places you can wait 90 days and then you can put it in the paper and then you can have a public auction. And if if someone shows up, if not, you know, then you know, eradicate the space and make it clean again for a new tenant. But you know, it’s that simple fact of, hey, if I want my stuff that’s worth me paying my 75 bucks to get it back and then go inside and get it right. So you know, it’s it’s, it’s a matter of you just get locked out immediately, which obviously doesn’t happen in the residential world. You know, so it makes a little more clean.

J Darrin Gross 14:52

I love that just the mechanics. I was like, Hey, you didn’t make a payment. You can’t come in and I’m just kind of curious. He You know, I’ve seen Neo to the Storage Wars or whatever, whatever the reality shows where they families, you know, auctions and stuff for the, for the storage, or for what’s behind door number one or whatever. What’s the percentage of people that that end up in that position?

Joe Evangelisti 15:19

I can tell you, I tell you what, then I look at us as pure developers, and we actually develop the deal. And then we hand it off to nationwide third party managers. So like, extra space in your cube smarts, and your island, your life story, these these guys, for the most part, they own a big chunk, but the reality of it is they manage weigh more than they own. So when you see a sign like that, you know, they’re they’re the ones that do the great marketing, they take care of the tenants, they make sure that we’re full, you know, we really rely on them after after construction.

J Darrin Gross 15:47

Gotcha. So you guys basically identify the space? And do you rely on them for some input as to whether or not this would be a good space? Is there some sort of a relationship before you break ground with the eventual manager of your property?

Joe Evangelisti 16:04

Yeah, absolutely. The due diligence process is, I think, is one of the things that sets us apart. First of all, we buy primarily off market property. With my background in finding single family real estate, we really took a lot of that marketing and that direct to seller capability to create great opportunities for us and our investors. So most of the time, we’re, you know, either buying raw land or buying a darkened big box chain or doing a value add, when we do that, we’re going direct to the seller, and we’re creating a great opportunity there. And then, you know, again, you know, figuring out from there, but part of that process, that purchase process is a multi tiered due diligence, right? We’re getting a third party independent feasibility study, then we’re getting a feasibility study from one of the nationwide managers and then we’re getting one from our bank feasibility study. Our team does their own internal feasibility study. And then we’re going to compare all four of those studies at the same time and say, okay, is it all jive? Right? Did we all get the close to the right numbers? Does it seem like this is an opportunity and you know, if more than one of those is like, you know, this is a wishy washy opportunity blend will pass on it to something else.

Got it. What’s the cycle as far as the length of the cycle, from identifying a property to handing the keys over to the management company to start run?

Yeah, it’s gonna be a little bit different depending if we’re doing a ground up construction, which would be the longest right if we’re taking a ground flat piece of ground and we have to get variances or entitlements or zoning requirements met, it’ll take us a little bit longer to do that. The big box chains where we’re taking abandoned building and we’re renovating them, obviously, we’re shaving a lot of time off because the structure is there, right it’s it’s already got a roof it’s already got walls and we’re just building out inside of it. So it’s gonna be a little less time. And then last but not least is your value add that’s where we take a you know existing site that needs improvement, maybe it has deferred maintenance, maybe it does have a bad marketing plan, a lot of times you have there’s a huge massive piece of the Self Storage industry most people don’t realize this, it’s just mom and pops right but we get used to seeing these, these public storage is all over the place and think that that’s the the main storage place but honestly, it’s it’s a lot of mom and pop storage places that have been run for the last 30 years. And they need upgrading, they need updating sometimes they got a lot of handshake deals going on for leases and things like that. So we have to adjust and create more efficiencies and create bigger noi which is also you know, making the deal more valuable and that would be the quickest one right so I would say if you’re talking about the quickest one which would be evaluated sometimes that can be done in six months to a year depending on what needs to be done or if you’re expanding your your big box renovation is going to be somewhere in that 18 month 24 month category and then new construction usually when we do a raise for that we’re doing a 30 to 36 month raise just because you know again the townships and especially with COVID being delayed i mean you know the inspection phase and the review phase and all that kind of thing has been taken a little bit longer than normal because you know people are remote.

J Darrin Gross 19:06

Yeah. So again, going back to just the recognizing the opportunity in a particular market is there is that are you relying on the the eventual manager of the property to say you know, this market right here could really we could do something if you find something or are you guys do you have your list of criteria and you’re hunting the landscape and then trying to go back to them to say Hey, what about this market or tell me how that works for you as far as you’re finding your your different markets that you guys are in.

Joe Evangelisti 19:45

So it’s a combination of those two things and a couple others so so when we go out to seek a market First of all, we’re looking for mshs that are increasing in size that you know that there’s there’s large corporations are moving into. For example, we’re doing One in Atlanta right now it’s in underwriting. Atlanta is one of those markets where, you know, the American Cancer Society’s there, Coca Cola is there, Amazon is there as this massive corporations and their diverse corporations. And Atlanta as a city just keeps going out just keeps expanding, right, there’s more population coming in, as opposed to, you know, a lot of the Northeast states. I mean, I live in New Jersey, you know, not that we’re not building in New Jersey, because the population is still great. But there’s people leaving, right, they’re calling south, they want to be in Florida, and Tennessee, and Georgia and Texas. So number one is we’re trying to find growing populations, or at least get in where the where the population is growing to, right, a lot of the Carolinas have cities that are starting to expand out the rallies and Charleston’s and stuff like that. And so we’re looking for expanding opportunities. But to go back to the The first thing you said, which is do we do it first, there’s the third party do it first. It’s all it’s all a well orchestrated effort at that at the very beginning. Because we take that parcel, we get all of the due diligence and all the data that we need up front. And then really all the teams start working on at the same time, our third party management will take a look at it or independent feasibility will look at it our in house is now doing their due diligence. And really what we’re trying to do is we’re trying to build a story around that site, what makes it popular, what makes it a good destination for us to build what makes it something we can fill up quicker than then maybe you know, somewhere else. And of course, all of those different parties add their own thoughts and an ideas in because if you’re dealing with a third party manager, they’re already managing stuff in the area. So they know what the fillip rates are they know what the what the rent rates are, they know how quick it’s going to fill up. And then, you know, so they can give you that that end of the story, the feasibility guy, right, he’s doing Self Storage sites all over the country. So you know what, most likely he just did one nearby. And so he’s going to be able to tell you what’s going on there now and what’s happening. And then of course, the team, the team brings their, their eyes to it. All of that creates the decision of whether or not we move we move forward to bringing in investors or it’s a pass.

J Darrin Gross 22:03

Got it? So as far as the the actual construction, are you guys relying on a local general contractor to build it for you? Are you guys deploying your own people? or How are you doing?

Joe Evangelisti 22:15

Yeah, so we work with site supervisors that we that we have in house. And generally, there’s going to be a component of a general contractor there. However, like I said earlier, what’s nice about these things is they’re very simple. Right? So, you know, our local will always have a local General, I’m sorry, civil engineering team on ground because you need those people to help through the jurisdiction and uses and understanding of water tables and everything that’s in that local area. But for the most part, we’re using nationwide general contractors to do the construction to do concrete to do the locker build out inside. And you know, so it’s a mix, but it’s a lot of it’s a lot of the same contractors going from site to site, because that’s what they do. They just, you know, they travel and they build.

Got it. And as far as the, the capital to do these, are you guys syndicating or how are you going about? Raising the capital?

Correct? Yeah, it’s a combination of syndication and bank financing. We have an amazing pool of accredited investors that we tap into. And, you know, we really look at them as our partners, even though their LPs and GPS and we look at those as people that we want to build with and we want to grow with because our syndicated deals, they never relinquish equity equity. So if they come in with equity, they have equity in perpetuity, even after they get their cash out, and they’re refinance in the backside. They own that piece. They’re, they’re a part owner for the duration. So you know, we kind of treat that and think it’s it’s extra special, because I want those people to ride with us on the next deal and the next deal in the next deal, and ultimately build legacy wealth together.

No, I like that model, are you? Or at least based on what I’m hearing? You say that the plan is kind of build and hold then is it? Say kind of?

Yeah, we started out early on thinking man, we would sell some, we’ll keep some we’ll sell some. And I owe it to my business partner, Brian, who’s our CEO. He’s kind of our head of construction. He sat down, like, not too long ago, and he was like, why would we want to sell any of these? We’ll just keep them as long as we possibly can. I mean, we’re, we’re refinancing, we’re stabilizing, we have cash flow, what’s the sense, right? Why would you know, why would we do that? Because, you know, hopefully, we’re gonna go back 15 years from now look back and say, Man, that was a hell of a portfolio put together.

And as far as the investors that is basically refi, that you’re getting them their money back. And then they’re saying, Hey, what about the next one? And that’s is that kind of the define that a lot of the people are one wanting to get in on that next one is that you’ve absolutely yes, yeah.

In fact, you know, almost every deal we have is between 50 and 60 cents on the dollar that we’re into posts or pre stabilization. So, you know, the goal here is that we continue to build these Almost 2x equity deals that they can more than easily take out the refinance more than easily take out the initial investment. We’ll still have some leftover after that. And yeah, they ride with us to the next one, because we over delivered.

J Darrin Gross 25:15

Great. So let’s take a minute here and talk a little bit about your, your other opportunity or the activity you’re involved in with executive coaching. Sure. So I’m curious from a standpoint of like a real estate investor, or somebody that’s wanting to get into real estate investing, if you could speak to, to, you know, them as far as how they could improve their performance, or how they can get to that next level, if they’re, you know, have they have a single family property, they want to get into multiples, or they gets, you know, small multiples, I want to get into large multiples, is there any insight that you can provide? On on, you know, maybe a way of thinking or way of acting that, you know, they should consider?

Joe Evangelisti 26:07

Yeah, absolutely. I appreciate you asking me that. I mean, you know, part of what really drove me to become an executive coach was the position that I was in, when I told you that I was doing that chasing game, right where I was, I was wearing so many hats, and I kind of felt like, you know, they say, No, man is an island. Well, I was an island, right? I was running as fast as I could, you know, I had at that point, I had two young girls, I had a new wife, I had a new house, two dogs, and like, you know, I wasn’t spending nearly what I should be on them on my lifestyle, right, I was chasing all this opportunity. And I kept thinking, if I put in more hours, I can make it work, you know, I just do more, do more, do more, and I’ll be more, right. And, you know, that was the epiphany moment where I just said, I gotta do something different. This isn’t going to work for me, I’m missing. You know, like, my kids barbecues on Sunday with a family, I’m missing, you know, soccer games, I’m telling my wife, I’m gonna be home late tonight for no reason, just so I could, you know, do busy work. And I think a lot of entrepreneurs get stuck in that cycle where they feel like if I just do more, I’ll get better results. And what what I learned kind of the hard way, but opportunistically, through my mentors and coaches that I hired that time was, I got to work on Joe, right, when I become a better Joe, everything else starts to come into alignment. When I start working on myself, I start becoming a better father, a better husband, a better leader, a better business owner, a better coach to my people. And, you know, ultimately, I was able to, you know, figure that all out. And now I help other people navigate that, that those things through through their life in their business. And what I figured out was what I call the five roads to victory, you know, the US Navy seabees, I call it this because the seabees, back in World War Two had physical five roads that they were they were designing around the globe, you know, to give our our forces access to things and to block off, you know, access to things from from our adversaries. And so when I created this thing called the five roads to victory, it’s really the five dominating things that we have to change about ourselves in order to find the success that we want to find.

J Darrin Gross 28:11

Can you share with us five? Is there a?

Joe Evangelisti 28:15

Sure? Yeah, I can. Yeah, so the first one I talked about there is what we call getting your mind, right, or your limiting beliefs, right? Because so many of us, we say to ourselves, you know, things like I’m not good enough. Not fast enough. I’m not educated enough, right? I’m not capable this, you know, why would I do that? You know, because I’m comfortable where I am. And the reality of it is, a lot of times when we have those conversations with ourselves, it’s it’s literally conversations with ourselves, right? Like when there’s when you go to decide to do something big, or you set a new goal, and you start hearing that little voice in your head, that voice is your voice, right? So understanding that I get to control that voice, I get to decide what that voice says to me. And a lot of times when we try to make a decision that’s big, we start to do what we start to rationalize, right, we start to go, Well, maybe this will really if we break that down, what we’re doing is we’re telling ourselves rational lies, right? We say to ourselves, I want to go out and I want to build, build, build whatever, I want to do 10 flips a year. And then before you can even get the thought passed your head, right? You’re all of a sudden hear that voice. 1010 might be too many. Where am I going to get the capital for that? How am I going to do that? I don’t have a team to work with. How does anybody else do this? Maybe I should just stay where I’m at and do what I’m doing. Right. And we rationalized the reasons why we can’t grow. So the first thing I do with my coaching clients is look into what’s their limiting beliefs, what’s their value system? What’s the standards that they live by? Why Why do they want what they want, and create results and purpose around that so that we can start to change that inner voice to actually catapult you to success instead of holding you back from their goals?

J Darrin Gross 29:52

No, that’s the limiting belief. That’s pretty powerful stuff there. Yeah, absolutely. So In, in your work with people in, you know, on the coaching net? What kind of a timeline Do you find? for people to have some sort of a measurable? change? I mean, obviously, you know, you were saying working on yourself and that, but I’m, you know, I’m just kind of curious, whoa, you know, if somebody says, Okay, I’m tired, I want to go, I want more, you know, putting in the work, I need somebody that’s kind of guide me along the way to get get to where I want to be kind of thing. Is there any kind of like, you know, an expectation on on how long is it was based on how big your goal is? Or is or like to see some sort of, you know, a meaningful change and to get some, you know, some sort of a positive results?

Joe Evangelisti 30:53

Absolutely. I’ve seen I’ve had people will have results instantly, within weeks. And then you know, there’s some people that it takes a lot to get through to reset that mindset and reset that that thought process. And you know, it takes, you know, a month or two, but reality of it is I’ve never had anybody work with me six months that didn’t see incredible results. And we call the 36, and six, right, it’s about collapsing time, or what we call turning decades into days, you know, we can accomplish three years of what we normally think we could accomplish in six months. If we know the plan, we know, you know, where we’re going. And so second part of that process is really what we call the plan of attack, right? So if I’m in the military, and I’m going to board up on a sci fi, and I’m going to go invade a foreign country, right, we don’t just jump in the back of the plane and parachute out the back and land and go, okay, what’s next? Right, we have an actual plan of attack, right? And so the challenges Darren, that most people spend more time planning their trip to Mexico for a week, and they do with their life in their business, right? If you’re going to Mexico, you know, what plane you’re going on, you know, what seat you’re sitting in, right? You know how you’re going to handle transportation to and from, you know, when I get to that hotel, do I have a pool view? Do I have an ocean view? Right? Am I near the beach? How far am I from the bar, you know, all of these things, and so people know every step of their seven day trip to Mexico, but you say to somebody, you know, what do you want in life? What are your goals? What would your perfect day look like? Right? How much money do you really want to make? Right? And people don’t have the answer for this, because we didn’t reverse engineer and remember, we’re talking about the outcome, not the task. And so many people spend their day, day to day doing tasks doing to do lists, you know, checking off the box, make themselves feel good. And they and they’re just putting out fires all day. But they’re and I tell I tell a lot of entrepreneurs, the ones that are putting out the most fires, right? The ones that pride themselves, like I put out fires all day long, they’re walking behind the building and their lighting matches, right? They’re literally setting themselves on fire, so they can feel good about putting themselves out. And so what we want to focus on instead of the firestarters is how do we convert that energy into outcome based goals? Right, what I really want to see what do I really want to achieve and then reverse engineer from there.

I love the the mindset or just the the foresight of, you know, reverse engineering, you know, understanding where I want to go now, how am I going to get there kind of thing and, and working backwards from there. That’s, that’s pretty powerful.

And yeah, most importantly, creating a strategic plan around that. So that you know, what, what, what you need to get done in order for it to be to be accomplished for you step by step.

J Darrin Gross 33:27

So let me ask you this. So your role as a coach, is their accountability factor here? Are you holding people’s feet to the fire? Or is it more a matter of a kind of a, you know, talk to me a little bit about how the how that relationship works?

Joe Evangelisti 33:46

Yeah, I mean, yeah, you’re getting ahead of me a little bit. That’s step five. But so again, no, it’s okay. No, I mean, I love to answer that. I mean, the challenge is this when someone feels like you know, they need to be held accountable or hold their feet to the fire. They’re thinking, like, I’m gonna have a coach yelling at me or telling me what to do. And the reality is, it’s almost opposite, right? Because when we reset the mindset, and we control, what is the outcome, what are the results? Why’d you hear people say, what’s your WHY? Right? And everyone says, Oh, well, it’s my kids, or it’s my wife or my grandkid. Like, what’s your What? And generally look, it’s a BS answer to cover up something, right? Because the truth is any one of us that have kids, yeah, we do everything for our kids, right? But that doesn’t mean every goal I have is in alignment with my kids, right? If I want to create a multimillion dollar business so that I can have time freedom, and I can only work a couple hours a week running it or letting it run itself. I’m not doing that for my kids. I’m selfishly doing it for me, so I can control my time. Maybe I’m going to spend more time with my kids. Maybe I’m going to buy them cooler stuff or give them more opportunity. Or maybe I’m going to start a charity or maybe I’m gonna you know, there’s so many angles I could take that so what is the result and what is the outcome and the purpose that I’m actually trying to get out of building a multimillion dollar business. You know, so many people chase the dollar sign, and not the outcome that they’re looking for not the actual purpose of why you want to create it to begin with. And that’s really your why Darren, when we know our why that’s what drives us. That’s what keeps us you know, we hit obstacles. That’s what keeps us going forward. Right? You’re not just going to stop at a stop sign, because you know, it came up when you’re when you’re focused on your why you’re going to run the stop sign, because nothing’s going to keep you from getting to that goal. Make sense?

J Darrin Gross 35:22

Yeah. Not that’s, again, knowing knowing why you’re doing it. I mean, that’s, that’s really kind of the the key thing there.

Joe Evangelisti 35:29

Yeah, absolutely. styling. Yeah, I mean, run past your, the next day, they all go out of order I look at Yeah, okay. It doesn’t matter. It’s okay. That mean, there’s really, again, there’s no, there’s no right or wrong for how these things happen. These are, these are literally, these aren’t theory, these are the things that I do on a daily basis. But I really keyed in on what makes me you know, be able to do what I do and build a lifestyle business around, you know, what I what I want to do every day, you know, who I want to work with who I want to be around.

J Darrin Gross 36:02

That’s good stuff. Joe, if we could like shift gears here for a second? Sure. By day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if we can avoid the risk. That’s not an option, we look to see if we can minimize the risk. And if we can’t avoid nor minimize the risk, then we look to see how we can transfer the risk. And that’s what an insurance policy is. And I like to ask my guests, if they can look at their own situation. Could be your clients, investors, tenants, the market opportunities, but if you can take a look at your situation, and identify what you consider to be the biggest risk and for clarity, not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Joe, evangelist at what is the BIGGEST RISK?

Joe Evangelisti 37:14

Absolutely. And I have insurance background as well. So I mean, I’m not going to answer from an insurance perspective, but I understand where you’re coming from. And, and look, I think insurance is one way, you know, we could talk about risk, but really, when we’re talking about risk in life, and we’re talking about risk and success and growth and contribution and creating something that, you know, when we talk about legacy, wealth, or legacy building, I think about legacy as when I create that thing, there’s some kid 100 years from now, who’s never heard my name, who’s going to be impacted by that, because his grandfather, and Father, you know, taught that, you know, took it down the line and created that long term legacy and wealth, right? In order to create that there’s no way you can do it without risk, right? Everything we do is risk, you drive your car to work in the morning, it’s a risk, but you don’t not work, right, you don’t not go to your job. It’s the same thing, I think in our industry, is there’s going to be a lot of risks. But the one way that we can create risk mitigation is through proper due diligence through making sure we check all of our boxes through thinking 12 months to two years in advance or five years in advance in some in some cases, right? So, you know, when it comes to like, let’s say Self Storage development, for an example, there’s a lot of outliers, right, the market could change the the the price of materials right now has gone through the roof. And so we build in contingencies for these things, we pay attention to the what ifs, we look ahead to, you know, making sure that we ask the right questions and do the proper due diligence. You know, we don’t buy sites that, you know, used to contain an underground oil spill or you know, have major water issues or any that type of thing. So I think the best way to mitigate risk when you’re in the development business and in your in the construction business, is to do the proper due diligence, like you see here, most of the nightmare stories of big developments gone wrong. It’s because someone forgot to ask the right question. someone forgot to do the right study, someone skipped paying for the feasibility report and just went in all in on a gut feeling. You know, one of the things about these big deals that I like is there’s so many people involved in the approval process, right? It goes through 20 different hands before we say yes, and before we even decided to go take investor money in. So we want to make sure that we’re mitigating the risk to create the best possible upside, knowing that it’s going to go wrong, that we have problems, things happen, right, and then being surrounded by really good problem solvers. So when they come up, we have a plan B and A plan C and a plan D.

J Darrin Gross 39:39

No, due diligence. That’s kind of I mean, I see it too many times is it you know, like I said, People get all excited and in don’t consider the downside. And next thing you know, they’re either out of business or upside down or, you know, it’s just, it can be it was something that was it was avoidable, but they just I chose to look the other way kind of thing so I really appreciate you sharing that. Yeah. Joe where can listeners go if they’d like to learn more connect with you?

Joe Evangelisti 40:10

Yeah, there’s there’s two places if they’re looking for expansion on the on the executive coaching and pure NP performance side, we have a website called invest I’m sorry, Elevate with Joe dot com. It’s elevatewithJoe.com, and that they want to check out some of the storage side our storage website is investwithlegacy.com invest with legacy. So you can check out our storage deals there. And of course, if you’re looking to, to grow as a person and a business owner and you want to see real real results and go to the elevate with Joe, com.

J Darrin Gross 40:44

Awesome. Joe, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it, and learned a lot. And I hope we can do it again soon. Absolutely. Thanks for having me on. All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Network’s CRE PN Radio.

Announcer 41:16

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Solar Power Incentives for Commercial Real Estate with Manny Renteria – CRE PN #307

Manny Renteria 0:00

In a nutshell, we were able to cut down the level the cost of energy for this business owner. And the tenants because we ended up paying the bill for it down from 24 cents a kilowatt hour down to about nine cents a kilowatt hour, even eight cents a kilowatt hour. Because the owner is is is, you know, forking up the investment in it. And in the first year to five years, the owner will recover 50% of that investment through federal incentives, which is 26% tax credit. And then you’ve got the accelerated depreciation over five years. And then now there’s another depreciation benefit that came through a couple years ago. And so commercial business owners are recovering, you know, more than 50% of the cost in the first five years. And then the next, you know, the other five years that they’re operating already recovered the rest of the investment by way of energy savings. Welcome to

Announcer 1:03

CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from the experts.

J Darrin Gross 1:22

Today, my guest is Manny Renteria. Manny is a 15 year veteran of the solar industry, and has been designing commercial solar systems for over eight years. He is a founder of one up solar, an industry leader and residential, nonprofit and commercial solar installs in San Diego. And they are expanding their reach to the entire country. And in just a minute, we’re going to speak with Manny about the opportunities in solar for real estate investors, and specifically more commercial aspects.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. You can find us on youtube at commercial real estate pro network. And while you’re there, please subscribe without on Welcome my guest, Manny Welcome to CRE PN Radio.

Manny Renteria 3:00

Thanks, Darrin.

J Darrin Gross 3:02

Well, Manny, I’m looking forward to our conversation today. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Manny Renteria 3:13

Well, my background is mostly in electrical and electrical engineering, which is why I got into the solar field I guess. Prior to to joining one of the top solar companies in the world, back then known known as Solar City, I was a commercial electrician. And prior to that Residential Electrician and I’d also worked on wind turbine generators and things like that. So my passion comes from knowing understanding electrical transmission, distribution and troubleshooting. So when I found out when I first found out what solar photovoltaic cells are and what they did, I was blown away by the fact that I could now you know, offer folks the value of producing that power on site versus having to transmit it through transmission lines and things like that. So that’s, that’s my background of family man out of San Diego. And, you know, just proud to be an electrician in the trade.

J Darrin Gross 4:31

Awesome. Well, I’m excited to talk to you about solar. I know it’s been something that’s it’s always appealed me ever since. You know, first time I remember hearing about it and probably grade school or something like that. In just the the product itself. Can you talk a little bit about, you know, the product and you mentioned the cells and how they’ve improved And the last, I don’t know how far back you want to go, because I’m sure there have been leaps and bounds. But it just in the recent past, if you could talk a little bit about the product and, and how it’s improved,

Manny Renteria 5:10

Certainly. So the first batch of solar panels that I encountered, were back in 2001. And I was I was actually on a, on a track home build. And we were wiring this these model homes for track home development. And there were, there was an electrician on site that had these modules. And they’re, I mean, they were probably to two feet by four feet. And there was, you know, they had like, two pallets of them. And I looked, I took a look at them closely. And they were manufactured in some warehouse here in the United States by hand. And they were only rated at 25 watts at the time, so the system itself really didn’t, didn’t cover the entire home’s energy demand, so to speak. So, but it was a cool technology, right, just to know that it existed now fast forward seven years, when I actually got into solar, myself and had had hands on experience in in, you know, designing and installing these panels. The modules by then the solar cells, which are, the solar panels are actually, you know, a group of cells that are kind of wired together by conductors. And so when you see a solar panel, usually it has about 60, or more cells. So these cells were now rated at around 175 watts. So, you know, 25 watts, 275 watts over, you know, seven years. And that’s

J Darrin Gross 6:59

per cell, per cell,

Manny Renteria 7:02

well, per, you know, packaging of cells. So, okay, packaging, so so the, when you see a solar panel, the traditional solar panel that you see on home, that’s going to be the usually the standard size of packaging. And so as, as the years go by efficiency inside of each cell, increases about one to 2% per year has been the average. And it’s had, it’s had kind of a drop off over the last few years, where the cell efficiency is kind of leveled, leveled off. And and now we’re seeing in commercial, especially modules that are rated upwards of 450 to 500 watts now, so huge, huge, you know, bounds and leaps to get where we are today. And so now with now with one solar panel, you mean you can you can power an entire, you know, entire kitchen, whereas before you needed like 10 of them? So, so yeah, I mean, technology’s come a long way. It’s not it’s not going out of control, you know, to the point where, oh, yeah, two years, they’re just gonna be this big and, you know, one cell is gonna take care of an entire apartment building I that’s not gonna happen, but

J Darrin Gross 8:18

Right, right. But this is just the the progression to where, you know, you may have needed like, yours and your neighbors or have to power your house where now you can get it done with you know, party roof being covered is it’s it’s fascinating and impressive just to see you know, the, the real practicality and, and the opportunity there. So that the basic is a cellular or an outsider but the solar panels that basically the kind of the foundation of what you guys do as far as the or I guess the, the energy collection is that were the, the primary kind of the starting point for the the collecting the energy from the sun.

Manny Renteria 9:08

Yeah, so so that’s going to be the only source of you know, incoming power that we that we have in our systems and from there, we have inverters, which which condition and convert the energy to usable energy to sunlight energy to usable energy, then you’ve got batteries that store the power and distribute the power during different times of the day. So, yeah, in fact, the solar the solar panels and the solar cells themselves are responsible for attracting that sunlight and converting it into energy.

J Darrin Gross 9:40

Getting so going from the 25 watt to the 175 watt panels. How somebody that has one of these installations on the Start with a residence, are you able to essentially be off the grid for the average? average homeowner?

Manny Renteria 10:02

That’s a great question. The possibility or the feasibility in going off grid is, is is available, it’s a thing. It’s not really cost effective to be off the grid. today and for for as long as I can remember, solar in the, you know, marketable residential and commercial space has always been grid tied. And so what that means is that your, your solar PV system, that generates all the power that you need in your household, is, in fact is most of the time is going to be grid tied. Why? Because storing energy can become really expensive, and not only storing it, maintaining the storage batteries, and having enough storage, battery capacity, you know, to weather any any type of ongoing, cloudy days, for example, I don’t know, let’s let’s use as an example, Seattle, where you have, you know, days and days and days of no sunlight or low sunlight or even Alaska. Or even in California, we’ve we’ve had days where, you know, four or five days, there’s not a lot of sunlight. So what happens is, if you don’t have an autonomous, you know, storage system that could take you through these five days, you’re you’re going to be left without power. So it’s not really a good idea to be off grid unless you’re, you know, you’re living in a cabin, up, you know, the woods where there’s really no no access to grid voltage, and communication. And then that’s where that’s where you can really become much more efficient, and find electrical devices like, like light bulbs, or even refrigerators that are powered directly off of DC power and doesn’t require you to store the energy. And you just you have to live a very minimalistic sort of consumption life, right to be off grid. So it’s possible, not feasible.

J Darrin Gross 12:05

So, so let’s, so I guess walkway from the the off the grid, but but just in the fact that you’re generating power, is it common now that when you generate power, and you’re not using it, that you’re that you’re able to, I guess, supply the grid? Or is there any kind of a do you become a generator for the grid, then?

Manny Renteria 12:31

That’s a great question as well. So most utility companies across the US, they will sign this agreement called the net net metering agreement with the with the consumer, or the customer. In this case, most utility companies benefit from solar power, because what happens is you you become a producer of power, and then you lend them out that power, which they can then turn around and sell it to you know, the building next door or the neighbor for you know, for the premium price that they sell power at. And instead of you getting billed for it, you get credited for the excess power that you put in put onto the grid. Now, some utility companies in California now have enacted net metering 2.0 and are going for 3.0 where 2.0. Now there’s they’re actually charging you a small non by passable charge, they call it NB C’s not by passable charges, to store the power on the grid. So now they’re they’re actually charging you a small fee to store that excess power, and then call it back in the evening. And then they’ve got time of use rates and things like that, where where they have actually learned how to recover some of the losses that they’ve experienced with with solar customers. But for the most part, yes, it’s it’s an, it’s a one to one exchange, so you give power, they give you power, you give them power. But now they charge you a small fee. And it’s a small percentage, I’m talking maybe one or 2% of what they’d actually charge you if it was if it wasn’t, if it wasn’t solar energy that you put on the grid, if it was just pure power that you’re buying from them and wholesale.

J Darrin Gross 14:19

Well, it’s interesting, I’m just kind of curious, you mentioned that, you know, California I think has probably been more progressive. Stay with regards to solar power. Have you found that most states are moving in this way? Are there any that have been resistant to you generating power and, and, you know, putting it into the grid or or or tying to the grid that you’re aware?

Manny Renteria 14:47

Yeah, so there are many states now that are on board with solar. You know, there’s there’s a handful I can name off a few Texas, Nevada, Arizona, New York, New Jersey. South and North Carolina, Georgia is now peaking. And Montana, Florida, I mean, just just to name a few, there are quite a few states that are still, you know, kind of struggling struggling behind. But these new states and figured they’re actually offering tons of incentives in some of these states, state incentives along with federal incentives, you know, to deploy rooftop solar. And not only are not only are their state and federal incentives, there’s also production incentives, and also, utility now are offering rebates as well. So I like in the Carolinas, I think there are, there’s, there’s a pretty significant utility rebate when you go solar, and I imagine it’s because of the, you know, the lack of energy sources around the area. So there’s a lot of fields out there, where where, you know, people have big plots of land, and they’re putting, you know, utility scale solar on there. So now they’re putting solar in, they’re selling it back to the utility and the utility gets to profit from that.

J Darrin Gross 16:10

Yeah, no, I was gonna say, recently, I’ve seen more and more of those, just kind of a field with panels. You know, and I didn’t know if that was privately owned, or if that was, you know, municipality owned, or, or how that was, but it’s, it’s, it’s impressive. I mean, when you see, you know, 100 acres where the panels all lined up, they’re generating power. So, the, the the basic is, the panel on on your roof, whether it be your residential property or commercial property, you are able to operate your, your facility, from the power you’re generating any access, then you can have an agreement with the utility. So right, and then, and then they kind of store it, and then you’re, you’re not like unplugged. But you are getting some credit for your, your generation. So, let me ask you this. So we’ve talked about basically the, the system or the hardware and stuff. What’s the I guess the the cost and the benefit and kind of more of the, you know, the, what kind of a financial obligation to somebody, you know, looking at to, you know, whether you’ve got a 10,000 square foot building, or 100,000 square foot warehouse, or can you talk a little bit about how that looks? And then kind of ways that you mentioned some sort of the incentives that are available? Or how how these installations are being paid for or financed?

Manny Renteria 17:49

Yeah, certainly, though. So in California, the easiest way for me to explain the cost of solar is comparing it to the cost of the utility power in terms of kilowatt hour or price per kilowatt hour. Because I can tell you $100,000, and that’s not going to mean anything to you unless you know how much you’re spending or, or how much you you’re avoiding in the near future. And that’s not some sort of gimmick is just the way it is the way we calculate the levelized cost of energy over 25 years span, which is, you know, which is the typical lifespan of a system, the minimum lifespan, I should say, because there’s warranties in place. And so, when you look at all use California as an example, the rates here, especially in San Diego Gas, and electric, the rates for commercial power, are roughly around 22 to 28 cents per kilowatt hour. Now, compared to residential, it’s almost half of what residential power costs are energy, I should say, energy is a measure of kilowatt hours. And so 22 to 28 cents per kilowatt hour is what you’re paying for electricity today. Now, when you deploy solar on your rooftop, and it really depends on the size of the building, obviously, if you have a taller building that has a smaller roof space and you have you know multiple floors, then you know solar panel coverage on the roof, may or may not cover your your full need, right, we’re looking more for buildings that are you know, one to two storeys with a with a with a larger footprint, where you can actually cover that rooftop and and then realize the full incentive of going solar and, and the most savings. So in my building right up above my head, actually I have an 18 kilowatt system installed. Now below us, there’s a restaurant. There’s and then Next to that restaurant is another restaurant. So we have an it’s an it’s us. And then next to us on the on the left here, we have another office building, and that’s a real real estate business. So we have about 1200 square feet in here. And the real estate has around the same. So together, because it’s the type of the business that we are, right, we consume, we consume light, and we consume air conditioning. And that’s pretty much it. We don’t have, you know, multiple refrigerators and, you know, in all these freezers and things like that, like the restaurants have, so basically, the roof space that we have above our heads only only satisfies the the power consumption of the top floor, which are offices, right. So office space, retail space, things like that, that’s where we see, you know, a huge feasibility. So the owner of this building, when I when I brought the project to them, because I, we pay the electric bill, listen here, listen, this is what we sow. So in a nutshell, we were able to cut down the level the cost of energy for this business owner. And the tenants because we ended up paying the bill for it down from 24 cents a kilowatt hour down to about nine cents a kilowatt hour, even eight cents a kilowatt hour. Because the owner is is is, you know, forking up the investment in it. And then the first year to five years, the owner will recover 50% of that investment through federal incentives, which is 26% tax credit, and then you’ve got the rapid accelerated depreciation, I think it’s

the makers, right, it’s a, I don’t know what the N stands for, I don’t remember off the top of my head, but it accelerated depreciation over five years. And then now there’s another depreciation benefit that came through a couple years ago. And so commercial business owners are recovering, you know, more than 50% of the cost in the first five years. And then the next, you know, the other five years, that, that they’re operating, already recovered the rest of the investment, by way of energy savings. So you know, after, after the first five or six years, everything from then on is just is just power that’s being produced on the roof with a system that’s been paid off. So, you know, cash investments are definitely, you know, the, if you have that type of, of investment, capital, I would say is, is the biggest, you know, the the best way to recover your your your return, to realize return on investment on any system. So, because your levelized cost of energy ends up being around seven cents at that rate. So if you can, if you can compare paying seven cents for power, you know, over 25 years, versus paying 20 to 24 cents today. And then being susceptible to inflation and other things that utility companies usually stick us with every year three to 4%. You know, there’s a huge saving spectrum. And so when you add financing in there, when you add interests, when you add, let me give you an example, we looked at a finance option for this building, as well as with interest in program fees and other things like that the levelized, cost of energy went from seven cents from being in cash investment to to about 12 to 13 cents in a finance investment. So So when picking up investment financing, your levelized cost of energy actually goes up, but you’re still around 50% in savings. Now, that’s for California, other states. We, it’s, it’s a little bit tougher when you when you when you when you finance your commercial project, in a utility where the utility power is only 14 cents, you know, because then what ends up happening is the price that you pay for power today is going to equal the price that you’re paying for your investment right off the bat. But with but with, but what I like to what I like to really focus on and have my customers that I consult for focus on is the fact that they that they’re getting rid of that expense and replacing it with an investment cost No matter how much this investment is, if it’s a little bit more a little bit less, it doesn’t you know, you’re getting rid of the whole expense. So it’s like renting your power versus owning it. So that’s my perspective on, on on financing and the cost the cost right now very, very accessible and affordable, obviously compared to what it was years ago and commercial. I can To tell you commercial right now is going to cost anywhere between 25 to 35%, less than any residential project. So if anybody’s ever had a residential bid for their home, they can expect to see, you know, 25 to 35%. lower costs for their commercial business, because of the size of the system.

J Darrin Gross 25:20

Gotcha. Gotcha. And you mentioned kind of the the base rate for California 22 to 28 cents for the commercial. Do you have our I mean, I would assume based on just the the recognition of the the benefit, that states that have higher cost power would be kind of more of a target opportunity, just just for my initial easy to see that the benefit kind of thing. Are those states easy to identify what states that that stand out?

Manny Renteria 25:55

Yes, states and stand out to me are going to be California, Maryland and New Jersey. Those are the New York. So those those four states and Massachusetts. So these are all states that have that we’re experiencing power over 18 to 19 cents per kilowatt hour.

J Darrin Gross 26:15

Gotcha. Yeah. In and if I understood, right, the payback on this was roughly five to 10 years, based on the California model you were talking about as far as the cost to invest. And then you said 50%, back in five years, and that was just, if I should write that wasn’t even talking about their reduced or the XIV, he said five, but 50%, five years, and then I assumed of the balance another five years, so 1010 years payback? And then after that, you mentioned that the systems are good for 25 years is that kind of the expected life. So you’ve got, you know, 15 years of controlled cost of your your power at a reduced rate, remove in your out of the susceptibility of the increases from the power company, correct. You can lock in?

Manny Renteria 27:11

Manny RenteriaThat’s correct. Yep. So yes, now, that’s California, I think it’d be anywhere between four to six years for a full return on investment. Only because 50% of that is coming back through incentives. The other 50% is coming back through energy saving.

J Darrin Gross 27:29

Oh, I got just so the fit there is that there’s both? Okay, I knew there’s two parts that I just didn’t, yeah. So you’ve got the incentives, plus the reduced rate. And the reduced rate is something you’ll carry on for the life of the system. Right?

Manny Renteria 27:44

Yeah, so once, once you you, you realize your return on investment, which again, California can be four to six years, there’s no cost of power after that everything’s paid for done. In fact, most every power system that we that we develop and consult for comes with a 25 year craftsmanship guarantee. It’s more of a operations and maintenance, sort of warranty, that, that covers, that covers, any any, you know, manufacturer defects, that covers any any malfunction of the system, you know, that this is unexplainable, but anything having to do with like, real world conditions, like I don’t know, say a hurricane, or our you know, tornado comes by or hail. Even hail doesn’t really cause a, you know, a lot of damage, it’ll damage the roof before it damages the solar panel, ironically, but so, so that’s what we look out for is usually something that comes with with a full plan and coverage, you know, maintenance coverage over 25 years, because that’s one of the biggest concerns is like now it’s on my route, who’s going to take care of it for the next five years? So to finish answering your question, again, that’s going to vary by state. And I think, I think if we look in the in the states where you have the lowest cost per kilowatt hour, utility wise, your your return on investment, you’re looking at around 12 years that you know, at most, so from from five to 12 years can be the the the window, I guess you can call it

J Darrin Gross 29:27

right. But even as the system outlives its here, you know, you get to the end of its life. I’m assuming would the would the I guess the replacement would it be a full replacement or would it be just more of like significant parts like the panels or I mean, because you’ve got some guests in there some infrastructure or some capital improvements you have to do just to make the system plug into your your building there is that? I mean is it is that makes sense. So as far as I’m assuming, like, the wiring and stuff, he wouldn’t be necessarily replacing that it’d be more of the panels, maybe some key components? color.

Manny Renteria 30:08

Great question. Actually, what’s what’s great about solar panels is the fact that there’s no moving parts. And so when you when you talk about or or think about huge ticket items that need to be replaced, maybe once or twice throughout the life of the system. Depending on the type of system, there’s only two, there’s, there’s systems that have micro inverters and every panel. And so typically, what happens with those little micro inverters is you have to replace one or the other every other, you know, every so often you have to have somebody out there replacing one of these, one of these components, and you can have 100 200 panels on the roof. And you probably have two or three malfunctions, every, you know, two or three years. And so throughout the life of that system, you’ll have somebody out there 25 times replacing these little components, but it doesn’t shut the entire system down. Whereas when you have a an optimized system that has a central inverter, and there’s differences between the two, and I’m, you know, I’m for both, but the one with the central brain, for example, the central inverter will typically need to be replaced somewhere around 12 or 15 years. And that’s a, you know, to four to five hour, you know, just replacement. And so your system is down for about, you know, half of a day, while they go on, they replace this big component, and it’s backed up and running. And so those are the kinds of things you need to weigh out, as it relates to, you know, full system maintenance, and then solar panels themselves. You know, there’s there’s panels out in space, I’m sure you’ve heard this reference, right, you got satellites and things like that, that solar panels attached to him since since the 1950s, and 1960s, are still in orbit. So I mean, solar panels themselves is just, you know, a cell that’s glued to a piece of glass and, and it’s on there and has two wires on it. And that’s basically all that is. And so those things can go forever. Really, the performance guarantee is what runs out after 25 years. So after 25 years, you’re no longer have that coverage, that your system has to produce this amount of kill this, this amount of energy, you know, throughout the 25 years, and there’s degradation and things like that. But once you lose that warranty doesn’t mean your panel just dies out, it continues to work, but you probably will need to replace the electronic components every now and then.

J Darrin Gross 32:36

Got it? Got it? No, no moving parts certainly is. You know, something I would like I mean, just from the standpoint of it seemed like the things to turn around and and that move they they tend to have some sort of a bushing bearing or something like that that’s due to squeak and become a problem. Yeah. Let me ask you this. So if somebody has a, an office building takes like, I don’t know, say like a 20,000 square foot footprint. They they get a a system installed by you guys. And, you know, they’re they’re able to show energy savings is is there a transfer to the bottom line? As far as the value? If you were to, you know, sell your property? Is there a is there market recognition of, of the system that the translates to increase value?

Manny Renteria 33:35

Yeah, I mean, it’s the system is paid off, then then obviously, you can calculate using the software that the system is equipped with, you can see exactly, you know how much power this system has produced in its lifetime, year after year after year. And you can see and measure the degradation. And so once you measure how much power this thing is capable of producing every year, you can actually calculate that into energy savings, and then calculate that into the future. Let’s say let’s say year 10. Somebody transfers this building, they transfer over the system. And they tell you, they give you this full report. There’s over the last 10 years this system has produced, you know, 15 megawatts of power, avoiding, you know, this much in utility costs, which can be you know, 10 times what the system actually costs originally. And so, and this system still has a 10 year warranty, here’s the contractor’s number that’s responsible for the servicing. And this is how much this this this system will will then save in terms of energy, right, and so they will not have this expense moving forward. And then, after you’re 10, the system’s already paid off, so there’s really not a big, you know, I’m going to hike up the price of the building just because I have a small Solar System on here, I don’t think it really affects the sale of the property, it does help it. And, you know, some some, if there’s still, if there’s still some sort of a loan or, or a lease on it, then it’s easily transferable most of the time, once you show the benefit in the savings and what you know what this, if there’s, you know, a loan, a loan payment, that it’s equivalent to, you know, one quarter of the cost of the actual power that the utility would bill you for it, then it kind of sells itself, right. So there’s something I did want to mention, with, with different building types, the bigger buildings and and you know, refrigeration, like liquor stores and things like that, it really when you when you, when you become a high energy consumer, in the eyes of the utility company. And residential, you may have experienced this, where you use more power, they, you know, they, they, you jump into a higher tier, or they bill you more at certain times, and things like that. Same goes for commercial, we have time of use rates, which bill customers, you know, at a higher rate at certain times of the day. And that’s obviously to recover a lot of the losses that we’ve that the utility companies have experienced. And so they also have this other charge that commercial only commercial customers I’ve seen,

are actually being billed for, and those are, those are called demand charges. And for years, it’s been, it’s been this constant battle between, you know, the solar industry and utility companies to kind of figure out ways to, to mitigate that demand. So what demand charges is really simple, let’s say, let’s say you have, you have a few air conditioning units on the building, all these air conditioning units are programmed to turn on at the same time, when the temperature hits something. And then what happens is the the entire demand of power spikes up, and you’re drawing a lot of power, and all of a sudden wire that brings the power in is saturated with power, and there’s all this power coming in. And so the easy way to explain that is if if you have a huge traffic of power coming in for any any 15 minute interval, and it exceeds that threshold, that that, that commercial buildings are sort of, you know, set at, I think it’s like 20 kilowatts or 20,000 watts at a time over 15 minutes, you get hit with these charges. And then once you once you become a customer that gets demand charges, then that’s that’s, that’s every month now. Now they’re looking for that demand charge every month. So you can actually avoid being on that by, by, by doing these things inside the building, which are energy management devices, you can you know, you can probe around your h HVAC units to do different things at different times. Same with refrigeration, if you can isolate, you know, all the condensers and things like that kick on the refrigerators, you can program those at different times. And you can you can avoid these demand charges. Because one thing about demand charges is they’re really difficult to get rid of, and you can’t do it with solar panels most of the time. Because Because the solar panel, I’ll give you an example. If, if it’s a cloudy day, and you’re a demand customer and your solar panels are only producing at a quarter of the rate that they’re supposed to be producing, because it’s cloudy, and then for some reason your demand kicks up, now you just got this huge charge for the month in a 15 minute interval, you can have a two or $3,000 charge. And that’s because you’ve used this much power for this long. And that’s a penalty, basically a penalty fee. And the only way to avoid those sometimes is with with large battery banks, capacitors or there’s even there’s even gas generators that that some, you know, that that that some buildings are installing in order to avoid busy buildings that you know, drawing 100,000 watts of demand. And you know, they get billed 200 grand in one, you know in 115 minute cycle. And so there’s different ways to sort of get, you know, just get in front of that or get away from it. You just have to be very strategic. And that’s that’s what we like to we like to look at all these aspects, right. So with your, with your utility, we have a we have a this link that we send out to our commercial building customers. It’s a utility API link. And what that does is it we can pull their their Energy profile over five years and it gets minute by minute data, so that we can we can understand the you know, how this energy how this building consumes energy. And then we can kind of target and say, hey here, we can actually put in some devices, instead of, you know, putting into batteries that are putting, instead of putting more solar panels, we can actually convert everything to LED, you know, put in some, some controls here and do this and that, and then reduce makes makes the building much more efficient, before they produce the power that they need. So that’s really important to do energy efficiency,

J Darrin Gross 40:40

more of a global approach, as opposed to just to replace the source. But look at the demand kind of thing. I like that. And even like you mentioned, just leveling off the demand to where if you can, you know, space, the power, instead of having all the compressors kick on at the same time, you know, have them sequence or whatever, to where you can level that out. That makes a lot of sense.

Manny Renteria 41:02

Right?

J Darrin Gross 41:03

Yeah. So let me ask you, what’s an ideal prospect? for solar, as far as in commercial type applications.

Unknown Speaker 41:15

Interesting. Um, so we’ve, we work with, with organizations that are nonprofits, places of worship, we’ve worked with. So all the assets are the spectrum of nonprofit, whether it’s an HOA, which an HOA is still kind of rare, generates revenue, but doesn’t pay taxes or something like that. But then you have houses of worship. And, and so so we have all the nonprofit sector that we can help now, because we have programs that help them even though they’re they don’t have a huge tax liability, and they can’t necessarily monetize the tax incentives and the depreciation, there’s, there’s tax Equity Partners in these funds, that can actually do that for them. And so what ends up happening is, for the first seven years, these tax Equity Partners have a fund that owns the system. Right. And the funding, the funding is based on the on the on the net cost of the system. So after all, the incentives is what the customers or the building will will finance because the Equity Partners and take all the tax credits and things like that, that, that the nonprofits can’t. So that’s one, obviously, private businesses, any any private business that that is established, that has, that has a good track record will qualify for funding, anybody that just that has, you know, that that sees the value in in producing their own power and being independent, if you own a piece of land, and you and power is getting into that land, whether you have tenants there, or whether you have your business there or, or it or you have nothing there, you know, and there’s no power coming into it, you can capitalize on on just the fact that you can produce power on that piece of land and sell it either to the utility company, you can sell it to your own business, you can sell it to your tenants. So really, there’s a there’s a huge market for for power. And I think I think the most overlooked type of business are our retail spaces where they have tenants, or tenant tenant occupied buildings, where let’s, let’s say, for example, I have a you have a tenant that has a 10 year 15 year lease in that building, that’s a perfect candidate, because there are no programs that that tenant can qualify for, as long as they have a commitment to be in this building for a certain amount of time, then they can make the commitment in saving the money and putting up a system that’s going to save them money. And at the end of the day when that when that when that lease or or whatever agreement is done and and they’re moving out and someone else is moving in, the property owner gets to keep that system. So and the tenant paid for it. So, you know, there’s really some opportunity and we can get really, really we can get really creative as it relates to this. And I just the the ideal candidate is every building that has the space to produce the power that it needs to to sustain itself or to sell it back to, you know, to the utility in this case for for a small profit

J Darrin Gross 44:51

at it. Hey Manny, if we could like shift gears here for a second. By day I’m an insurance broker and work with my clients to assess risk and determine what to do with risk. And there’s three strategies we typically consider, we look to see if we can first avoid the risk. If that’s not an option, we’ll look to see if we can minimize the risk. And then beyond that, we’ll see if we can transfer the risk. And that’s what an insurance policy is, is a risk transfer vehicle. And I like to ask my guests if they can look at their own situation. And you can frame this however you want, whether it be or you’re looking at your clients, investors, tenants, the marketplace, in a technology. But if you can take a look at it your situation and identify what you consider to be the biggest risk. And for clarification, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Manny Renteria, what is the BIGGEST RISK?

Manny Renteria 46:02

So the biggest risks that we run as a nationwide consultancy, and myself myself personally, as a consultant that has, that has a phone with with over 1000 clients, and that call me You know, every other day is, is, is not meeting the performance, right. So I’ve, I’ve made this mistake, you know, when I, when I first started consulting, in the consulting business signing agreements, on behalf of service providers, so I would be the the in between the service provider and the customer. And so, in this agreement, I’m the one presenting disagreement to the customer and saying, hey, these are all the benefits of, you know, doing solar with, with my, with my service provider. And so in these agreements, it’s it’s not, it hasn’t been a standard to have a performance guarantee. And that I think, is the biggest, biggest ticket item for me, for my customer. And for him, even for the for the service provider, is to have that, because now without that I cannot sell anybody’s product, I cannot promote or sign anybody’s agreements, unless there is a performance guarantee, which covers me, and it covers my, my, my client, in this case. And what that is, is very simple if if your system is, is out there and is producing power, but the power that it’s that it’s supposed to be producing, let’s say I presented you with a proposal that says, hey, this, this system is is supposed to produce 10,000 kilowatt hours every month, okay. And for the first year, you know, multiply it by 12, that’s 120/3, whatever that is, right. So, so they sign up based on the fact that you showed them, you know, a performance estimate on the proposal that they signed, and then the agreement didn’t really have any performance guarantees. And what happens is, a year later, when this system underperforms significantly, and and your customer ends up with with a system that doesn’t produce or meet their needs, and on top of that, now they have a huge utility bill, why because all the power that they didn’t produce is now coming from the utility and now they have this extra bill on top of whatever, you know, if they’re financing, then they have the only have two bills. And so what ends up happening is I have to go and explain why the system is underperforming, or whether or not they need more panels. And I’m stuck in between, you know, explaining to the customer, hey, you know, your system didn’t produce because these trees are still in the way or something like that. So it’s really, really important that that a performance guarantee is set in place by any service provider. And then that performance guarantee has some sort of sort of sort of monetary compensation in in the event that the system underperforms in a certain year or every two years and typically what a performance guarantee does is every two years if the accumulated power doesn’t equate to this much you get reimbursed at this rate. So that to me now is is one of the biggest risks that I that I’ve had moving forward. And so now I always look for that in service providers to give me that performance guarantee. Otherwise, I’m out there, you know, exposing myself and my company as as you know, as being untrue or just on I don’t know, just not not trained, I guess

J Darrin Gross 50:01

Well, no, that’s, you know, from a consumer standpoint to anybody and if you’re making a big investment and it’s based on future savings and performance Yeah, I would think that would be that would be a pretty critical at least you know for the for the make the thing work as far as monetarily You know, you’re you’re investing in it with an expectation of payoff, so I get it. Manny, Where can the listeners go if they’d like to learn more or connect with you?

Manny Renteria 50:31

Um, so on my Instagram most most people are on Instagram, you can find me as the the solar plug at the solar plug. And in in, in my bio, I have a link tree to you know, various, you know, consulting sites or I know there’s calendly links, there’s links to testimonials those links to my LinkedIn, I’m on LinkedIn as well. I’m pretty much on all these platforms. My company is one up solar.com so you can reach me there my face usually pops up at the bottom of the website asking if you need any help. So yeah, you can find us there or you can shoot me an email my emails, Manny at one up solar dock. And that’s that’s the number one.

J Darrin Gross 51:22

channel one up solar. Alright, wait, Manny, want to say thanks for taking the time today. I’ve enjoyed her talk, learned a lot about solar. And I look forward to doing it again soon.

Manny Renteria 51:37

Well, thanks for having me on here until my all the listeners on on on Darrin’s radio station. I really hope you you know, you guys, if you own commercial real estate, or are thinking about owning or a tenant, definitely look at the look at the possibility. All all that we require that anybody requires to give you a full analysis is your utility bill. So if pulling your utility bill, you know, out of your mailbox and sending it over as too much to know them? Yeah.

J Darrin Gross 52:12

probably not a good prospect. But yeah, that’s awesome. Thanks again. And for our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro networks. cr e pn radio.

Announcer 52:38

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Real Time Landlord Monitoring Solution via Cellular with Charles Hadsell – CRE PN #306

Charles Hadsell 0:00

We have a solution that could it could detect in real time. Running toilets, burst pipes leaks, and allow a landlord to remotely take action like close a water valve send an alert or sound sound a buzzer. So it’s a pretty unique solution because we know we’re the only one that operates over cellular. So it gives landlords a way to now track water consumption and prevent damage in their in their properties.

Announcer 0:23

J Darrin Gross 0:43

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is Charles had cell. Charles is the CEO of EA property care, a prop tech company based in Boston that provides smart building solutions for landlords and developers that operate over the cellular network. And in just a minute, we’re going to speak with Charles about tech for property that can help boost your net operating income.

But first, a quick reminder, if you like our show, CRE PN Radio, there’s a couple things you can do to help us out. You can like, share and subscribe. And as always, we can, we’d love for you to leave a comment we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. You can find us on youtube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest, Charles, welcome to CRE PN Radio.

Charles Hadsell 2:10

Darrin, thanks for having me. I’m excited to be on your show.

J Darrin Gross 2:13

I’m excited to talk with you. But before we get going here, if you could take just a minute, and share with the listeners a little bit about your background.

Charles Hadsell 2:24

Yeah, sure. So I, I graduated with an electrical engineering degree. So I kind of knew I always want to be like technical like hands on. But I quickly realized that I wasn’t gonna be a good engineer, like I moved into kind of sales and marketing. So I spent the first 15 years of my career in the semiconductor world, you were working at Texas Instruments and Analog Devices. So we’re really we’re literally building these ships that go into all these IoT and electronic devices. So that excited me greatly through my various like corporate moves, I got into real estate. So I moved to a city by by our residents rent out rooms, moved transferred to another city rent out that place, kind of rinse and repeat the process. So I kind of acquired over like 15 years rental properties across like multiple states. And I kind of got to a point where like, okay, you know, there’s, there’s got to be a more efficient way to manage these properties to kind of try to use tech to kind of track with to track what’s going on. So my parents have been in real estate for a long time. So they encouraged me to kind of get into you lean into real estate and kind of figure out how to how to solve some of these problems. So did a lot of investigation and kind of saw, you know what, there’s not really any good solutions that meet kind of the use cases of small landlords. So let me kind of go build one that kind of covers the use cases that I need to efficiently manage to an out of state rental portfolio in a more tech enabled fashion. So three years ago, you know, I came to a transition point, and I decided to, you know, found a property care to kind of build that solution now to help you know, small landlords and big landlords, you know, remotely control the rental properties and boost noi at the same time. Cool.

J Darrin Gross 4:01

So you were you were in real estate, you had rentals, you had a problem with your background decided to solve the problem. I love it. Let’s talk a little bit about what what is he property care? What do you guys, what do you do and what are the some of the, the the tools that you have available for landlords?

Charles Hadsell 4:27

Yeah, sure. So if property care is basically a cellular smart building platform, so when when you think about a lot of the problems with rental properties, a lot of landlords don’t have reliable landlord owned like Internet connections because that property is not cost effective to get you know, Comcast or a big internet provider to provide Internet just for a nest thermostat or a video camera. So you know, we’ve kind of come in over a cellular you know, utilizing the alarm comm platform. So one.com kind of built up, has built up a platform over 20 years. That is basically a cellular first kind of platform that allows us to support a lot of these very interesting use cases. So the first use case that we we focus on is water protection. So water is a problem for every landlord and a homeowner out there. And if you’ve had ever had water damage, you know, you never want to have that again. So we have a solution that could it could detect in real time running toilets, burst pipes, leaks, and allow a landlord to remotely take action, like close a water valve send an alert or sound sound a buzzer. So it’s a pretty unique solution, because we know we’re the only one that operates over cellular. So it gives landlords a way to now track water consumption and prevent damage in their in their properties. A second big use case that we focus on is temperature monitoring. So we have thermostats that are part of our platform, that allow landlords to remotely control the temperature, but also limit the range that tenants can operate the thermostats so tenants especially if the landlord supplying electricity, you have no It has very little incentive to conserve energy. So they could be a blast the heat at at open all the windows, run the AC at 60 freeze the coils of the air handler. So this this left landlords kind of have more control, you know what’s going on. And even better, you know, the solution kid predict when something’s gonna go wrong. So instead of getting that you know, late night call that my heats out, my AC is out, our system actually uses analytics to look at the heating and cooling cycles to identify when there’s a problem to say, Hey, there, you’re taking a long time to cool your apartment Darren, something’s wrong here is an alert, go check it out before you get that late night call and have to pay you know after hours you know, emergency maintenance, you know fees. And the third use case is access control. You know, I think going keyless is it’s kind of been a big mega trend here where you’re kind of once you go keyless with your apartment or your rental, you know, attendant never goes back to he’s just like with your cars, you know how many people insert a key in the engine and turn it to turn it on, it’s all wireless and push a button turns on. So you know, keyless entry is the same big thing. You know, tenants can go keyless uses a code or an app. But the landlord now could remotely control the lock and remotely add an erase codes. So this was actually the key use case I was looking to solve, you know, three, four years ago, it’s like how could I basically rekey that lock in my property in Dallas, without having to pay someone to like drive over the property and rekey the lock. So that was the use case that kind of propelled me again, kind of into this. So our platform ties these all together over cellular and gives the owner the property manager and even the tenant app control the different elements of the of the solution. So you can kind of pick and choose what makes sense for a given building. And focus on the use cases that are most important to you,

J Darrin Gross 7:44

Got it. So that the cellular means there’s some sort of a transmitter that’s at the located the property then that that is what I mean, I’m assuming there’s some sort of power connection.

Charles Hadsell 8:01

Yeah, like, like, you see in the video that this is the actual cell hub right here. So this kind of goes in goes into the the property. So it could go into like the basement or a common area utility room or the unit itself is into larger like multifamily building. And that just requires power that doesn’t need a Ethernet connection doesn’t need Wi Fi. Just plug it in. And it connects to all the devices, normal locks, the sensors, the thermostats, the water shut off valve, and gives you that kind of cellular connectivity. And even better, you know, it has battery backup. So, you know, when you look at like what happened in Texas, the two months ago, where there was those power failures and all that water damage that just devastated allow these multifamily buildings. I think every landlord that in the world kind of saw those pictures of the frozen icicles coming down from a ceiling fan and realized that you know what, I don’t want that to be me, or to or to be my building. But in cases like that, you know, this is why cellular is, I think the best medium for connectivity for for rental properties because the cell tower stay online because they have battery backup, our hub stays online as battery backup. So that kind of gives you that kind of activity, even when power’s out Wi Fi networks are down, you know, everyone’s kind of worrying what’s going on. So that’s when your property is most at risk. So our solution kind of allows you to kind of know what’s going on during those kind of time periods.

J Darrin Gross 9:20

No, I love it because that’s been one of the things that I’ve I’ve got a property in other states and and you’re exactly checking the box or at some of the challenges I’ve had with you know, if you pay for an internet connection thing for one thing, is it really cost effective or are you just better off just to take your lumps or whatever. So, you mentioned three things kind of the water, the temperature and then also the access. Can you are there any other devices or any other types of of connection off So you can incorporate.

Charles Hadsell 10:02

Yeah, so the platform also could support like lighting control, like audio, video video, doorbells, you know, so there’s a lot. So it’s kind of a, a platform that covers a lot of like homeowner use cases as well like having like a video doorbell or control on your lights, or you been able to play Sonos over your your speakers. But you know, but we’ve kind of oriented more towards the the landlord use cases. And I kind of found that access temperature water are really the three kind of killer use cases for where one of those will resonate with every landlord out there. But the platform could do more, we could also control building doors. So if you have 100 unit building that has an electric strike control on the storefront door and a butterfly intercom, we can integrate that in as well into the system. So now that the single app gives us the resident, that entire new kind of digital experience, but our focus is on the asset protection side. So now the landlord, the building owner now has all these analytics about water consumption, temperature or status of things, to allow them to make quick decisions and take quick action to prevent losses.

J Darrin Gross 11:06

No, no, I get that. I just I’ve got a particular situation my own and it’s driving me nuts. It’s the illegal dumping. You know, I’ve got people that are coming by and taking my dumpsters a public dumpster and just throwing all sorts of crap in there. And then the trash company, they have their ability to take a picture and send me the picture. And, you know, at that point, there’s not, you know, it’s too late, they’re already charged me more for the trash pickups. And I’d love to find out who the heck’s you know,

Charles Hadsell 11:35

We got a solution that we could do video over cellular so for like a one or two camera system, we actually have a way to do video over cellular so now, you can set up a little single camera system and not have to pay you know, 100 bucks for Comcast to have an internet connection. Yeah, that’s

J Darrin Gross 11:50

exactly that’s exactly it, you know, the the overage is not cheap. And and, you know, it just blows me away how this big strong truck, you know, the guy inside can’t lift it, because the bins overfilled or whatever, it’s, you know. But I would think that that would be a maybe it’s just me, but I would think that landlords anybody has ever experienced that it’s it’s a frustration. It’s like, God dang it, you know, here it is that you’re you’re trying to conserve your costs and keep things you know, running efficiently. And you got these weird things sticking out some?

Charles Hadsell 12:28

Yeah.

J Darrin Gross 12:30

Yeah, so that so that the the, the basic is your your unit there, you plug that in, it’s got the cell signal, and then you’re plugged into the Is there a specific network? You said, is it alarm comms at the network you guys operate on? Or is or do you have to then get a cell contract with a local provider, or how’s that work?

Charles Hadsell 12:50

Now we integrate that into our monthly service. So we handle all like the cellular data and like the software, and alarm.com provides, like the underlying platform, so with all the devices, we operate on the Z wave network, so think of z wave as it’s different than why because Wi Fi is not designed for like low power sensor networks, WiFi is designed for like audio and video, like high speed stuff. So if you have like a water sensor sitting in the basement, you know, if that thing was offering on Wi Fi, you’d be changing the batteries a lot, because it’s just not a little power protocol. leeway was really the one of the first major protocols designed for building automation, you know, because it’s low power, it’s long range. And it’s what’s called a mesh network. So that sensor in the basement and talks to the next node, which which passes the data along back to the hub. So you don’t need to have like the Wi Fi router in the center of the house to talk to everything directly things kind of phone home through through other nodes in the network. So it makes it really efficient to kind of build these networks in like buildings and homes, you know, offices, you know, commercial commercial applications to be able to have like good connectivity from you know, basement to you know, rooftop in some cases so so so the technology all uses z wave for the local connections and he uses cellular kind of on the back end to get home to get onto the internet

J Darrin Gross 14:08

No, that’s that’s great because that is always an issue with the Wi Fi is centrally located so you can handle your sponsor otherwise you got to add add additional antennas or modems or whatever

Charles Hadsell 14:22

Yeah, those little beacons and repeaters Yeah, it just makes it inefficient and just not designed for like low power battery operated devices you know so that’s kind of where these sensor networks because having sensors like on your condensate pump on your by your sump pump by your water heater, a washing machine, now it’s effect now it’s cost effective because you can deploy those and not worry about them for you know, five five plus years and when they get low they’ll tell you that they’re low so you don’t have to worry about a is that is that water sensor still act still working you know, because it will work report back when said hey, I’m running low on batteries. Come change me.

J Darrin Gross 14:55

Right. Right. You mentioned the the water These like water bugs or whatever that are on the floor? Or do you also tap into the line to tell if you’ve got a, you know, just the the waterside, shutting off? Or how how’s that work?

Charles Hadsell 15:11

Yeah, so two parts of the solution. So again, we’re on video here, I’ll show you a little demo. But this guy right here, this is a water shut off valve flow meter. And so that gets cut into the line after the water meter. And it could go either after the water meter on a riser, or on the honest Pacific unit shut off into like a larger building. In some cases, developers use to one for the hot one for the cold for every unit of building. So what’s really unique about that product is it can detect in real time, high medium and low flow conditions. So let’s say you have, you know, you have a property in Dallas during that freeze, and now the exterior faucet burst because of the cold time because you forgot to drain the line. So that would see, you know, maybe 10 gallons a minute for, let’s say, five minutes. And that could be you know, if I see that, that’s a problem, shut off the water. And this is all programmable, they might also see an another from property two gallons a minute for 60 minutes, that’s a that’s a problem that’s that too long for a shower, that’s probably a running toilet, or someone left a faucet on. Either way, you know, let’s send a note to someone to go check it out before you have an overflow or get get tagged with that $1,000 water bill from the city. And the third use case is the kind of really low flow conditions. So think of like a leaky refrigerator water line. Like Normally, you wouldn’t catch that for probably six months. And by the time you catch it all your floors rotted, you have mold, just a big mess. So it can kind of catch that high medium low flow condition. In addition, it could catch even things like periodically running toilets. So you have like a loose flapper that occasionally drains and refills. You know, typically that’s never caught, you know, because a tenant doesn’t report that and rarely do they even report the running toilet. And then they can catch those. So those are just big sucks on noi, because that gives a lot of times landlords bear the cost. Tenants don’t care, it leads to that with the wrong incentive that basically lead to view a big bill for the landlord.

J Darrin Gross 17:08

Yeah, no. And usually the only way the landlord catches it is you know, your bill is out of whack. And and it’s amazing how much water bad flapper can waste.

Charles Hadsell 17:18

Yeah, so that was one lever. One bath library. If you think about people who have 1000s of properties out there 1000s of doors, they probably have dozens of running toilets right now that they don’t even know about. Just because he gets integrated in and you think about, you know, running toilet the cost? Yeah, probably 20 to 50 bucks a month. And that adds up over time, you know, even periodically running flapper, so it adds up over time and properties. So that’s like one level, the other levels, water bugs, things that will go by like a washing machine, some pump water heater, just to give you that added level of protection. So it kind of lets you pick and choose what makes sense for a given building you want. If you maybe have a water main water heater on the third floor of a building, might want to have an additional sensor there just in case because that thing goes it could ruin all three floors. But the water valve and gives you that added layer of coverage and protection and the ability to shut off and and that’s what the insurance companies really like.

J Darrin Gross 18:13

Right? Right. Let me ask you on the these types of alarms, if you will, any kind of issue with false alarms.

Charles Hadsell 18:27

So on when we think about the water valve, the false alarms will only trigger if you have like the wrong the wrong settings programmed in. So let’s say you say someone say you set the medium waterflow Timer at 30 minutes, and someone takes a long shower, you know that that could trigger a false alarm, you know, or if you’re in the basement and it’s really humid or there’s moisture seeping up from the concrete floor, you know, that could trigger like a false alarm. So I’d say they’re they’re not, you know, they’re they’re not perfect. But I think that technology is getting like better and better where it’s basically recognizing, you know, like a really a high percentage of the correct cases and only false positives or, you know, a minority of the time. That’s least at least my experience.

J Darrin Gross 19:14

Right now I in the reason I asked the water bugs brought to mind claim we had years ago and it was a situation where they had they would create a false alarm. And what happened was over time, the client got kind of numb to that, you know, I got a false alarm and cried wolf cry. Yeah. And then when the one time it really is gone, you know, full throttle water everywhere. You know, he had a whole lot of time that elapsed before they were able to get in and and take care of it because it was like some sort of reset thing. But I mean, but even so, I mean, that was like, you know, it’s probably more of the waterbug than it was the alarm system. It was the you know, the sensor, something like that was was the issue there.

Charles Hadsell 20:03

And that’s why we like the flow meter, I think the flow meter shutoff valve is really the right solution, because that covers the entire plumbing network of that downstream plumbing network or the pipe. And, and that’s, you know, digital, you know, looking at water consumption, so that that one’s easy to kind of, yep, program is just to make sure you’re capturing the right use cases. But that’s also why we like to layer the layer, the solution has water sensors, and that, so you have multiple degrees of protection. So if you ignore that water bug that goes off, you’re still caught and protected with all the water, the water flow meter.

J Darrin Gross 20:36

Right, right. Well, and even if you’re just able to, to mitigate the situation, you know, sooner rather than later, you know, more water in a place is not a good thing. You know, inside of a vessel, it’s supposed to be and that’s not good. So, basic concept of get he got the the sensor, and then you can program the whatever the different monitoring devices to your unit. And so what is the the the user the, the investor have on their hands just on their cell phone is an app, they

Charles Hadsell 21:15

Yeah, it’s an app, and they have a website to go to. And we also have like, We’re one of the few dealers of point Central, which is one of the first big prop tech kind of smart apartment providers. So that allows like the user to have like a single dashboard to kind of view all their properties. So they could have like multiple buildings and multiple units in the buildings. So it gives them the ability to look at that enterprise level, or just at the local level. Like if you just had five rental properties scattered among, you know, different different states, you could have five properties all lined up in the app, or you just easily flip between all of them from the same login. And that’s what I, that’s what I do for my rental properties, you know, I have them all in the app, I get alerts from them, you know, real time alerts, and I could affect change on them through through the app, so I could be on the go. And I could take take action. So it makes it really easy for a landlord to kind of manage the property.

J Darrin Gross 22:06

That makes sense. So you mentioned having multiple properties. You know, if a guy’s got a, you know, a 20, unit building, or you know, 10, single families or whatever, he works all on all of them, or I guess I’m the 10 singles, you’d have to have a transmitter at the end each location, but on the one that has multiple doors, can you operate on just the one transmitter and then multiple sensors, or how’s that as I work,

Charles Hadsell 22:35

There’s a couple of system deployment options, it kinda depends on the level of software integration that the client wants. So a lot of the larger like apartment owners or building owners have like a PMS system from like a yardie, or an app folio or real page. So we have a version of the software to integrate them with those. So the fully take advantage of integration, you basically need a dedicated hub per apartment to kind of handle all the full the full scope of the integration. Now, if you didn’t have a PMS system, or you didn’t have like 100 units, 100 plus units, you can use like a shared hub implementation where you put a hub that covers, let’s say, four different units, and by United control everything from a single screen, so you lose some of the benefits of like all the integrations, but it gives you like a more cost effective approach to be able to get a lot of the key benefits from from the land from the asset production and the control standpoint, with with a lower monthly and in hardware cost. So we kind of give people multiple options. And then for the single family, you know, it’s really one of the only solutions that that is out there that could scale down to a single family rental and be cost effective. You know, because we think about that that internet problem that we talked about earlier, you’ll be able to come in at, you know, 510 bucks a month, and give connectivity to a property. Most landlords would say yes to that, because they’ve been burned by one of those use cases that just waste time or waste money or cost them cause damage. And they’re like, like never again.

J Darrin Gross 23:57

Yeah, no, I mean, yeah, I was gonna ask your next question about the cost did is five to $10 a month is that kind of the price range per per unit or?

Charles Hadsell 24:06

Yeah, for like, for like a dedicated hub system, probably like five to 12 bucks, but for like your shared hub, that that price could come down to about $2 a month, per unit, depending upon the software version, the use case. So we kind of give landlords a lot of different options, they can choose what what’s needed for the given building, realizing that every building is going to be a little different, they’re going to have a different kind of focus and price sensitivity. But we want to be able to dial in a solution for the people pay for what they need and don’t pay for what they don’t need, so to speak.

J Darrin Gross 24:36

Not that seems very, very affordable from management or cost management standpoint. And, you know, just to have that kind of, you know, an awareness of what’s going on at the property. So that if there is a problem you can attend to it before it becomes a big problem. Because in at least in the water case, That we’ve talked about I know, you know, insurance is one of the things that I sell on, and it’s good I was telling my clients, I said, I hope you never have to use this. Because when you do, you got a problem. And, you know, then even even though the insurance works, you’ve got a deductible, you’ve got time committed, you’ve got now you’ve got a blemish on your record, so that naturally your cost goes up. Because now you’re, you’re no longer a preferred risk, because you’ve had a claim and any more companies are taking more of the attitude, I don’t know, say all companies, but there, there are a number of companies out there basically saying, hey, look, you know, you had a claim, we don’t like customers that have claims and you got to go. So it’s, it’s to be able to just be on top of it to where you wouldn’t have a claim, I think would be just, you know, certainly beneficial to to you, and certainly the insurance can make and see how they would love to know that you’ve got something that’s going to prevent them from having a claim as well.

Charles Hadsell 25:57

Yeah, we’ve actually worked with several insurance carriers, because because when you think about water is their second largest cause of loss outside of like wind and hail. And water is majority of it is preventable, you know, obviously floods, you can’t prevent that, but you know, leaks in plumbing and verse fittings that cause all the damage. So it’s a huge problem. So we’ve actually worked with insurance carriers, especially up here in like New England and New England area that really liked the kinds of cellular and kind of the automated protection aspects of it. And they’re actually giving clients credits, allowing clients to take can take max credits on their on their policies, just to having a protection solution in place. So what we’ve seen is some customers are able to basically pay for the cost of the solution through insurance savings, because more insurance carriers are getting into this water on water bandwagon, realize that you know what, let’s let’s create some incentives here to get these go out people and either homeowners or like commercial commercial lines, people to deploy these protection devices to prevent these, you know, million dollar disasters.

J Darrin Gross 26:59

Yeah, now, water, water is a messy one. And once it gets into the drywall and carpets in your sub floor, and all that, and if you’ve got multiple stories, it’s it’s just a math. So that’s definitely something that nobody nobody wants. So let me ask you the we kind of talked about how it works in kind of some of the applications, but do you find Is there any? Anyone that’s more kind of your target audiences? Is it the investor of properties that are like traditional rentals? Or do you find that even like some of the, like, Airbnb, kind of rental type situation? Are they? Is that a good, good opportunity for them as well? or?

Charles Hadsell 27:50

Yeah, like, I mentioned earlier, how the solution kind of scaled down to like single family rentals. And that includes like short term rentals. You know, we have integrations with lots of short term rental providers to basically automate everything, you know, to have like, a tenant resident, like, moves in, you know, for like the duration of stay. When they move out, they hit a closing code that informs the cleaners to say, hey, come and clean, you know, that cleaner comes in, does their thing enters their closing code, it will inform the inspector inspector comes in hits it, then it says, Hey, the next resident, your property is now available. So basically streamlines that whole process, because now imagine you’re going on vacation somewhere, and I get that a text and say, Hey, your units are now available, you know, two hours early, you know, come here’s your code and check in. So it makes it really streamline for short term rental situations. But I’d say we’ve, we’ve focused more on like the larger multifamily both in kind of two ways, like on a class kind of class like BNC, you know, properties, there’s a huge retrofit opportunity there, you know, because I think for those buildings, asking an investor to replace all their locks or replace our thermostat, that’s a hard ask when you’re midway through a whole, you know, a whole period, but the water that’s one where you get an instant boost and building protection and save against those rain toilets. So we kind of frame it in the context of noi. You know, on the protection side, water has a huge impact on noi because it will reduce your insurance, it will catch those running toilets and it will prevent that kind of catastrophic damage. So that’s one where that makes sense in every building new or old to kind of to kind of consider we’ve oriented towards more towards kind of class a housing on like the grounds of construction projects. Because for these smart apartments really become the very desired amenity. It’s almost becoming into Mandy’s arms race among these large like you know, apartment providers, you know, you’re almost at a disadvantage. We don’t have smart tech in your in your property, because you’re going to be able to charge you know higher rents and get higher renewals because once the tenants go smart, it’s hard to go back to the old way of doing things. So we kind of see kind of the market in two ways, kind of the retrofit market where we focus more on like asset protection. And in water protection. And then on the new construction side, you know, we could obviously design and allow the asset protection into the into the plans. But now you also have this concept of a better resident experience that could drive rent growth. So we kind of look at reduce rents, increased rents, reduce costs, and that has a big impact on noi, which makes us more of an investment not a cost.

J Darrin Gross 30:22

No, if you can increase the noi, and lower your cost, that’s all good. And like you say, also, I think the making your property more attractive, you know, having more the new bells and whistles are just what people are used to not having to have a carry radnicki ringer, so like, that’s definitely something people appreciate. And, and I can, I can definitely see that. Well, this is this is really cool. I mean, I just I’m, you know, I’m sitting here kind of, in my own head thinking about some of my own situations. And, and, you know, I’ll talk to you later about possible solutions. But this is really, I mean, it makes complete sense. And just the fact that you’re going over the cellular as opposed to the Wi Fi thing is, is I mean, that seems like that’s really weird. that a lot of the the benefit for somebody like myself with with not is opposed to that extra cost of that, that contract with Comcast or whoever kind of things. That’s, that’s awesome. Eight, Charles, if we could like to shift gears here for a second by day, I’m an insurance broker. And I work with my clients to assess risk, and determine what to do with the risk. And there’s there’s three strategies we typically consider, we first look to see if we can avoid the risk. If that’s not an option, we’ll see how we can minimize risk and is a third strategy, we look to see if we can transfer the risk. And that’s what an insurance policy is. And I like to ask my guests, if they can look at their own situation. And LA, you allow you to frame the situation, whether it be your clients, the marketplace technology, however you want to look at them. But if you can identify what you consider to be the biggest risk. And for clarification, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Charles. Hansel, what is the BIGGEST RISK?

Charles Hadsell 32:36

Yeah, sure. Darrin, I think, you know, when I thought about this, I think the biggest risk I think about is technology rescue, you know, even even alluded to it a little a little earlier in our discussion, right of kind of the early generation water bugs having so many like false alerts that it kind of caused the owner to like be dead in because the alerts and now you have a real issue. And now you’re, you miss it. So I think technology changes rapidly, you know, and this kind of comes back to my time and some doctor as well, we look at the pace of innovation on putting more electronics into smaller places and asking like these, you know, end nodes of the network to do a lot more you rather than sending it back to some centralized server, you’re having decisions made at the very edge of the network. So reliability is like is like very important for these, these these applications. And I think with semiconductor technology, reliability is continually improving. But there’s always that risk of a component failing at the wrong time and leading to like a bad outcome. You know, so that’s why we kind of like to take the approach of kind of layers of redundancy, you know, like, so for example, like to prevent, like water loss in your basement or in the basement of a building, have a sensor to tell you, if someone left the exterior door open, then have a sensor that tells you it starts to get cold, then a sensor to tell you that there’s a water problem, you know, so you have kind of three layers of redundancy there that could kind of prevent, prevent a disaster. So So that’s kind of how I think about risk is like a technology is changing rapidly, you need a platform that could adapt to that. So you’re not kind of stuck in the stone age’s with the platform that’s, you know, out of date are no longer relevant. And then also like the kind of I say that the connectivity risk, you know, of a, that power outage happens, what happens to your system, we saw what happened in Texas, you know, a few months ago where all that led to all that damage. So that’s why we covered this a couple different places on the show today, you know, cellular i think is the right technology medium for these IoT systems and these rental property and like landlord applications, just because it’s up, it’s up when everything else is not up. So that’s kind of my overall kind of thought of you technology risk is kind of the big one and that’s how we really like to wrap your head around minimizing the impact and putting redundancies in place.

J Darrin Gross 34:54

Makes complete sense. I you know, the redundancy is is definitely Under the belt and suspenders approach to, you know, making sure that what you’re trying to avoid from happening, you know, make sure it doesn’t happen. Thanks. That’s, that’s great. Charles, Where can the listeners go if they’d like to learn more or connect with you?

Charles Hadsell 35:15

Yeah, sure, they could go to E property care.com. On the site, we talked about a lot of different use cases, we have like videos that kind of show how things work. And people could book a free consultation with our team there. And we’d be happy to kind of discuss use cases. And I think, as we discussed there, and like, we’d love to have a discussion with you, you know, it sounds like you have a potential for for some of these things might be able to benefit you and your personal portfolio. But yeah, we scale from single family to 1000 plus unit rentals. So we can kind of cover a solution for pretty much any landlord situation that we run into.

J Darrin Gross 35:48

Now, we will be talking here, right after this. So anyway, well, Charles, I want to say thanks for taking the time to talk. I’ve enjoyed it and learned a lot. And I look forward to doing it again soon.

Charles Hadsell 36:04

Absolutely. Darrin, appreciate the time. Thank you so much.

J Darrin Gross 36:06

Announcer 36:26

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Investing in Manufactured Housing with Matthew Ricciardella – CRE PN #305

Matthew Ricciardella 0:00

To these two property types are at or near the top of the list. And as a result of that there is a tremendous amount of demand from sophisticated investors to get into the space because they are recession resilient. They did withstand the 2008 2009 10 storm and now they’ve proven to be resilient during COVID. So folks want yield they want predictable, safe free cash flow. And these two asset classes have proven to deliver just that.

Announcer 0:32

J Darrin Gross 0:51

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate, investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is Matthew Ricciardella. Matthew is the founder of Crystal Spring, excuse me, Crystal View Capital and has over 18 years of experience in the real estate industry. Crystal View Capital is a private equity real estate firm that specializes in acquisition and management of self storage facilities and manufactured housing communities across the United States. Known for its in house acquisitions and management team and unique company culture. Crystal View Capital is vertically integrated, disciplined to its investment strategy and has a proven track record since a firm’s launch in 2014. And in just a minute, we’re gonna speak with Matt about self storage facilities in manufactured housing.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you want to see how handsome our guests are, be sure to check out our YouTube channel. You can find us on youtube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Matt, welcome to CRE PN Radio.

Matthew Ricciardella 2:42

Thanks, Darrin, thanks for having me today. I appreciate it.

J Darrin Gross 2:45

You bet. I’m looking forward to our talk. Before we get going, if you could take just a minute and share with the listeners a little bit about your background.

Matthew Ricciardella 2:54

I’d be happy to I I got started in commercial real estate back in 2005. I I started off by buying manufactured housing communities and self storage facilities for my own account started off with relatively little to no capital. So you know faced that challenge that first time investors always face and that’s how to raise equity and debt to buy your first deal or your first few deals. So kind of went out to the market found some off market opportunities in self storage and manufactured housing communities and was able to rock and raise some private capital put some deals together. And, you know, figured out how to manage these assets, created some value did well I sold some properties kept some others, which I still have to this day, which I actually bought back in 2008 that I still operate and thought that I was on to something I was doing quite well but had a limited amount of capital. So what I did is, I thought to myself, gosh, wouldn’t it be great to scale up so I launched crystal view capital fund one back in 2014. And that was a $10 million equity raise. And we did quite well with that actually investors receive back two and a half times their invested capital about a 45% internal rate of return. And then we launched fund to same strategy, which was manufactured housing and self storage across the United States. And that fund is now fully subscribed, we raised a little shy of 60 million in equity on that offering. And we’re tracking about a 30% return to our limited partners. And now we’ve just launched our third fund Darren which is a $95 million equity offering. And we’ve already raised about $38 million in two and a half months. That fun, same strategy is from one in two and we’re really excited about what the future holds?

J Darrin Gross 5:01

Cool. So, in 2005, you had the foresight to get into manufactured housing and self storage, it’s your the first time and usually it seems like people have like, migrated to that from something like they started out maybe in single family and, and then felt like something was, you know, too competitive or not recognizing other opportunities in real estate? How did you land on manufactured housing, and self storage?

Matthew Ricciardella 5:30

You know, I wish I could tell you, you know, I did a rigorous due diligence and research process, and I did to, to a small extent, but really, a lot of it was luck, I kind of looked at all the different commercial real estate asset classes and thought to myself, which one of these are most inefficiently priced? Which one of these? Do I have the highest probability to buy at at a fair to discounted acquisition price? And where can I create value through inefficient management, identify and identify that as a result, these two property types, and kind of went across the entire country, built relationships with owners bought most of these deals off market? And, and worked out for us? So that’s kind of how I you know, I got my segue into the space.

J Darrin Gross 6:27

So you mentioned you were kind of operating on your own there for a little while before you started the fund. How many parks Did you acquire operate on your own before you decided to go the fund

Matthew Ricciardella 6:40

route? Yeah, we I bought personally about four communities personally, before we launched the fund and three storage facilities. Personally before launching the fund. One community one mobile home park, one Self Storage, I still don’t To this day, both of which were acquired back in 2008 2009.

J Darrin Gross 7:03

And were those primarily local acquisitions? Or did you know

Matthew Ricciardella 7:07

now the two that I still own today are ones in Wisconsin, and the storage facility is in Louisiana? So we kind of had a shotgun approach Darren, where we went across the entire country and said, Where am I going to find the best deal, and still do it to this day in that same fashion in that same manner, where we’re kind of agnostic to the market versus saying, Hey, we buy this asset class in North Carolina? And that’s all we do. And if you could show me how I could steal something in some other market? The answer’s no, because I boxed myself into this asset class in that market. That’s exactly what we didn’t want to do. So we’re open to looking anywhere, for the right opportunity in these two asset classes.

J Darrin Gross 7:54

So let me ask you, since 2005, when you first started till now 2021. What have you seen is the biggest change in that that timespan as far as the I guess, the asset class and, and the opportunity,

Matthew Ricciardella 8:12

biggest change is there’s been a complete 180. And that is, I guess the analogy I could give you is going from a redheaded stepchild to completely and utterly in vogue. When I started in the industries, capital was extremely hard to come by it was either seller financing or a local bank. Now you have agencies, Fannie Mae and Freddie Mac cmbs, life loans, literally knocking at your door lining up to finance your projects. Same thing on the investment side, you know, kind of when I got started and told people what I did, they kind of looked at you with a funny face, and why in the world would why would you want to do that? Now, you tell people what you do. And it seems like everyone has figured out, the secret’s out, these are high cash flowing vehicles, cash cows, from what they call them, little risk recession resilient. And as a result, large part of the investment community, including institutional investors have a huge appetite to get into both of these property types.

J Darrin Gross 9:22

So in 2005, you described limited capital. did all that change kind of post? What are they called the big? I don’t even know what we call it anymore. The recession, the big risk, I mean, 2008. What the market when it went upside down, residential housing was in the tank, foreclosures, short sales, all that fun stuff. Was that kind of the turn where were, you know, institutional capital recognize the opportunity, or was it later?

Matthew Ricciardella 9:57

You know, I think it was later you had some institutions that were getting involved. Post meltdown, let’s call it 2012 1314. But I think there was a tidal wave of interests, probably that began in 17 and 18. And now it’s just tremendous. And I think a lot of it was post COVID. Because here’s here is, in my opinion, what happened, if you look across the different four major food groups of commercial real estate, retail, industrial, multifamily, and office, look at the negative effects that COVID had on hospitality, office retail, I mean, just crushing and those asset types are in distress right now. So I think this smart investors looked at all of the different asset classes and said, which ones withstood the COVID storm, which ones continue to generate a free cash flow and ongoing income, despite the lock downs and what we went through. And I’ll tell you, these two property types are at or near the top of the list. And as a result of that, there is a tremendous amount of demand from sophisticated investors to get into the space because they are recession resilient, they did withstand the 2008 2009 10 storm, and now they’ve proven to be resilient during COVID. So folks want yield, they want predictable, safe, free cash flow. And these two asset classes have proven to deliver just that.

J Darrin Gross 11:37

So you mentioned the returns that you were able to achieve, you know, with with the funds net, as more people migrate into it, and and you know, want to play in the space. Are you seeing that compress? returns?

Matthew Ricciardella 11:53

Absolutely. Yeah, cap rates are compressing yields are compressing as a result, valuations are expanding and rising. And partly, it’s because of the increased demand for investors wanting to get into the space. And then also, it’s the ease of financing. As mentioned, not only is debt capital easy to source, but it’s also extremely cheap. I mean, we’re getting loans right now, Darren, at sub 3%, interest, interest only fixed for 10 years. I mean, that’s extremely attractive debt, and it does wonders for your cash flow.

J Darrin Gross 12:33

Yeah, it is a kind of a funny thing, how that really changes the marketplace and money. So available like that. So let me ask you, not totally familiar with but the the mobile home, Park and kind of the historical stigma, but I’ve also kind of come to understand that some of the municipalities and that they don’t want them? Are you seeing any growth in the market?

Matthew Ricciardella 13:06

I’m very limited, very limited, there’s little to no new development in the space. And that’s what makes it appealing and attractive. And in that you’ve got limited or shrinking supply, because a lot of parks come offline every year they’re converted into, you know, some other use, whether that be retail, and you’re not seeing that as much anymore, but could be condos could be multifamily. Now, relatively no new development coming online, but ever increasing demand from renters that want to get into affordable housing. And this is the lowest rung of affordable housing out there. So even cheaper than apartments, classy apartments, so you’re seeing more people downsizing, wanting to get and retiring, that want to go into manufactured housing community. And also if you think about it from a COVID perspective, you’re seeing this phenomenon of D urbanization, with people leaving these major metropolitan areas and going into secondary and tertiary markets. Well, guess where mobile home communities are relatively located exactly in those markets. And guess what else compared to multifamily where you have common areas or compare it to, you know, Senior Living where you have common areas, you’re insulated in your own home, you know, insulated from potential, you know, COVID you know, kind of contraceptive So, you’re, it’s helping from that angle as well.

J Darrin Gross 14:41

Yeah. It seems like the ideal as far as the limited supply and you know, how to control demand, that’s, that’s where you want to, I mean, if there is a place you want to be that’s, that’s, I guess, a place you want to be a seller especially. So tell me a little bit about Self Storage. How does it operate compared to the mobile home? parks? Well,

Matthew Ricciardella 15:09

let’s talk about supply and demand. Since we’re on that topic, you know, it’s not that way in self storage, I wish it were. But it’s relatively simple to build storage facilities. Some municipalities aren’t allowing it because they’re already oversaturated in that marketplace. But a lot of markets out there, you know, you’re in Portland, I know your market is oversaturated, Denver, Dallas, Nashville, Tennessee, those markets are over supplied. So as a result, operators are having to offer concessions, free months rent, moving specials, things of that sort. But there are other markets which we operate in, where there is limited supply. And we’re able to continually increase our rents, increase our cash flow, and as a result, increase our Property Valuation. So I think the big thing when you compare these two property types and how they operate differently, the storage, you got to be really cognizant of the supply in the market that you’re entering into. from a management side, the operations are very similar. You know, we have an in house asset management team, which manages all of our fund portfolio properties. So we oversee everything in house here from Las Vegas. So we’ve developed proprietary systems to manage all of our assets. And they are, there’s nuances to each. But we’ve developed a strategy and a procedure to operate both asset classes effectively.

J Darrin Gross 16:42

Do you find that the the markets are similar? As far as the you know, we talked about the metro areas not being or not inviting or wanting the mobile home parks and the oversaturation are you finding that the successful markets tend to be more of those tertiary markets for both the mobile home parks and the Self Storage?

Matthew Ricciardella 17:06

For the storage? Yes, for the manufactured housing, you know, if you could own in a major Metro and have a large community with good size lots, that would be my preference, right, as an example of you could be in Metro Dallas market, and have a newer park with larger lots. That’s a fantastic market to be in, you know, so and because there’s no new supply. On the storage side, there’s plenty of new supply coming to market. So I would say, I’d rather be in the major Metro markets for manufactured housing, and I’d rather be in the secondary and the tertiary markets for storage. That’s not to say that, you know, the major markets, you won’t do well, for storage, you just have to know what you’re doing. And that’s not to say the secondary and tertiary markets won’t do do do well, for manufactured housing, because we’ve proven to do well in all of those different markets between both asset classes.

J Darrin Gross 18:05

Right? So you said, all of your management, you guys are in house, is that? Is it asset management? Or do you do also have in house property management? Both? Okay,

Matthew Ricciardella 18:19

we’re an in house assets slash property manager. So we kind of oversee the asset creation, the value creation process from A to Z, all in house. So that goes from acquiring the property, implementing a value creation plan, executing upon that plan, prepping the asset for sale, and then ultimately exiting at some point in the future.

J Darrin Gross 18:43

Gotcha. So with manufactured housing, you don’t own the homes necessarily on the ground? And the I guess the streets, basically, and what are some value add strategies and that kind of a scenario?

Matthew Ricciardella 19:02

Yeah, so it’s a good question. And, and to reiterate, yes, we own the infrastructure, we own the underlying land, there are some homes and communities that we do own. But for the most part, they’re all tenant owned homes. But there’s several, we call them levers to pull to create value. One of them is sometimes we buy a property rents are materially below market, we simply bring them to a market level, that could create a lot of value. Other times we buy homes, we bring them to baking sites and and sell them which is increasing our occupancy, increasing the rent roll. Other times we’ll identify an expense that’s too high and it’s bloated as an example. We’ll look at water and sewer expenses, and sometimes the landlord will pay those costs. What we do is we’ll sub meter past that Spence through to the residents. And that cost savings falls all to the bottom line. And that increase in noi is going to have a direct translation when you apply a cap rate to property value.

J Darrin Gross 20:12

Oh, I love all those. Same here fairly easy as opposed to kitchen bath and capital improvement intensive. That’s, that’s, that’s ideal.

Matthew Ricciardella 20:25

Yeah, absolutely, we look for the low hanging fruit, we have a little saying here, we like to step over one foot hurdles, rather than jump over seven footers.

J Darrin Gross 20:35

And I like that. I like that. So Park size, what’s an average Park size that you guys plan

Matthew Ricciardella 20:44

for us, the larger the better due to our size, as mentioned and fun three, we’ve raised thus far about $30 million of equity. And we’ve we’ve had no issues with raising equity capital because of our track record, and because of how our property types are performing and in the market presently. But a park size typically is 150 spaces and larger for us, is what we’re looking for. And now in the Self Storage side, it’s typically 40,000 square feet and higher.

J Darrin Gross 21:17

Gotcha. So let me ask you this. So that the manufactured housing? Is it? Do you consider the affordable housing that essentially the I mean, kind of the the threshold? Is that kind of where the entry point is? Yeah, not

Matthew Ricciardella 21:33

only is it affordable housing, it’s the lowest form of affordable housing, there is a market.

J Darrin Gross 21:41

So as the economy goes, I mean, obviously, it’s been the most resistant asset class as far as foreclosures, etc. Do you have any sense of or concerns? Or is there any kind of a forward look or a thought on inflationary concerns? I know, you know, I was watching the panel the other day talking about, you know, all this money that’s been printed and circulated and stuff and very low concerns about inflation. But But, you know, there’s a lot of wage, talk about increasing minimum wage, blah, blah, blah. Is there anything in that that that, you know, you look at differently than perhaps somebody that’s looking at a multifamily property? Or is there any, any thought to that?

Matthew Ricciardella 22:31

Yeah, I mean, look, I think you bring up a good point, with all this printing that’s going on, you hear chatter, that it’s not going to create inflation, I don’t see how it’s possible to pump trillions of dollars into a system, and over the long term, not experience inflation. So I think, you know, may not be this year, but at some point within the next 10 years, and we’ve already experienced tremendous inflation of asset values since COVID, I think that trend is going to continue, if you look at the price of a gallon of milk, maybe that hasn’t experienced as much inflation. But I think across the board, inflation is going to rise. And I think the benefit for us in what we do is look at our lease terms, you know, compare what we do to let’s call it retail or office where you have 510 15 or 20 year leases or even last mile distribution facilities, which are leased to Amazon, those leases are locked in for 10 year leases with, you know, 3% bumps on them. Our leases are month, a month, or at the most year to year and what that does, it allows us to re adjust for inflation. So we could we could offset inflationary pressures by increasing our rents accordingly. So we’ve got a great hedge against inflation due to the timelines or the span of our leases. So that alone is going to be a tremendous benefit for us. Not only that, again, asset values are going to continue to rise. So what’s in our portfolio today, if you factor in, let’s say, four or 5%, inflation over the next 10 years, even if we don’t increase noi, think about how much those assets are going to increase in value just as a result of inflation. So I think I think we’ll do well, I hope we don’t, don’t get me wrong, I hope this country doesn’t enter into a hyperinflationary phase. But if that were to happen, I think we’d be a beneficiary.

J Darrin Gross 24:33

And I think there’s definitely a benefit to having, you know, assets as opposed to be sitting in cash if you’re, you know, experienced a lot of inflation. So that’s, that’s definitely true. And it’s it is kind of a weird cycle when you think about just the the trillions of dollars that have been put into the market and, and, you know, I guess it’s kind of more of a function of the interest rates, just the availability of the capital, it’s really, you know, make crank, crank and the demand and and pushing that

Matthew Ricciardella 25:00

up. And well, I think that that is going to be the negative. That’s the downside, I think because you know, rates are going to have to rise to offset this inflation. And now the cost of capital is going to rise. So the borrowing costs are going to go up so that that is going to be one drawback, I believe from inflation for us. Right.

J Darrin Gross 25:22

So you’ve got the main factor in housing, parks, you’ve got the Self Storage, parks, you’ve got your your funds, are the funds. Are they segregated between the assets? Or is it you? Those are the two assets and wherever you find an asset, that’s where you, that’s where you That’s

Matthew Ricciardella 25:43

right. That’s right. So our investors are going to be diversified across both asset classes, and across various geographies throughout the country. So there is a good amount of diversification there because of that.

J Darrin Gross 25:58

Got it. And you said, fund one was 10 million. Did that go full cycle you return everything back to investors are

Matthew Ricciardella 26:09

we actually have one last property that’s under contract that’s scheduled to close next month. And when that occurs, I’m proud to say it will be a complete full cycle.

J Darrin Gross 26:18

Oh, that’s great. Congrats. And can you find the most of your investors? Once they’ve they’ve received their capital back? They look to reinvest. Give me more kind of, yeah,

Matthew Ricciardella 26:30

absolutely. Most of most of our investors are fun, one fun two investors who have reinvested in basically reinvested all of the distributions that we’ve given them in the first two funds right back in and guess who else is included in that category? Me. I’m, I’m a large LP in all of our funds. And I continue to reinvest all of my distributions. And the reason I do it is Darren two reasons. Number one, I like to have a great alignment of interest with my partners for on one hand, and on the other hand, I do it for selfish reasons, because quite frankly, I don’t know where I’m going to get a better return. And where I’m going to mitigate my risk better than what we’re doing here.

J Darrin Gross 27:15

Not that’s so true. I, I love the the synergy of sorts as you you have success, and the you know, because it would have kind of come to learn is that people when you’re trying to raise money that the first couple times, or maybe more of a challenge, but as soon as you have success, in return that capital people are like, hey, wait, when’s the next deal? You know, kind of thing and

Matthew Ricciardella 27:38

exactly what you build up, you build up an investor’s trust over time. You know, when you go and launch a new fun, there’s, there’s not really many questions, they already know, our level of integrity, they know our ability as operators and our ability to execute on the business plan.

J Darrin Gross 27:57

No, that’s great. Let me ask you, you know, we’ve talked about some of the markets that you guys look at. Are there any, you know, KPIs that you look for? I mean, you know, for the longest time, I mean, pre COVID it was always about jobs and population and in laws and stuff, but but COVID seems to have changed a little bit. You know, that that sounds because of everybody doing like, what we’re doing the zoom and and that I don’t know, is that affected your your view of things are changed at all, or is there there are some different things that you look for now, when you when you look at a market.

Matthew Ricciardella 28:39

Um, when I look at a geography, I don’t think COVID has a material impact on us making that investment decision, I will say this, we’ve we actually outperformed during COVID, our properties across specially during, on our storage side, our occupancies actually rose. And the way that happened was that we actually built online portals where investors or I’m sorry, we’re storage, tenants can move into our units without making face to face contact with managers. We also had online portals for our manufactured housing and our storage tenants to pay their rent directly. So by being set up for COVID, we were able to actually outperform now, in terms of our investment decision, I don’t think COVID has had an impact on that certainly hasn’t had an impact on our geography. If that’s if that’s the question.

J Darrin Gross 29:39

I just think of there’s if there’s anything that it’s effective, but sounds like it’s pretty much hasn’t been an issue for you guys. That’s no

Matthew Ricciardella 29:47

Knock on wood. We’re not out of the woods yet. And none of us are, you know, don’t want to rest on our laurels. But up up to this point. We haven’t. We haven’t been materially negatively effective. COVID. So,

J Darrin Gross 30:01

Got it. Hey, Matt, if we could like to shift gears here for a second by day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider. First, we look to see, can we avoid the risk, that’s not a possibility, we look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize the risk, then we look to see if we can transfer the risk. And that’s what an insurance policy is a risk transfer vehicle. And I like to ask my guests, if they can look at their own situation can be their clients, their investors, the market tenants, however you want to define it. But if you can take a look at your situation, and identify what you consider to be the biggest risk. And for clarification, I’m not looking for an insurance related answer necessarily. But if you’re willing, I’d like to ask you, man record Ella, what is the BIGGEST RISK?

Matthew Ricciardella 31:15

Well, I think it’s a great question, obviously. And I think there’s a lot of answers to that question. But I’ve, I’ve thought about this, obviously, in depth. I think, for me personally, in what we do, by far, the largest risk is overpaying for an asset. You could take a good investment and make it a poor one, by paying the wrong price. Or vice versa, you could take a mediocre investment and make it a wonderful one by paying the right price. So we focus diligently on not overpaying. And the way we do that. There’s a term actually I think, Charlie Munger had this term, which is Warren Buffett’s partner. And he said that risk is inextricably bound up in the price that you pay for an asset. And I think that rings true for me in a major way, the way we mitigate that risk to answer the other part of your question, Dan, is, by and large, we don’t compete with the rest of the buyer pool that’s out there. way we do that is we buy most of our properties off market. So we create a bond in a relationship with a seller where we’re dealing direct with them without a broker. And that’s how we put probably 80 to 90% of our deals together. Right now, as I mentioned, the two asset classes are white hot. Because of that. There’s bidding wars, there’s auctions, you have to compete in those auctions, and you offer the highest price and you win. But question I have is, Are you really a winner? Or are you a loser? I mean, you paid more than everyone else out there. So we like to focus on finding our deals without competing. And I think that’s how we lay off the risk. So as you would use the term in the insurance world where we mitigate our risk to a large extent.

J Darrin Gross 33:14

Makes a lot of sense. Matt, where can listeners go if they’d like to learn more connect with you?

Matthew Ricciardella 33:21

Yeah, so if you want to learn more about making an investment into the third offering, you can visit our website at www.CrystalViewCapital.com or you can email us at invest@Crystalviewcapital.com or you can email me directly at MattR@Crystalviewcapital. com.

J Darrin Gross 33:46

Great. Hey, man, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. learned a lot. And I hope we can do it again soon.

Matthew Ricciardella 33:56

It’s been my pleasure. Thanks for having me. Darrin. Let’s do it again.

J Darrin Gross 34:00

Announcer 34:19

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Commercial Real Estate Deals Partners and Markets with John Stoeber – CRE PN #304

John Stoeber 0:00

Well, I have been looking at Arkansas for apartments before. I really like Northwest Arkansas, where you have Bentonville and the university up in Fayetteville. I mean, like that area is booming. Little Rock is actually never on my radar. I mean, like it’s a pretty stable market. It’s a little higher and crime, but I wouldn’t say it’s like, you know, one of these high growth markets, I just had a great opportunity come my way from someone I trusted, she had a deal under contract, and she needed money and partners to put the deal together. And it’s kind of like your first job to or at least for me, like I didn’t have a ton of options coming out of school, I’d take a job so I can get experience. It’s the same thing with this portfolio where it’s like not my ideal criteria, but it makes sense and it’s just a way for me to get experience and start racking up some wins. Welcome to

Announcer 0:50

J Darrin Gross 1:08

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is John Stoeber. John uses his background in finance to build financial models and analyze multifamily properties from a number of different perspectives. He currently owns and operates 34 apartments in Little Rock, Arkansas, and is looking for deals in growing markets. And in just a minute we’re going to speak with john about partners deals in the skill set you need to do your first deal.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do. You can like, share and subscribe. And as always, we’d love to hear from you please leave a comment. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. You can find us on youtube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, John, welcome to CRE PN Radio.

John Stoeber 2:33

Hey, Darren, thanks so much for having me excited to be here today.

J Darrin Gross 2:37

I’m looking forward to our talk. Before we get started, if you could share with listeners a little bit about your background.

John Stoeber 2:45

Yeah, um, you know, the short story is I’m just a spreadsheet jockey. But I went to college for you know, accounting and finance, I got a double major and I was on that w two path pretty much since the day I was born. The entire last semester in college, you know, I’m looking for a job and I finally get an offer. And at the time, there was no remote work. So I look at the like the number of vacation days, I’m going to get a look at the salary and I’m just kind of like, this isn’t gonna work. Like this isn’t gonna work for the lifestyle I’m trying to build, which led me on the search for passive income. And on that search, meaning Google, you know, I kind of fell down the real estate rabbit hole. I heard about other investment options like bonds, CDs, dividend stocks, but I was gonna need like a million dollars invested at least just to make like 50 grand a year of passive income. Whereas in real estate, you know, you get tons of other ways to accumulate wealth. Besides the cash flow, you get principal pay down appreciation, tax advantages. And I mean, I’ve always kind of been interested in real estate before getting this job offer. But I’m incredibly not handy. Like I shouldn’t be allowed to touch a hammer so that it always scared me away from it. But as I climbed down the rabbit hole, I started to realize like, okay, I can develop systems, I can hire a lot of this stuff out. So I can do that. So fast forward like nine months, I you know, I graduated college, I’m working my first job. And I had this really long commute from Washington DC to Baltimore, Maryland, and I wanted to get rid of it. So I ended up buying a two unit, you know, duplex to do what’s called house hacking, which is where I had two apartments, I rented one of them, I lived in the other and then my apartment also had a basement. So I rented out the basement so I was living for free and my downpayment on this like owner occupied duplex was like less than five grand and that included like all the closing costs, like everything like I bought a property for less than five grand which is like four or five months rent and in Baltimore like in these coastal markets. So that was awesome. And like yeah, I had to evict my first tenant. Which was kind of nerve racking, because she knew right where I slept. But you know, I evicted her, I put a new tenant in there, I put a tenant in my basement and all of a sudden, I’m living for free. And I kind of caught the bug at that point. So then I’m like, okay, I wanted to graduate and do what’s called the bar method, which is stands for buy, renovate, rent, refinance, and repeat. It’s kind of like, instead of fix and flip, it’s fixing rent, and then you just refinance, all the money you put into the deal back out. So that man, I had to, like tackle this inability of mine to like manage contractors and construction, because like I said, like, I shouldn’t even be allowed to touch a hammer. So I team up with a couple partners. And we go, and we take like the biggest, baddest flip down in Baltimore City, where you’d have 100 plus year old homes, then they’re just absolute shells. So we had one of those where it’s like, all new mechanical systems, new roofs, had to dig out the basement. And then everything else that comes along with that, now is a huge, huge learning curve for me. Like, honestly, was not ready for that big of a project at the time. But while I’m doing that project, you know, one of my partners, he had a four Plex, I had this duplex. And he ran into some issues with his four Plex where like he had to do this really long eviction. No, I had to do an eviction, and I was dealing with like a couple tenant headaches. But like, the light bulb just kind of went off in our head, we’re like, you know, whenever we make a mistake with a four Plex, or the duplex, like, really, our tenants pay for it. So like, as he’ll tell you, he’s like my tenants paid for my eviction. Whereas when we miss something in our rehab budget, like that came out of our pockets, and our bottom line. So like, while we’re doing this, we’re just kind of like, you know, like, let’s just go buy apartments and like bigger multifamily. It’s what we want to do anyways, and like, we really don’t want to work our way out through like, fix and flip and single family. And, and that kind of started this entire journey.

J Darrin Gross 7:01

Got it? Got it? Well, that’s the you’ve got quite the library there of experience here with, you know, being a landlord with the tenant next door to doing a major flip. I mean, I’m curious on that big flip, you talked about? How long did that take you to do that? From from acquisition to?

John Stoeber 7:22

I’m assuming you sold that? Yeah, we sold that over a year ago. I mean, we, we thought it was gonna take like three months to do the entire thing. And it took over a year to go from start to finish on that thing.

J Darrin Gross 7:34

All right. But did you come out ahead. And in the end there, do you make a

John Stoeber 7:38

No we we didn’t we did not come out ahead, unfortunately.

J Darrin Gross 7:42

So is that more of like a he didn’t buy it right? Or what was just over cost overruns? Or your budget? or What was your what it was?

John Stoeber 7:49

I mean, it was kind of everything? I mean, I don’t think we necessarily bought it wrong. But yeah, like we definitely came in low on the rehab budget, and then the amount of time that we held it just like those holding costs, and especially because we bought it with a hard money loan, like they really into your profit margins. So when you’re thinking that it’s gonna be like a four to a six month, month hold, and ends up being over 12. I mean, those holding costs will crush you.

J Darrin Gross 8:14

Right, right. Well, you survived, right? Yeah, I’ve always kind of looked at some of the opportunities I’ve jumped into is, it won’t kill me. Right? If it goes wrong, but lessons, I’ll never forget. But Alright, so you, you kind of had the the taste of the flipped in like that, like the landlord, but realize being in something larger than a duplex or a four Plex was really kind of the way to go. You mentioned your partners on there. Did you end up partnering with with your flip partners to get into larger multifamily?

John Stoeber 8:55

So I still work with one of them, the guy who owns the four Plex, but on the 34 unit portfolio, we’re doing a reposition right now. He’s not part of that deal. But we’re still looking for deals together.

J Darrin Gross 9:07

Okay. You mentioned your spreadsheet junkie and jockey, and I don’t just say jockey,

John Stoeber 9:15

Yeah, jockey. Same, same thing. I might as well be a spreadsheet junkie because I’m always on them.

J Darrin Gross 9:21

Right, right. Right. Um, so let’s, let’s talk a little bit about the, you know, what you saw on the 34 and what you’re doing with a 34 unit property?

John Stoeber 9:33

Yeah, um, you know, from like, a financial perspective. Yeah, no, yeah.

J Darrin Gross 9:38

Tell me what, what was it? Tell us about the property and what you saw? And are you doing a value add position or what tell tell us all the juicy detail?

John Stoeber 9:48

Yeah, we’re, we’re doing actually a really big value add. I mean, this was a distressed property. The person who previously owned this was just completely miss managing it. I mean, no record. or anything, didn’t screen the tenants. But if you look at like these larger commercial properties, like as a flip, you know, like, it’s really not that much different from a single family flip or you know, a bar, it’s just the way you calculate some of the numbers are different. So like, if you’re flipping or you’re doing a bur on a single family house, you’re gonna have your acquisition costs, your renovation costs. And then your ARV, which stands for your after repair value. And like the general rule of thumb is, you know, you want your acquisition costs and your renovations to be 70%, of what you’re gonna sell it for. And then that leaves some room for like, you know, realtor Commission’s holding costs, soft costs, as well as your profit margin. It’s really not that much different when you’re looking at a multifamily property. The key thing, though, is the way you calculate your sales price. So like with a single family house, you’re going to go off of sales comps. And you don’t really have a ton of control over like stretching the market, you know, if similar homes are selling for 200k, like your home is going to sell for 200k. in multifamily and commercial real estate though, the value is based off of the net operating income, and sales, comps do come into play. But like on a basic level, you’re gonna take the net operating income of that property, which is all of the expenses except the mortgage, and then you’re going to divide that by the cap rate in the market. So let’s say you’re making $100,000 of net operating income, which again, is cash flow before your mortgage. And that market cap rate is a 6%, you’re going to take 100k divided by 6%. And that’s you should know this number, it’s like I think it’s less than $2 million, it’s probably like $1.8 million. But so that’s your ARV. And then you’re going to take your your acquisition costs your renovation budget, as well as the other costs. And you’re going to see if you have a spread. So the thing with the little rock portfolio is when a buying 34 units for $800,000, which comes out to 23 and a half k a door, we’re putting five to 10k of rehab into each unit. They’re renting for 650 to 700. Right now it’s all one and two bedrooms. And based off the cap rate, and the other sales comps in the market, we should be able to sell them for 45 to 55k a door. So it’s like you’re all in for probably like 35k a door. And you’re selling them for 45 to 55. It’s like there’s a huge spread on that. And then you’re just calculating your other numbers to to make sure that it’s going to cash flow if you refinance it.

J Darrin Gross 12:41

Got it, got it. What in Little Rock, what was the Was there an attraction to the market? Or was it more of like a property you found or?

John Stoeber 12:51

Well, I had been looking at Arkansas for apartments before I really like Northwest Arkansas, where you have Bentonville and the university up in Fayetteville. I mean, like that area is booming. Little Rock is actually never on my radar. I mean, like it’s a pretty stable market. It’s a little higher in crime, but I wouldn’t say it’s like, you know, one of these high growth markets, I just had a great opportunity come my way from someone I trusted, she had a deal under contract. And she needed money and partners to put the deal together. And it’s kind of like your first job to or at least for me, like I didn’t have a ton of options coming out of school, I’d take a job so I can get experience. It’s the same thing with this portfolio where it’s like not my ideal criteria. But it makes sense. And it’s just a way for me to get experience and start racking up some wins.

J Darrin Gross 13:41

Makes complete sense. So So tell us about you mentioned that you have a partner on this one then did you mentioned somebody had a deal and needed help?

John Stoeber 13:50

Yeah, so I have a few partners, but she had a deal. I mean, she had this deal locked up. Back in March of 2020. It fell out of contract because COVID hit and you know the partner she was going to buy the deal with ended up bailing, just put it back under contract. And then she had to raise money. And she just said to me, she had to put a team together because she didn’t have all the money to just buy it herself. And she lives in Salt Lake City. So it’s not like she’s in the market. And you know, I can I can run the numbers, I can kind of act as like, I guess like a financial analyst or a CFO on the project to add value and like I had some money to put into the deal.

J Darrin Gross 14:29

Okay, and so are you did you come in as a as a joint venture? ditch? syndicator. How

John Stoeber 14:36

did you guys put together? So this is just a joint venture, it’s not a syndication.

J Darrin Gross 14:41

And so does everybody have different skill sets? Or is or are you guys missing anything? Have you been able to

John Stoeber 14:52

No, I mean, so I’d say the skill sets are are pretty well rounded. I mean, one of our partners Well, they’re married But they’re like one group, you know, they have a lot of experience managing contractors and renovations, and they also live closest to the property. So they’re like the boots on the ground and the construction managers, my partner who found the deal. I mean, that was basically her role. Like she found the deal. And she also has the most experience managing large commercial real estate. She’s a couple other apartment complexes. I’m kind of like the numbers guy. And then our other partner, Ryan, you know, he’s out there raising money and dealing with the property manager on a daily basis.

J Darrin Gross 15:36

So when did you close on this? You said it was under contract in March? What When did you guys I’m closing on it?

John Stoeber 15:44

The end of June.

J Darrin Gross 15:46

Okay. And where are you in the actually it’s back up here. What was the renovation plan the value add plan.

John Stoeber 15:55

So the renovation plan was mean, we need to put about, you know, we’re averaging anywhere from four to 6k per unit and renovations. And that’s to put all new, you know, lvp, glue down, flooring down, if appliances need to be replaced, that’s in the budget, new paint, and then some new light fixtures and like handles for you. It’s called like, nickel. You’re not the renovation guy here. But it’s like the stuff you put on your cabinets. Satan nickel, I think. So it’s like five, five grand on average for the interior renovations. And then on one of the properties, like we completely repainted it fixed up a lot of the wood rot on the outside. And we’re installing a lot of new doors on that property too. And we had to repair a gas leak as well.

J Darrin Gross 16:44

Gas leak needs to be repaired, that’s for sure. Yeah. So how do the rents are you would you serve as a distressed property? Did you? Where were the rents before the renovation? What do you expect the rents to be post renovation?

John Stoeber 17:02

Great question. So it’s, it’s all one in two beds, and they were renting anywhere from $400 to, you know, 550, but definitely gearing toward like the lower end the four to 450 range. So right now on the renovated units, we’re getting 695 on the two bedrooms that we’re renovating, and 650 on the one bedroom. So on average, it’s like a $200. You know, rent bump per unit.

J Darrin Gross 17:33

That’s, that’s strong, were there any expenses, you were able to, you know, either eliminate or pass on to the tenant.

John Stoeber 17:43

So we’re passing on some of our utility bills to the tenants. There haven’t been any expenses we’ve been able to eliminate. Because the seller just I mean, he ran the property into the ground, like he was running it like a 25% expense ratio. And that’s why the property was like in such disrepair and mismanaged because he wasn’t putting any money back into it. So our expenses have gone up. But so has our income. And when you take you know, our current income and our projected income over our stabilized expenses, like our net operating income is going way up over what it was.

J Darrin Gross 18:19

Good. Well, that’s the that’s the plan. Right? Yeah. So name of the game. And so what is your your? Where are you in the timeframe here? You said, You started June, you’re seeing a rent bump, 34 units? Are you going to be renovating all of the units? Are you a part of the units? What’s the plan?

John Stoeber 18:40

So we kind of have it broken out in phases. And right now, I’d say we’re still in phase one. Because this previous owner didn’t do any sort of tenant screening, we had really low economic occupancy when we took over what I mean by economic is, you know, people may have been living in the units, but they weren’t paying. So our occupancy was like in the 30% range 30 35% when we took over, we’ve just gotten that into like, the 60 to 70% range, and we cover all of our bills plus the debt service now. So we have a few more units that were were already renovated, and we’re leasing them up. Once those are leased up, I’d say that begins phase two. Phase Two is really just a decision we have to make, do we flip the property and make a whole bunch of money on the sale right now? Or do we go to a bank refinance out because we’re on a we’re on seller financing right now and get a construction loan, and finish off the rest of the units that need to be renovated and they just cash flow for five years. So that’s a decision that our team still estimate but both of those options are on the table.

J Darrin Gross 19:52

Let me ask you, you mentioned the economic occupancy being low and then we’ve got COVID going on. What what’s been your? How have you been? You know, how have you dealt with a situation with people not pain? And COVID? Have you been able to evict or correct that? Or what’s the whole? How have you dealt with him?

John Stoeber 20:18

Yeah, that’s a that’s a great question. Fortunately for us, most of the evictions we’ve done haven’t gone through, the tenants haven’t even shown up to court. So they’re cases just thrown out, and we win. And we’ve been able to evict them. For some of them. And we’ve had a couple, I think we’ve had two, who actually like turned in the CDC paperwork, meaning they’re protected by the moratorium, but they’re on month to month leases. And they’re not like very good residents to begin with. And they’re, like loud, obnoxious, we don’t really want them to be part of the community anyways. So we can, what we’re trying to do is getting is get them out on tenant holdover, like we’re just not renewing their lease. And then if they don’t leave the property, you know, we can get them out for tenant holdover, or breach of lease, which is kind of the avenue we’re going. And there’s all sorts of like rental assistance programs out there. So we came up with like a flyer that said, like, Hey, you know, here’s the numbers, here’s the emails, like you guys need to call them, and they can potentially help you pay the rent. And we actually just had our first tenant who applied for, or she like, filled out the CDC paperwork. She just got a big rental assistance check last week.

J Darrin Gross 21:33

Did she pay you the rent showed?

John Stoeber 21:35

Yeah, you know, no, like, it came to us. Oh, rental assistance. Yeah, they mail it directly to the landlord. Okay.

J Darrin Gross 21:44

Like that was one of the challenges a lot of landlords have felt was the tenant get the money, but the landlord didn’t get the money?

John Stoeber 21:51

Yeah. Like, it wasn’t like she got stimulus. This was just like some local nonprofit.

J Darrin Gross 21:57

Gotcha, gotcha. So So basically, it sounds like you guys are coming up on, you know, completing phase one, you got it economically viable? It’s, it’s covering the debt, you’re kind of facing that question here. Do you continue or flip this thing and, and go on to another property? Is there a timeline for that decision?

John Stoeber 22:24

Probably probably by summer, we’ll have to make that decision. Because we closed on it in June. And we don’t want to sell it within a year, because then we’ll get taxed at an ordinary rate. Or as if we wait for a year, it’ll get taxed at the long term capital gains rate.

J Darrin Gross 22:40

Right, right. So let’s, let’s dive into this a little bit. See, we talked a little bit about your partner’s everybody. Good fit? I mean, you you guys talking about going and doing additional deals after this? Or is this kind of like a one and done everybody go their separate way?

John Stoeber 22:58

That’s a good question. I like Firstly, we’re I think we’re all just going to wait and see, like, what happens with this deal. I mean, so far, I think it’s been a good experience for all of us. But none of us have, like 1000s of units and decades of experience. For most of us, except for the partner who found it like this is our first multifamily deal. And for the other partners who have like the renovation and construction experience, I mean, they’ve owned like a pretty large rental portfolio before, but it was in their backyard where they self managed it. So like, this is completely brand new to all of them. And there’s definitely been a learning curve. So it’s kind of like this joint venture was put together pretty quickly to get the deal close. So I guess we’re just gonna see what happens when it’s all said and done.

J Darrin Gross 23:49

Got it. So with that, is there anything that you would look for going forward when you’re looking for partners?

John Stoeber 23:59

Well, I think I mean, you should be looking for people who have similar values to you and then have, you know, skill sets that complement yours. So like for me, it’d be great to connect with someone who like is great at managing construction contractors and renovations because I don’t like doing that. And then capital is just a huge part of this business because if you go out and you’re buying one 200 unit properties, which is where I’d like to go, I mean, you’re talking about you’re gonna need to raise millions of dollars.

J Darrin Gross 24:31

Right, all right. What about looking forward for deals here? We talked about you know, you’d been a couple and and realize that multiples were the, the, you know, had a much better advantage as opposed to the singles and or flipping. And you mentioned that Arkansas was kind of on your radar but but not necessarily literal rock. Is there there anything that you can point As far as lessons you’ve learned, or things you’d look for going forward and when you’re looking for a deal.

John Stoeber 25:09

So when I’m looking for a deal, or like when I’m looking at a market?

J Darrin Gross 25:12

Well deal and market, I guess.

John Stoeber 25:15

I mean, when I’m looking for a deal, and there’s a lot more due diligence, I would do going in next time, especially physical do really all due diligence, physical due diligence, and financial due diligence. And you just, you can’t know what you don’t know until you’ve actually done it. I mean, I knew a bit more about like construction and renovations now. So I mean, I’d be going there with like, multiple contractors, my property management company, and ideally an inspector and just getting all their perspectives, and really questioning the contractor like, how is how are you coming up with, with your bid, because you’re just gonna throw out a number, like, I need to know what that encompasses. So I can make my own decision, whether it’s enough to get the work done. As far as like identifying the market. It’s interesting, because like this deal, it’s not in a hot market. But I would do another one like it again, even if it’s not in like a high growth market. Just because the spread on it is so great. I mean, we’re talking about being all in for $35,000, a unit, which includes all the holding and the soft costs, and selling for 45 to 55, or refinancing at that value. Like if it works out, you know, all of our networks are going to grow a lot. So I would definitely consider something like that in a more stable market. But really like Florida, too, and I have a partner who lives there. He’s boots on the ground. And that’s just got, like all the demographics you could want in a market.

J Darrin Gross 26:50

No, it’s that’s definitely both of those the, you know, find the deal in the markets. I mean, you know, I’m kind of curious to hear any thoughts on the market? Based on, you know, the COVID experience? Is there any as COVID changed your, your thoughts on where you might look for a property?

John Stoeber 27:15

Yeah, it actually has, um, I was kind of really hell bent on being in these big primary markets before COVID. Because that’s where all the jobs were, and people weren’t working remotely as much. Now, though, I mean, it seems like the trend is people are moving away from these big, major cities, especially the high cost of living ones like New York City, and you know, pretty much everywhere in California. And they’re moving to places like Florida, and Texas, the southeast, where it’s more affordable to live, taxes tend to be lower. And now you have all this remote work, so you can kind of live wherever you want. And act like I moved to Denver earlier this year, because I still have a W two and like, I can work remotely now. So I’m just like, I want to live here, I’m going to move. So I think finding markets to where there’s just like things to do, and people want to live. So in the southeast, you have warm weather and beaches. In places like Colorado, you have the mountains, so like looking for attractions like that, like that, with still a strong employment base and a strong economy. I think that’s gonna be pretty key to identifying markets. And you could probably pick some great small tertiary markets that way.

J Darrin Gross 28:35

The the skill sets, you know, what do you see as the skill sets you have to have, whether it be you personally or on your team in order to get into your first deal and be competent.

John Stoeber 28:52

So I think there’s like three legs to be buying big commercial real estate, you have to be able to find the deal if people manage the deal, and you have to be able to raise money. So if you if your team has all those legs filled out, you’re probably a rockstar team. With the guys I work with right now at Cronos. That’s our company. I think we do a great job at identifying the deals because I think we’re really strong at analyzing the deals. And we’re definitely picking up our on our ability to raise capital. And through this experience and Little Rock, you know, now we have real asset management experience. But if you’re just starting out, at least like what I would do is I would focus on one of those legs, and then pick like a skill set within that leg. So like for me, it was finding deals. And then I’m a spreadsheet jockey. So part of finding deals is being able to analyze them and identify them. So like I focused on that. If you’re really good at developing relationships with people and networking. Maybe You know, you’re the one who’s talking with the brokers and developing those relationships, or you’re the one talking with ambassadors and raising money.

J Darrin Gross 30:08

Yeah, no, it makes sense. Yeah, I mean, definitely three critical pieces there. And and having people that are strong in each of those would definitely propel your, the chance of your success. That makes sense. JOHN, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker, and work with my clients to assess risk and determine what to do with the risk. And there are three strategies we typically consider. The first is we look to see if we can avoid the risk. If we can’t avoid it, then we look to see if we can minimize the risk. And when neither of those are options, we look to see if we could transfer the risk. And that’s what an insurance policy is as a risk transfer vehicle. And I like to ask my guests, if they can look at their own situation, their investments, their clients, the investors in their deals, tenants, the market interest rates, however, you want to identify, you know, then the question for the answer. But I’d like to ask you about biggest risk. And for clarity, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, john Stober, what is the biggest risk?

John Stoeber 31:40

Right now, I still think COVID. And just the environment we’re in is the biggest risk, especially if you’re dealing with C class properties, you tend to deal with residents who are on the lower end of the socio economic scale. So these are the people that you know, their servers, waitresses, receptionist, they actually have to go into work. So if there’s a shutdown, like, they’re not going into work, or if they get COVID, like, and they may not have a job anymore. So I think that is a huge risk, like from a property perspective, but also with this, like the home market right now. And it you know, it’s February 2021. Like the whole market just seems crazy. If you’re, if you and your listeners have been, like paying attention. I mean, just look at gamestop, AMC Dogecoin. It’s just like it seems very unstable right now. Kind of bubbly and frothy. And like, I don’t know if the lending market is going to be the same 12 months from now where people are able to get loans so freely. And if you can’t get loans, that really drives down the number of buyers who can buy a property, which in turn is going to drive down values.

J Darrin Gross 33:00

Yeah, that’s definitely some some things to pay attention to. And hopefully, they don’t come to fruition as far as a negative effect there, but always arrest. That’s good. JOHN, Where can the listeners go if they would like to learn more connect with you?

John Stoeber 33:21

Yeah, I’m pretty active on Facebook and social media. So just reach out to me at john Stover or on Instagram at john underscore Stover. You can check us out at our website Kronosinvestmentpartners.com. We have our own podcast called the millennials and multifamily podcast so you can check that out. And we have a free book called How to analyze big apartment buildings and make them feel small.

J Darrin Gross 33:49

Cool. Tell me how to spell the the coronas or the

John Stoeber 33:54

K r o n as a Nancy Oh, S.

J Darrin Gross 33:59

Got it. Got it.

All right. Well, john, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. learned a lot and I look forward to doing it again soon.

John Stoeber 34:12

Thank you so much, Darrin.

J Darrin Gross 34:13

Announcer 34:33

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Silicon Valley Opportunity Zone with Erik Hayden – CRE PN #303

Erik Hayden 0:00

Most capital gains events occur either from the sale of a business, the sale of real estate or the sale of stock. Here at Urban catalysts 70% of our investors their capital gains event was the sale of stock. If you have that capital gains event and you invest into a qualified opportunity zone fund, within 180 days, you’re eligible for the tax benefits. And there are three primary tax benefits. The first is you don’t have to pay taxes on that capital gains event until you pay your taxes in 2027. The second benefit is when you pay your taxes in 2027, you get a 10% reduction. So for every $100 that you would have owed in taxes, you only have to pay $90. And really the third benefit is the biggest benefit and that is after investors money seasons in an opportunity zone fund for 10 years. All of the profits from the fund itself are tax free.

Announcer 1:12

Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors buyers and sellers of commercial real estate coast to coast whether you’re an investor broker, lender, property manager, attorney or accountant We are here to learn from the experts.

J Darrin Gross 1:12

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is Erik Hayden. Erik is the founder of Silicon Valley based Urban Catalyst, named by Forbes and Sorenson Impact Center has a top 10 Opportunity Zone Fund. And in just a minute, we’re going to speak with Erik about Opportunity Zone Funds, and the potential for investors in the next 10 years.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help. You can like, share and subscribe. And as always, we’d love to hear from you. Please leave a comment. Also, if you’d like to see our answer, I guess are Be sure to check out our YouTube channel. You can find us on youtube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Erik, welcome to CRE PN Radio.

Erik Hayden 1:12

Thank you, Darrin happy to be here.

J Darrin Gross 2:37

Yeah, I’m looking forward to our conversation today. Before we get started, if you could take just a minute and share with listeners a little bit about your background.

Erik Hayden 2:47

Sure. So throughout my career, I’ve been doing ground up real estate development in the San Francisco Bay Area. In general, I build institutional quality and scale projects. I’ve done several billion dollars worth of development throughout my career, and a pretty heavy emphasis on Silicon Valley and downtown San Jose.

J Darrin Gross 3:08

And in any particular asset class that you’ve you’ve worked more in?

Erik Hayden 3:09

I’ll tell you, I’ve built a variety of asset classes. Probably the strongest asset class I have as part of my background is multifamily. But I mean, that’s been the bread and butter of developers here in Silicon Valley, you know, for over 10 years.

J Darrin Gross 3:30

So let’s talk a little bit about opportunity zones.

You know, you you have a fund and you also do opportunity, opportunity zones. Are you do you just have a fund? Or can you talk a little bit about how your?

Erik Hayden 3:42

Sure, so here’s a little bit about what makes us different than other opportunity zone funds out there is we’re not just fund managers, but we’re also the developers of all of our projects.

J Darrin Gross 3:53

Okay. And are these all local to you in the area in San Francisco then?

Erik Hayden 3:55

Yeah, so all of our projects are located in downtown San Jose, we closed fundraising on our first fund in December. We have those projects in downtown. We started fundraising for our second fund here in January. And we have those projects identified in downtown San Jose as well.

J Darrin Gross 4:22

Got it. And the the essence of the opportunity zone. When we touch a little bit on that I know the basics is the tax advantage, but can you share with listeners a little bit about what the opportunity is for the investor?

Erik Hayden 4:41

Absolutely. I’ll give you a little background on the program. So the program started as a part of the 2017 tax cuts and JOBS Act. The federal government wanted to create positive social and economic impacts in lower income areas. And what they did is they designated certain census tracts. Well, these they said here’s What census tracks qualify, that could be opportunity zones, they let the states choose 25% of those eligible census tracts in each state. here in California, the tracks were chosen in April of 2018. And the way that it works is if a developer or not even a developer, but is if an opportunity zone fund invests into an opportunity zone area investors into an opportunity zone fund, get some special tax benefits. And just kind of taking a step back. In order to be eligible to receive the tax benefits associated with the opportunity zone program, investors have to have a capital gains event. Most capital gains events occur either from the sale of a business, the sale of real estate or the sale of stock. Here at Urban catalysts 70% of our investors, their capital gains event was the sale of stock. If you have that capital gains event and you invest into a qualified opportunity zone fund, within 180 days, you’re eligible for the tax benefits. And there are three primary tax benefits. The first is you don’t have to pay taxes on that capital gains event until you pay your taxes in 2027. The second benefit is when you pay your taxes in 2027, you get a 10% reduction. So for every $100, you would have owed in taxes, you only have to pay $90. And really the third benefit is the biggest benefit. And that is after investors money seasons in an opportunity zone fund for 10 years. All of the profits from the fund itself are tax free. And here at Urban catalysts, our plan, of course, we’re ground up real estate developers, we’re going to build these buildings, we’re going to stabilize them, we’re going to hold them until we get to the end of that 10 year mark, and then we’re going to sell our assets. And that’s when we return the majority of the profits to our investors. And those profits are tax free.

J Darrin Gross 6:55

Okay, got it. I appreciate you. And that was actually very succinct compared to a lot of the explanations I’ve got people I’ve talked to. So I appreciate that. So the idea is to attract investor funds, identify projects, build the projects, hold the projects for 10 years, then liquidate and return at a substantial substantial tax savings based on the growth. I mean, that’s the that’s the the one that I’ve I think that, you know, really caught my attention was that that growth of the gain on the gain is really the the candy there, if I’m understanding correctly, and I’m assuming if you’re in a in an area that’s been identified as a, an opportunity zone, and there’s a bunch of funds, or a bunch of investment in that area, that the likelihood of that that area, you know, appreciating substantially is what we’re all planning on. Is that that kind of the idea?

Erik Hayden 7:58

No, I don’t think that the goal of the program is to, you know, say have land value appreciate in that area. And there were some studies that showed that in the early part of the opportunity zone programs, I haven’t seen as many news articles about it lately. But the benefit is for the people that live in these areas, it’s how our ground up real estate developments going to give back to their community. I mean, it’s not only designing buildings that the community wants and needs. But you know, for urban catalysts, it’s things like, you know, we pay, you know, millions of dollars in park fees that go towards the construction new parks, we pay millions of dollars in below market rate housing fees to create below market rate housing, we have a housing crisis here in California, it’s especially true in Silicon Valley, and anything we can do to help alleviate that is a good thing. Course, in general, the the government sees the opportunity zone program really is tax neutral. Yes, they’re giving some discounts on capital gains when they’re not collecting capital gains taxes at the end of 10 years. But if you add up the total amount of real estate taxes that we’re paying, you know, we’re building these big buildings. And before there were buildings there, there was something else that wasn’t paying as much property taxes. So you take that property tax increase over the 10 year period, and it really becomes more of a net neutral program.

J Darrin Gross 9:21

No, that’s, that’s, again, a great perspective. I hadn’t thought of that. Like most people I’ve talked to have been more from a you know, just a pure investment side of things on how to you know, win on your investments strategy and and, you know, lessen your tax burden. But the, you know, the benefit to the community, I mean, that that’s, that’s gonna be huge, especially if you have a lot of investment in an area I can only imagine that will track Well, not just attractive, but like you say it’ll be a quality place for people to Live and create more of a community there. In the areas that you were investing in, can you describe kind of what, you know how large of an area is it and what was there? versus what you’re what you’re building?

Erik Hayden 10:19

Sure. So, in San Jose, there are a total of 11 opportunities zones, and those are just the census tracks. By the way, when the federal government designated these census tracts, they didn’t necessarily reinvent the wheel, right? They, they pretty much said, Every census tracts, every census tract that qualify for below market rate housing tax credits is going to be an opportunity zone, or at least qualify for one. So it wasn’t some new formula. It was Oh, yeah, we already kind of have this. There are four census tracts in downtown San Jose, that cover almost all of downtown. And all of our projects are located in those census tracts of downtown San Jose in general, you know, maybe I should tell you a little bit about the story of San Jose, because San Jose, while it is Silicon Valley, and sometimes I get a lot of questions like, well, how to downtown San Jose qualifies in the Silicon Valley, isn’t this, you know, where Google and Apple and all these big tech companies are? And the answer is yes. But San Jose is a different kind of city, it was really one of the first cities to experience urban sprawl. So if it hit its peak in like 1940, is a farming community with a lot of, you know, canning facilities here in downtown generating these high rises started being built. By 1965. Downtown San Jose had died. And there was not a whole lot left here. The government came in an eminent domain, almost half of the city. They started, you know, really subsidizing development, building parking garages, building infrastructure, billions of dollars of funding went in, you know, from the public market to make downtown downtown San Jose, a place that people wanted to live. But the private markets really didn’t catch up to downtown San Jose until about five years ago, when we saw this wave of development starting to really come to downtown. And by the way, that was one of the major reasons why we formed urban catalysts that was to take advantage of these macro economic trends in Silicon Valley that are all pointing towards downtown San Jose as the next place to do development on a large scale. And for urban catalysts, we were going to do business raises fun do our projects. It was only after I started forming urban catalysts that I even learned about the opportunity zone program. And that everywhere that we were planning on doing business was already located in an opportunity zone. So thought, boy, wouldn’t it be great to be able to give our investors these additional tax benefits associated with this program. And that’s how we became an opportunity zone fund. Seeing this private market catch up with San Jose, I mean, it’s been an amazing amount of development, at least potential development coming to downtown. We’ve seen Google make a massive move into downtown. And I’ll give you a little summary of that. In the last two years, Google has purchased over $450 million worth of property in downtown San Jose over 80 acres. And plans that they’ve submitted to the city show them building roughly seven and a half million square feet of office and 6000 residential units. At build out. This will be Google’s largest campus on Earth. So we’re seeing big tech companies come downtown. And a lot of developers have come to downtown to in particular, a group called Jay Paul, they’ve spent 650 million on acquisition in the last couple of years. They’re going to do you know millions of square footage of development. And then even recently, a big Toronto based development company, West Bank has come to downtown San Jose, they’ve spent 300 million in acquisition in the last six months. So we’re seeing big developers and big tech companies all flooding into downtown. And this is what we saw urban catalyst when we formed, we wanted to really get it on the ground floor, acquire properties, and do ground development projects before these big developers and big tech companies really drove up the price of the land.

J Darrin Gross 14:14

Now that’s, you know, kudos to you on on your timing there to be ahead of all the big guys like that. How many projects do you have in your, your queue as far as work you’re going to be doing?

Erik Hayden 14:29

So in fund one, we have seven projects, a variety of real estate asset classes. We have multifamily office, student, student living, Senior Living and an extended state business hotel. In our second fund, we have two high rise towers in downtown right next to a mass transit station, really across the street from City Hall really on the main drag of the central business district. And that’s a large office high rise and a multifamily apartment building.

J Darrin Gross 15:02

Gotcha. And it will the multifamily be market rate or affordable or what’s the plan for those?

Erik Hayden 15:08

Oh, it’ll be market rate, you know, we’ll still pay, it will either pay our below market rate housing fees or we’ll build some below market rate housing into the project. San Jose has an inclusionary housing policy, and we’re going to meet that policy.

J Darrin Gross 15:23

And how many units do you expect to build between those projects? And

Erik Hayden 15:29

The multifamily should be well, in our fun to our multifamily project will be around 350 units. In our first fund, we have 184 unit multifamily project. And we have our student housing project, which will have 800 student housing beds. So it’s a they don’t necessarily do it by units for student houses. They do it by beds.

J Darrin Gross 15:53

Right. So they’re like a three bedroom or four bedroom unit kind of thing. With Yeah, no. And what’s the is San Jose State or what’s the university nearby for the student housing?

Erik Hayden 16:07

Yeah, it San Jose State San Jose State is right in the heart of downtown San Jose. And with 35,000 students, it’s the second largest university in the Bay Area behind Cal Berkeley.

J Darrin Gross 16:18

Got it? Got it. That’s that’s pretty significant. The progress of MindTap as well as all the major investors you mentioned that are have identified and have come to downtown. And I’m not that familiar with San Jose, I’ve driven through I just remember kind of being, you know, kind of a continuation at least it felt like it between San Francisco all the way down just around the bay and kind of the the topography. I know there was there was some high rise stuff. But so is this all down in the in the downtown core is that where this all taking place

Erik Hayden 16:57

That’s correct. It’s all in the downtown core. And, you know, San Jose, it’s an interesting city. Like I said, it’s the 10th largest city in AmErika has over a million people. But it’s also geographically like a lot like Phoenix where it’s very spread out because that urban sprawl I was talking about. So the downtown itself only has roughly 75,000 people at night and around 100,000 people in the day when people are working in their offices.

J Darrin Gross 17:23

Gotcha. Gotcha.

Erik Hayden 17:24

And the height downtown is limited by the airport. So the tallest buildings are 220 feet, which is probably why you didn’t notice them when you drove through because 220 feets like 20 stories. It’s not like other cities, we have these, you know, 50 100 storey buildings.

J Darrin Gross 17:38

Right. Well, still, though, that’s, that’s significant. You know, number of units and and just like you said, Google and and the others that are coming in there that I’m guessing that’ll kind of really kind of give a facelift to a lot of the downtown area is it is it is the Google areas at all contiguous all the ground that they’ve purchased draws their stuff is contiguous. And it’s by the diridon train station, which is slated to be the largest train station on the west coast. Got it. So there’s a significant transit, infrastructure already built or is going to be developed as well.

Erik Hayden 18:18

So most of the transit infrastructure has already been built. And that was a part of, you know, the government’s plans and revitalizing downtown over the last couple of decades, the only major change we’re seeing is that Bart, which is the largest mass transportation system here in the Bay, or is after 62 years, finally connecting through downtown San Jose into Diridon. Station.

J Darrin Gross 18:39

Got it. No that, that, that’s impressive, and again, you know, everything you guys are doing, as well as everybody else. I mean, it seems like just a complete home run, to have an area that has been identified in such a large scale for redevelopment to get in on that. And and, you know, while you’re, you said, definitely the the livability celuk, that’ll improve dramatically, you know, from an investment standpoint, do you have any kind of ideal, you know, what you’re, you have a target or like a perspective, so and what you expect the property to, you know, from cost to exit? Is there a multiple there are any kind of a,

Erik Hayden 19:27

Oh, we have all of those multiples, we don’t typically share them in public, because sec rules are associated with raising funds. But I will say that, and, you know, to your point, there is risk associated with investing in any type of fund. You got to understand that risk, and there have to be returns that are projected, that are adequate to take those risks. And our returns are right in line with where they’re supposed to be for the amount of risk associated with our fund.

J Darrin Gross 19:57

Well, that’s great. You said that the majority of the investors you’re finding are coming from stocks. Is that right?

Erik Hayden 20:06

You know, quite a few. And by the way, I mean, when we’re talking about opportunity zones and or opportunity zone funds in general, there’s a lot of different kinds of opportunities on funds. A lot of them are focused around ground up development like urban catalysts. But I’ve talked to a lot of funds out there that don’t primarily get their money from stock investors. A lot of our the reason why our funds are from stock investors has to do with us being here in Silicon Valley, and really because of the way that we raise money in the market. But I think the most common reason or least the largest reason why stock investors are interested in urban catalysts or investing in opportunity’s own funds is there’s never really been a safe harbor for stock investors in order to defer and reduce paying taxes until opportunity’s own funds came along. And now we’re really one of the go to ways to do that, while they’re diversifying their portfolio into real estate.

J Darrin Gross 21:01

Yeah, no, it certainly is a significant opportunity. And, you know, I can see that anybody that’s been in the market, you know, getting out and looking for a way to shelter some other games, that would make a lot of sense.

Erik Hayden 21:15

You know, Darrin, maybe I can make a comment about the opportunity’s own tax benefits. And that is, you know, when most people hear about opportunity’s own funds, you hear about the tax benefits. I mean, obviously, we’re big fans, the tax benefits here at Urban catalysts. But if the biggest tax benefit is you get tax free profits after 10 years. there better be profits after 10 years, really, what’s the point of the whole program? So understanding that underlying real estate and who the developers are that are doing that real estate is really important for an investor to understand when they’re looking at a potential investment into an opportunity zone fun?

J Darrin Gross 21:52

No, I, I get it, I get it. Let me ask you, the given the, you know, the start of your fund was, and correct me if I’m wrong, but on the timeline, you were definitely pre COVID, weren’t you? When you when you started? Your

Erik Hayden 22:08

We started? In our first fund we opened in February of 2019. Okay, we closed our first fund December of 2020. And we opened our second fund here in January of 2021.

J Darrin Gross 22:22

Okay, so time talk about how COVID has changed or modified or Evans had any kind of effect on what you see as far as the you know, the the go forward for you guys?

Erik Hayden 22:41

Sure. So really, the biggest impact that COVID had on us initially, was the federal government in the middle of COVID. Really, like in May or June, they said, Hey, we need to extend people’s opportunity to invest into an opportunity zone fund. So where it used to be, everyone has 180 days from the date of their capital gains event to invest into a fund. It became anyone that had an capital gains event going all the way back to October 4 of 2019. Had until December 31 of 2020 to invest. So we’ve been raising money, people have capital gains, events, they call us, they say we want to invest, we want to diversify, we want to get these tax benefits. And we’d say great, but suddenly was no one had any reason to invest. Now, they all had until December, we thought, Okay, well, our fundraising velocity will slow down in the middle of the year, and then we’ll have a really big q4, a huge December. And that’s exactly what happened. And so the biggest impact was, it just had me you know, a little bit worried there come around August, September, gone. Boy, I hope it’s a big q4 and it really came through in a much bigger way than we’d anticipated which was great. I get a lot of questions about how the designs of our buildings will change because of COVID Or have we rethought you know, overall, our asset classes have we changed our program types and in general, we haven’t made significant changes. And we have made some significant some changes as to the types of hv AC systems that we’re looking at putting into our buildings so that we can have cleaner air. We’d already planned on having you know, keyless entry touchless elevators is really that’s the new market. But some of the Floor Plan layouts of our office, or how some of our amenity spaces or lobby areas and our residential projects work, we’ve changed those slightly. From a wholesale perspective, when we look at COVID impact on the real estate market. You know, we have a long term fund, right? We don’t get tax free profits until after 10 years. So we have a longer term vision of the overall real estate market. And what we think about is what is the demand for our tenants, you know, what would be our tenant rents 10 years from now that’s going to make the determination of the value of our products. For our investors when we sell, and those rents are really going to be driven by Silicon Valley. So when I think about, you know, changes to COVID, it isn’t so much changes because of COVID. Because I’m really looking at the long term trends of Silicon Valley, and if that is going to be favorable, and historically, it’s been extremely favorable. And in general, Silicon Valley has three aspects that no one else has had as a huge concentration of tech workers, we still get more venture capital funding than anywhere else in the world. And we have, you know, six of the largest companies in AmErika either have their headquarters or major office presence in Silicon Valley. And that’s not going to change because of COVID. And over the long term, that’s what matters.

J Darrin Gross 25:47

No, it’s hard to argue with that, as far as just the brain trust and in the long history that the tech companies have there. And in Silicon Valley. I’m kind of curious, though, and I don’t know, you know, sometimes he read stuff, and it’s more of a national kind of a clickbait or, you know, some sort of a get you to kind of read and and make something of it, but you’re on the ground there. When I asked you about some of the, the information out there about just the political climate, the the tax climate in California, are you seeing is there, you know, there’s clearly news of companies moving out. But, you know, given the long history there, is there any, any concerns there as far as, you know, long term go forward in California.

Erik Hayden 26:38

So really, the two, the two things that happened last year that were interesting were California’s population decline for one of the first times in like 100 years, and it went down by just a little over 1%. And in the short term, that makes a lot of sense to me, because, I mean, if you’re not legally allowed to go into your office, I can see one out of 100 people saying, Yeah, I’m gonna go work from Bozeman, Montana, or I’m gonna go work from Austin, Texas. That makes a lot of sense, I really see that as more of a short term thing. The other is, you know, the news of companies leaving in three in particular, I’ll point out, Ilan musk moved to Texas, Oracle said they’re going to move their headquarters to Texas, and HP is going to move their headquarters to Texas. So talk about those three in particular, I mean, Ilan, moving to Texas, that’s a billionaires leaving California, so they don’t have to pay taxes, that’s nothing new that is COVID. Related, that’s just kind of business as usual. Oracle, yeah, that’s not a great thing to have Oracle say they’re gonna move, they haven’t moved a significant amount of their office space, but they have moved some. And then HP man, HP, they really hit their peak, you know, a long time ago, they even split into two companies last year. And what we’re seeing here in San Jose is yes, half of one of their two companies is moving to Texas, and the other one is increasing their office space in San Jose. So from our perspective, we’re seeing an increase in workers because of that, that move, at least locally, to put into a frame of reference, because a lot of the news articles you see about companies leaving, it’s sensational, right, they want to get people to read their news, right? That’s the way it always is, if you put it into perspective, just the companies that went public in the second half of 2020, in Silicon Valley, you know, in the middle of the pandemic, just those companies have a larger market cap than HP and Oracle combined. So Silicon Valley is still generating these new companies just like wildfire, like they’ll have and having a couple of older companies, you know, go to Texas, that’s not going to make any real significant impact.

J Darrin Gross 28:51

Right? I figured as much but again, they the headline news that, you know, grabs your attention is then the names, you know, the brands, you know, and, and, you know, the names are leaving kind of thing, but I think the the thing that I think is really hard to duplicate or, you know, change is just that the history and the you know, you also have the, the you know, Stanford’s nearby, and a lot of the, you know, just kind of like the brain trust of all of these tech companies are there and whether that cross pollination or whatever I mean, that’s, that’s where, you know, those people want to be and that’s how the ideas get started and stuff. And I would just think that would be an attraction for anybody looking for talent or wanting to, you know, go where the people are.

Erik Hayden 29:43

To give you another kind of frame of reference. cbrt recently released a study showing that the Silicon Valley office marker they called it the San Jose Metro region, is poised to be the hottest office market in AmErika. Post COVID. And what we’ve seen here in the last six months, is we’ve seen a significant number of office building sales. So a lot of these big reads are big equity investors, they’re all coming to Silicon Valley, and they’re gobbling up office space that, you know, either record or near record pricing in the middle of a pandemic, when everybody’s saying, well, isn’t work from home gonna really impact, you know, the demand for office? The answer is here in Silicon Valley, that doesn’t seem to be the case based upon the buying patterns of these huge groups and really cvars forecasts?

J Darrin Gross 30:37

No, no, it makes sense. And I think that, you know, COVID certainly demonstrated that, you know, there are businesses that can operate, you know, effectively or efficiently, remotely. But I think that in a creative environment, I’m just kind of hearing from others that a lot of that creativity happens when you’re, you know, together, as opposed to, you know, he’s isolated in a spare bedroom or something like that, you know,

Erik Hayden 31:05

the way that it really is shaking out is that people have learned that they can work from home. And if 4% of people work from home before the pandemic, it’ll probably be a higher percentage, after the pandemic, there will be some offset, as far as like, the amount of office space required to socially distance are some of the new ways that people are thinking that you need to interact in an office. And will those completely offset? I’m not sure, but really, that’s a short term thing. And it is here in Silicon Valley, it is the long term view of how this economy is going to do that’s going to drive office. And I mean, that’s really what’s always driven the office demand here.

J Darrin Gross 31:49

Well, it sounds like based on your talk, and in the care what the reporting, the market seems to be healthy. And and, you know, as long as the COVID gets under control, which it seems like it’s the numbers are trending that way, and everybody’s getting vaccinated and move on, hopefully, the light at the end of the tunnel here. So

Erik Hayden 32:11

That’s, that’s really what we’re seeing.

J Darrin Gross 32:14

Yeah, gotcha. Erik, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically look at the first we we look to see if we can avoid the risk. If we can’t do that, then we look to see if we can minimize the risk. And when neither of those are an option, we look to transfer the risk. And that’s what an insurance policy is. I like to ask my guests, if they can look at their own situation, whether it be your clients, the market investors, the future projects, whatever, whatever, however you want to frame it. But if you can take a look at that and determine what you think, is the biggest risk. And for clarification, I just wanna make sure you understand, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Erik Hayden, what is the BIGGEST RISK?

Erik Hayden 33:24

Sure, and this is a great question, because this is what every investor should ask whenever they invest into a property or a fund is what is the risk versus return because that’s what matters when you’re looking to make your investments. When you look at ground up real estate development, which is really what urban catalyst is, you really have to compare it to a group that goes out and buys existing stabilized real estate assets. Because you have a much better idea of what you’re getting into, if you’re buying an asset that has a tenant, it has a cash flow, it’s already in existence, and if it’s a piece of dirt that I’m going to build a building on, and there’s a whole future. So really in, in ground up development, there are four major risks. The first is pre construction risk, and that is, am I going to be able to get building permits and approvals from the city to build the buildings I say, I’m going to build. And here in downtown San Jose, that risk is significantly mitigated, really, because the local government wants to see development happen. And they’re very clear with developers early on in the process as in way before we enter into the contract to buy the land, say, here’s what you can do, here’s what you can’t do. And they’ve been really true to their word on that. So as far as other jurisdictions here in the Bay Area in California, it’s not quite as easy in a process so that risk is much higher in other jurisdictions here in downtown San Jose, that risk is significantly mitigated. The next risk that we look at is called land development risk. That’s there are things associated with the land that you just can’t see. I mean, there’s environmental contamination. There’s liquefaction geotechnical risks, there can be underground structures that you don’t know about. There can be landslides, there can be water tables, all sorts of stuff. And of course, we do a lot of studies before we acquire any property to make sure that we know everything that we can possibly know. But I’ll tell you, one of the reasons why I like doing development in downtown San Jose is because it’s flat, I know it’s flat, I know that there’s a high water table, so I don’t build any underground parking garages. And I do all those studies to make sure I know how to mitigate, you know, build my structural systems for a geotechnical standpoint and my foundations, and how I’m going to clean up any environmental contamination that’s associated with the property, I need to be able to put, when I say put a number in a box, right, you got to understand how much your risk costs. The next type of risk associated chronic development is construction risk. And this can be a bad one. But in order to mitigate that, we do a couple of things. The first is, and this is a bank requirement, every ground development project we do, we need to have a guaranteed maximum price contract with our general contractor. So we use third party general contractors. And really the way that those work is they say, here’s the price we’re gonna build this building for. And if we go over that price, it’s on us not on you. Now, a couple caveats to that. The first is it has to be a large enough general contractor that they can handle those cost overruns, if they happen, so you can’t have them just go out of business on yet. The second is, their bidding a set of plans, those plans better be clear up your architect, let’s hope they didn’t forget to put doorknobs on the third floor. Because if they did, that cost is on you as the developer. So we have a team of 12 development and construction professionals here at Urban catalysts, where we have a ton of experience diving through those construction plans to make sure that they’re accurate and complete, so that we get the best price on our guaranteed maximum price contract. We also, of course, carry contingencies associated with the project so that there are cost overruns, we have money to pay that. And then the last thing is a risk that everybody’s going to take, which is market risk. The difference between a grounded development and a project that’s existing is we’re anticipating what is market risk several years from now, because our buildings take a while to build. So that looking into the future market is that additional risk, we mitigate that risk by doing business here in Silicon Valley, one of the best real estate markets historically in the country, one of the last places to go into a recession, one of the first places to recover. Those are the four types.

J Darrin Gross 37:39

No, that’s that’s awesome. Very, very well stated. They’re curious, you mentioned the speed at which San Jose is willing to work with you on the permitting and stuff. I know the ground up construction usually, you know, takes quite a bit longer than just going to buy an existing building. Do you have any kind of a timeline from acquisition to completion, you have a kind of a window that you expect me as a year, two years, three years.

Erik Hayden 38:10

So it depends on the scale of the buildings, and I’ll give you kind of a rain, it typically takes us from the day that we acquire the building to the day we start construction is between 12 and 18 months. And then depending on the scale, you know, some of our high rises are going to take two years two and a half years to build. Our smaller projects take 12 months to build, we have a renovation, it’s going to take nine months. So it’s it’s a range of time. And then of course lease up is different for all of our different product types to when you’re looking at for a market risk perspective, because it takes about three years to get an extended stay business hotel to generate, you know, its long term revenue. It’s just people need to understand there’s a hotel there, they start to do business travel, they stay there, they like it, they come back. So it just takes a little while. Same thing with the senior living facilities. In general, it takes about three years for us to lease up our senior living facility to 100% occupancy, it takes us you know, maybe a couple years or a year to two years to do our multifamily where our office we anticipate having a tenant that is going to be able to start paying rent the day that we can have a certificate of occupancy. So it varies from product type to product type.

J Darrin Gross 39:23

I appreciate you going through that. I know it’s it’s always kind of a wake up call when you see you know something than just the the time that you you know, before any ground work has been done. I mean, trying to get your permits, and then architectural plans and, and all that stuff. A lot of times people forget about that. So I appreciate you sharing that. Erik, where can listeners go if they’d like to learn more or connect with you?

Erik Hayden 39:52

Sure. So to learn more about Urban Catalyst, visit Urbancatalyst.com.

J Darrin Gross 39:57

Got it. Erik, I can’t say thanks enough for taking the time to talk. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Erik Hayden 40:07

Absolutely, Darrin, thank you again for having me.

J Darrin Gross 40:10

All right. For our listeners. If you like this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 40:28

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Commercial Real Estate Operator Risk with Mike Zlotnik – CRE PN # 302

Mike Zlotnik 0:00

I grew up being a mathematician. So we’ve looked at risk too. And I’ve learned there’s two elements to risk. Number one, it’s likelihood. Number two is impact. So what what, what I do is I look at risks and try to figure that figure that out. So likelihood and impact are the two key variables that drive all the decisions. And I would say the number one risk on a grand scale of things, and for the entire real estate market, and I think about it, it’s not necessarily my biggest fear because I feel that the the impact is huge and likelihood is low, very low. But the interest rates going up a lot.

Announcer 0:43

J Darrin Gross 1:02

Welcome to commercial real estate pro networks CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is Mike Zlotnik. Mike is known in real estate circles is Big Mike, due to his stature. But more importantly, He is known for his personal integrity, and for having a keen understanding of the financial aspects of successful real estate investing. Mike is the CEO of TF Management Group, LLC, and is a real estate fund manager. And in just a minute, we’re going to speak with Mike about the best commercial real estate investing opportunities coming out of COVID-19.

But first, a quick reminder, if you like our show, care, pn radio, there are a couple things you can do. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you want to see how handsome our guests are, be sure to check out our YouTube channel. And you can find us on youtube at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Mike, welcome to CRE PN Radio.

Mike Zlotnik 2:35

And thank you very much appreciate the opportunity to join your podcast radio show. And delighted It’s a small world we chatted about this a little bit. You’re in Portland, where New York and close with some friends with folks that live in your neck of the woods. So yeah,

J Darrin Gross 2:54

and I you know, my neighbors. That’s awesome.

Mike Zlotnik 2:57

It’s kind of a small world. That’s so thank you for having me.

J Darrin Gross 3:00

Now. Glad to have you. Here. Before we get going, Mike, if you could take just a second and share with the listeners a little bit about your background.

Mike Zlotnik 3:09

Sure. So I grew up in the former Soviet Union. And but people asked me, where are you from? I call I say From Russia with love, like James Bond. Originally, actually from Moldova, not Russia, but I my native tongue is Russian immigrated from the former Soviet Union to the United States in 1989. As a political refugee, so I’m a US citizen at the end, the US patriot. And so that’s kind of the origins. I live in Brooklyn, New York, married to my lovely wife for 21 years, I have four kids, and a cat, the fifth child, those of you who have a path can appreciate what I’m talking about. And previously, I had a career almost 15 years as a software executive mathematician by education and spent years in that industry. But in 2000 I discovered real estate, made my first purchase and continued acquiring assets from there and discovered that’s the best asset class and never looked back 2009 I quit my last it job I went real estate full time starting managing my own investments as well as investor capital. And been it’s been a journey since then. And today we invest broad range of commercial and residential assets from performing to distress that from multifamily Self Storage conversion of hotels to affordable multifamily housing, industrial even cannabis farms, how about that? part farms we have debt on land. Well, not conversion, but permitting for cultivation. So it’s a strategy and pretty flexible, dynamic looking for greatest copywriters and greatest opportunities. And that’s what’s what we do.

J Darrin Gross 5:08

Awesome. Well, I I’m impressed with the kind of the width of your, your different asset classes, I think so many times I find people that are kind of, you know, they’re married to one, and we’ll write it up and write it down as opposed to recognize the opportunities that are in other asset classes. Can you speak a little bit of that how you how you are comfortable with with all the different asset classes?

Sure. So using the Wall Street term, we are allocators, the way to think about what we do is where allocators of capital into the best opportunities different during different market cycles. And so I think of myself as a diversification manager, and the capital allocator. That’s primary strategy kind of what we do, as far as building expertise in various verticals such as self storage, multifamily, industrial, as we make investments, we’ve been learning over the years, what works, what doesn’t, obviously, commercial underwriting has a lot of stuff in common. Obviously, cap rates, interest rates, sensitivity to over noi to, to the top line to the bottom line expenses, all this stuff is sort of similar in nature. But knowing a specific industry is important. And we’ve focused on picking the right sponsors. So the The game has been having a vertically integrated sponsor, so someone who does distress that in New York City, and that’s all they do. So we’ll allocate capital to that to the extent of the diversification strategy, as well as, as the deal flow gets better or worse with the market cycles. Similarly, as I mentioned, the cannabis farms, the only reason we invest with that in our industry, because we know a very competent operator, who figured it out, build the connections in Lake County, California, and they’re able to get their permits done faster than the rest of players. So that’s the way to think about this. pick the right operators, specialists, if the if there were few people that you can know, like and trust, you can execute the strategy with them. And then we have this to learn as we go, we adjust to observe. So that’s been kind of the approach. The way to think about this, everyone loves Warren Buffett, well, I don’t know if loves them, but he knows who he is. So Warren, if you read what, what, what he does, he’s only only about three things really, obviously, companies he wants to buy or what investments he wants to make, right? The dollars, he wants to put in those investments, and then the people to run them. We use the same basic methodology in the reverse order. We start with people, then we decide what dollars we can write into strategy within our diversification. And then obviously, the project so it’s projects, and then and then dollars. So as we know, we have a $2 million bucket in distressed debt. And we look for projects. And if the water projects come along, can we get it to the right economics? At the right, waterfall? There are plenty of great operators with soso deals, it has to be a great operator. great deal. And then the right, obviously, dollar amount. So I don’t think that helps, but at least that’s how I think about the whole exercise.

No, I think it definitely, you know, it clarifies it, as opposed to you know, those that are focused strictly on an asset class, you You said you start with the operator. I mean, knowing knowing that the operator but also understanding the the opportunity. And then getting into the if I understood right, getting into the the details on the project. So you have to have a good operator and a good a good project for for something, you know, for, you know, something that you would be interested in investing in if that’s kind of what I understood, right?

Yeah, exactly. So if we start with the relationship I’ll give you, I’ll give you an example. We’re working on the new opportunity, kind of while new, I mean, it’s been around that the concept is all but I go to number of masterminds, one of the masterminds I go to call the collective genius. It’s kind of very interesting, very cute name, but it’s movers and shakers in real estate. Some guys are residential. Some guys are commercial. Make long story short, I met a couple of new guys there. And their whole strategy is they buy land for cash, and then they sell it with seller financing to people who pay them on a credit card. So they’ll buy a lot for three, four or $5,000, they’ll sell it for 18 to 20,000 bucks on a payment plan 250 bucks a month for 72 months. It’s a massive receivables business. But they’re real businesses is a technology, business and marketing. But it has real estate as the product. So when I looked at this stuff, what’s really interesting is this was new. And we’ve never done anything like this. First thing we did, and you and I both know very best. So I send those guys the very best to get very verified because I have great relationship with with with very Western lens. And once they got very best verified, I knew these guys are clean, and they’re good guys, then we underwrote them, we gave them a hard money loan effectively secured by that portfolio off of all these massive receivables. So yes, the different strategies knew, but I thought it was a great deal, because they could afford to pay us better than market rates while the market is over subjective, but it’s a niche product. So the way to think about this, it’s a niche loan. And we found and we working with them, we’re working with expansion, their strategy continues to grow, we’ll continue to invest more capital with them. But this is an example of kind of discovering a sort of new to our strategy, whether the good operator, so we started with due diligence on these guys, to we gave him a small loan and they’re performing. And as they continue to grow, we’re looking to do more business with them. So the strategy is fairly straightforward. Is this a commercial real estate, in my view, it is it’s almost it’s a, this is an example of real estate mixed with a business, right, you have self storage, you have senior living, you have sell my operating businesses real estate component, but it’s all separation. And it’s critical to pick the right people who know what they’re doing. Right, I mean, we can talk about senior living, you could buy a bunch of senior living facilities, if you have a terrible operator the business falls apart, same is true with self storage, this gets a critical operating business. So

So let me ask you, I mean, knowing that the operator is the key to all of this, what are some key, you know, indicators that you look for? When when assessing a an operator.

Mike Zlotnik 12:09

So we always start with obviously, the basic background checking, I mentioned will relying now on very restaurant is for us, right? So as long as there the history is clean, or they can explain what has happened in a succinct manner, at least it’s a start to look for is well organized. documentation. They can’t can’t understate this. If they give you great documents, underlying spreadsheets, with KPIs and they know their business, you know it immediately. So in that business, one of the critical KPIs new lots acquired versus new lights sold on this financing, that tracking that they don’t have getting stuck with inventory. So getting well organized. The KPIs and data is very valuable. You get a sense whether they know their business, and how well, right. And obviously understanding how they make money, pretty obvious. Running the math. So what I do want to see is a business model that has pretty strong foundation. So risk levels. So the other thing is we’re looking at I mean, you we talk pre qual you’re, you’re the master of the risk assessment, the risk is probably one of the most fundamental things, what can go wrong with the strategy. So I looked at this, and lamp is not going to have a problem or it’s not going to depreciate, you’re not going to have buildings, it’s going to crumble, the strategy doesn’t have a lot of downside, other than these guys turning bad, and somehow disappearing with a bunch of cash, which is a risk, right? But if you can eliminate that risk, through the background check and understanding who they are and having some controls. But then have a day if the operator is high integrity, and that risk goes away. And the asset class itself works. And they don’t run into a problem with too much inventory. The business feels very solid from the investment perspective. So I would say fine, fund the fundamentals of the business, that’s the way to think about it.

J Darrin Gross 14:11

Is there any kind of a timeline of experience the look for him? I mean, all these things that you’ve mentioned, suggests that they’ve been in, you know that they’re a proven entity, is there any kind of a minimum years of experience that you would look for?

Mike Zlotnik 14:25

So that’s, that question is a part of this week. I’m not looking for somebody who’s 20 years of experience in this if they have 20 years of experience in this, they shouldn’t need my money. Right? But they just shouldn’t they should have built a great business and were bankable financeable. So these guys have a couple of years of experience to me. They have two strong years and these guys are young. So I see the path if they’re on the right trajectory. We’re catching them before they’ve gotten too big, too strong and they’re fully bankable with traditional money with a with a bank with a bank capital. So Couple of years, I would say, have general experiences sufficient. Obviously, they’ve not seen market market cycles. So what is important is more monitoring. But they’ve agreed to this. And they’re providing more reports. And they’re demonstrating what, what’s happening as long as that’s in pretty good shape. I don’t necessarily need 20 years of past experience and a resume that that has, you know, worth called in the paper. But can they still operate as he is, you know, you could have been great 10 years ago, and now things are falling apart. So let’s just call him like, you look at trailing 12. When you’re acquiring anything, that’s the key. What is the trailing? 12? The trailing 12 looks good. That’s an indication.

J Darrin Gross 15:46

Gotcha. Well, I appreciate you kind of diving into that a little bit. I think that, you know, the operator is clearly kind of the integral piece or I mean, the the kind of the tell of whether or not at least what I’ve seen, and an insurance if the, if the operator has their act together, things usually run pretty smoothly. If they’re always trying to shade things in a particular way, or make things fit in a particular way and ignoring, you know, the facts, it makes for a difficult go. And, I mean, I’m sure that’s, that kind of plays out in your business as well. Let me ask you so so, you know, in your experience with the different types of investments that you are placing in the capital that you’re placing. Right now, we’re in the middle of the covid 19 pandemic, if you were to compare your experience and what you guys were doing, pre COVID, as opposed to what you’re looking at, going forward? Can you kind of make a comparison for us based on you know, asset classes and strategies and where the opportunities are?

Mike Zlotnik 17:05

are so? Yeah, it’s a great question. I would say that the time horizon is changed when everything is running well, and we were a little bit more aggressive. In as COVID hit, it’s a wake up call. And what does it mean? It means we’re looking for strategies where we can get to the value of phase over a shorter amount of time and getting to civilization faster. Now, it’s not the only strategy will obviously invest in deals that have great fundamentals, but they take longer to execute. But in general, I would like to see faster path to cash flow, because one of the variables or uncertainties of COVID is the cash flow. If tenants are not paying, what’s the what’s a big risk? And the other adjustment is what is the risk to the cash flow related to COVID. dynamics, so specifically cannot evict cannot foreclose? Right. So we’re making loans we’re trying to be extra careful now. We’re going to have difficult time with foreclosure if is a default, obviously, picking the right operators. We can’t understate that that is the most fundamental thing. If you pick good people, you don’t have to worry about the foreclosure risk and so on. It starts with high integrity. Obviously, if you pick shysters doesn’t matter what I mean, they’re gonna figure out a way to cause grief. So I would say COVID risks obviously come into play. How is this asset specifically impacted? So multifamily investing today? Has that risk? For sure. But what asset class? They you know, is it the Class A Class B, Class C? section, section eight, one investment were made in the middle of COVID. We’re very comfortable with it. We invested with another member of the collective genius mastermind, who is I call him the biggest shark in Mobile, Alabama. So forgive me, I’m out of New York. I don’t know. I didn’t know where my bill Obama was on the map. So my ignorance, but obviously, I know now, and he was, was buying a portfolio of 93 single family residential properties. Right. So I looked at it as a commercial project. It’s basically a package and they all within 15 minutes drive from his office, and he owns hundreds and hundreds more. So you can manage the portfolio. And 90% of the portfolio was section eight, right? And so the the safety of the income stream was related to the the government payments, that’s why we invested in it’s cash flowing like a monster today. Because he bought a less than 50,000 a door and they’re, they’re renting 150 and 100 bucks a month. So from that perspective, you can get pretty good yield in a portfolio instead of multifamily go find multifamily. Yes, it’s harder, but this exercise was a precision of doing it with the right app. Raider, and in the market that case cash flowing substantially. And then obviously doing the due diligence on the project and the deal. So here’s an example of a justice strategy in the middle of COVID. The other strategy, we did make another investment in a substantial value of multifamily in Indianapolis, almost 1000 doors with a very, very competent sponsor. And we were nervous about where things gonna go. But the sponsor experience and the track record and ability to execute strategy in the rents below the market kind of helped us to clear that bridge. So if you have a very competent operator, they have a good track record of executing a similar strategy and you picking the right asset in the right location, then you can you can go with that. And the deal obviously had great economics and the right type of a waterfall and right depreciation benefits. So was it that unique thing about that deal? On top of all this, it was a value a strategy that had cash flow from day one. So if he asked me what has changed in the past, I wouldn’t care about the cash flow. Now I do, I would like to have the safety margin of some cash flow from day one as a buffer against problems. So that’s a COVID. Investing. So

J Darrin Gross 21:24

now that that makes a lot of sense. You know, and I’m just kind of curious, you know, you’ve emphasize the the quality of the the operator their experience. Is there. It sounds like you maybe answered the question with just saying the cash flow is more important now than it was historically. I know, like, I’ve heard multiple times from from investors, how the lenders are acquiring additional capital and reserves kind of thing. Is that, is that factoring in anything that you’re doing? Or when you’re underwriting deals? Are you? Are you looking for more cash, in reserve to weather any kind of storm that might still be on the horizon? or lack of income? or?

Mike Zlotnik 22:13

Yeah, for sure. So I’ve developed educational methodology called the four quadrants, a lot of people have four questions, or Robert Kiyosaki has four quadrants, I have my own four quadrants. So what I like to focus on what I call in quadrant one, and two of these are sort of investment grade quadrants, and I’m not selling this methodology. It’s simply the way to think about this is buffer reserves, though, if you if it’s an equity investment, is there substantial debt service coverage ratio, and then obviously, reserves. So the quadrant one deals are the deals that have a cash flow, have substantial reserves, healthy dscr. And a little over capitalized project, with, with extra cash always helps. Now, the bank’s requirements sometimes help, right? If the bank says, Hey, you need six months of interest reserves, and I’m keeping it well, that’s great that that, in fact, requires over capitalization because that cash has to be in the reserve account. So I don’t mind that at all. In fact, I like it. Lower leverage is one thing that I’ve looked at recently, most people want to get the higher leverage more than happy. So this trend, the aggressive operators will go to a bridge lender, and they’ll get at 85% leverage, while the conservative lender will say 70. But the effective benefit of a lower leverage is you can actually get a lower rate. So there’s two way savings. Looking at the max leverage, you know, it’s a two way sword. If things don’t go well, you can get wiped out faster. So I would say, yeah, looking for lower leverage, maybe a little bit lower target ROI, as long as the safety of the of the income is, you know, feels feels better just feels what I call the quadrant one and two deals, the speculation element is lower and it safety which can cash reserves, lower dscr simpler strategy to execute. is what I look at what I look at,

J Darrin Gross 24:18

have your time horizons changed at all as far as pre COVID. Now, I mean, I think you did hint at it. You’re looking for quicker cash, cash flow, are you even kind of said cash flow? I mean, day one is kind of what you’re looking at. Are you looking for deals to go full cycle faster? Or what is your is your expectation for a deal cycle? changed at all?

Mike Zlotnik 24:45

Yes, another great question. I would say that the path to civilization, you know, he can monster two years if you can execute that full strategy. Now if you’re innovating a lot of units, can you do it during that timeline. We haven’t talked yet. But I do like the hotel conversions to affordable multifamily. This whole strategy is pretty pretty healthy, generally extended stay hotels that are easy to convert that look like apartments, most of them can get to the stabilization point within 18 months. Now, can you enter into a similar asset class on an existing multifamily, it’s harder, because you have an asset class that’s distressed, now you can you can pick it up at a better price. And it’s an easier conversion path. So I would say that, because you gave a get through, you have an empty, empty future apartment complex. So you can execute the strategy versus you have a full apartment complex, we have to gradually do it. And I don’t mind the gradual strategy, which has better cash flow from day one. But sometimes you can go into more value add more speculative, as long as there’s a very competent operator, fairly straightforward conversion process, right. And obviously, sufficient reserves to be able to pay for the budget overruns, budget has to be conservative, too. If those elements are good, you can run into sort of value strategy faster, basically, you entering the strategy, without fear of something getting stuck, the the risks, what can go wrong. So even this project, the risks of things going wrong are lower than infest a path to a civilization. I like those projects more today. So that’s, that’s the kind of the way the view of the world what else can be done to reduce risks?

J Darrin Gross 26:38

I like that the conversion strategy, are you seeing a lot of that? And if so, are there any particular market characteristics where you see that playing out?

Mike Zlotnik 26:51

Yeah, it’s a it’s a non major MSA. Right, you could do it in New York, but I don’t know I would want to do it in New York is a massive oversupply of condos in Manhattan, why would I want to take a hotel in Manhattan and try to convert to more apartments not a good market, but if it’s a project somewhere in Midwest southeast, secondary MSA, smaller market and the key location of that property if it’s fits right into residential neighborhoods, and it’s a good location, but I do like a proximity to universities see if you have universities you could have potential for off campus student housing. So instead of paying paying on campus price, they could pay off campus have the privacy have a better living conditions and a pretty easy commute so that these are the kind of the characteristics it’s the location within the city in the town. And then obviously easy conversion you don’t have to do extended stay you could do a tour of a traditional one, but extended stays ideal kind of candidates.

J Darrin Gross 28:00

Right Well I know I’ve talked to other guys that have done that you know, he wasn’t exactly their first idea but it just it made sense. But I would think with the extended stay you’ve already got some sort of an assemblance of a kitchen in a lot of those were some of the smaller traditional motel kind of a thing you may you may not have you know a kitchen as much as you just have kind of a bathroom and some of the the you know the the capital expense required to add the kitchen I mean I guess if you buy if you buy it right and like you said if you get an if you starting with an empty property there’s not going to be any resistance to to moving through it versus a full property kind of thing but it I can see it both ways I guess

Mike Zlotnik 28:49

Exactly what you said. If an extended stay hotel has a kitchenette installed that’s a massive help right i mean saves quite a bit of money it may look a little bit you know if the hotel is not new it may look a little little age all its its antique it’s lovely to see

J Darrin Gross 29:03

the kids behind the walls I mean I guess you your guts bombing everything. Yeah, you can. You can hook up new fixtures and make it look all pretty but just the behind the walls kind of thing gets kind of expensive.

Mike Zlotnik 29:14

Yeah, that’s an ideal setup. The the secondary opportunity becomes like you mentioned hotel, it looks like a motel. These these are sort of studios. And what’s really interesting years ago when I was when I was in college, I lived off campus. This is many, many years ago, in a in a motel right next to the university, and essentially, they weren’t missing. They were missing kitchen kitchenette, but students still live there because it was better for privacy. So if you can install small kitchenette, and you can cook it works, it absolutely works. It comes down to the price folks who rent in these these type of assets are very price sensitive. The price makes a big difference. So the product has to be extremely common. petitive

J Darrin Gross 30:02

gotcha. You mentioned some of the asset classes you had touched on storage, or self storage. Are there other asset classes that you see are are potential opportunities coming out of COVID.

Mike Zlotnik 30:19

Office conversion to multifamily. Pretty obvious that some office buildings are dysfunctional as well, at least they’re not, you know, they’ve lost at least some number of tenants. And it’s a good conversion consideration if it’s got the right location. So I would say, that’s all local mean, if you find the right asset, if the conversion path is cost effective, I think there is an opportunity there also is a lot of retail space that needs another home, for sure. So the classic big box retail conversions to self storage, that strategy has been around for a number of years, it may still make sense in some markets. The cities don’t want it anymore. But it is a creative repositioning of, or retail into some housing, which is said it’s hard to play. It’s not designed for that, but it’s a possibility people can potentially find, you know, economically feasible projects. And then the rest is really our world is very opportunistic with people we know, it’s like it’s not a necessarily a massive opportunity in a given sector. It’s more that I like the the cannabis play, with the land conversion to land permitting for cultivation, if you’re in the right market, the whole country seems to recognize that and it’s no longer taboo, it’s very friendly topic. Like that strategy. I mentioned to you some of the newer things we’ve been doing with land kind of interesting play if you if you can buy the right at the right price. The reason I say that, because it’s it’s really marketing and technology business, getting to the sellers, and getting them to sell you the land is a skill. And if it’s the right operators, you may be able to make money in that field. That strategy has been around so people have done this for years, and it comes around in cycles again. And if you buy it right, almost hard to go wrong. infill, obviously. So getting back to the land there. This continues to be interesting strategies in cities, if you find the right type of location, and you can redevelop or develop ground up for affordable. I have a I have a friend who he’s a pastor. He’s a pastor in Los Angeles. And he his strategy is pretty interesting. He goes around the city and finds other churches that have land that they’re not using. And he basically offers them to develop the land into affordable multifamily housing. And he figures out the economics. And generally the churches, kind of like they do now is this post pandemic pre pandemic. He had the strategy before before COVID. But now it’s even more relevant again, housing seems to be the need for affordable housing is accelerating. So that’s kind of what what I see today.

J Darrin Gross 33:27

And that’s that’s, I know, here in Berlin, we’ve certainly got our share of housing issues. Let me ask is there a particular size of range? Or can you identify what what’s a range of opportunity for you as far as dollar size?

Mike Zlotnik 33:48

Sure. So we are relatively small, I mean, institutional players who write bigger checks. But today for us, the sweet spot that we write today is between half a million to a million dollar project. There’s no right or wrong, we can write a bigger check. We’ve done projects we’ve written bigger checks. that give you example, the project we we did that in Indianapolis that the big 90, almost 1000 doors, were over a $3 million check. And we sold off the rest through a sub syndication we had we spun out a separate deal. The deal was just so good. We couldn’t pass it. So we wrote it a bigger check. And it helped negotiate the terms, obviously. So we’re open to the idea to write a big check, from a diversification perspective would probably want to have less exposure than then I’m out. So today, as I mentioned, half a million to a million. We’re writing some bigger checks. But what’s the sweet spot today? No, we were pretty pretty happy to take a piece. We this hotel conversions, very few are leveraged. And you’re all in 6 million bucks, your four and a half million debt debt one and a half million dollar equity. We happiness. It’s almost perfect match for us. We’ll take a good chunk of it, if not all of it. So that’s kind of the way to think about small hotels, just kind of that whole space whether your equity raise anywhere between, you know, from, let’s say half a million to 5 million, this is where we are we happy to participate

J Darrin Gross 35:18

in Do you, do you like coming in on the equity side? Or do you like doing the lending or both? Are you? You agreeable?

Mike Zlotnik 35:28

Yeah. So, we actually we execute the strategy as we have a few funds. So the the tempo Growth Fund is a growth fund, it basically takes growth positions generally. So it’s equity. Typically, temp Opportunity Fund is more of an income and Growth Fund. So we like as much as we can to take that position. We’ll take that with an equity kicker if possible, or, you know, primary debt or mass debt. But we need that because the fund has more of an income focus for tempo Growth Fund, it doesn’t care. As long as the risk adjusted return is healthy. It’s fairly flexible either way. So there is no right or wrong. It really depends on the project. The again, the cannabis farms, the pot farms, that’s what I call them the the land conversion, the owner is not willing to give enough equity on the project. So he’s perfectly happy. We’ll record firstly mortgage and have hard money terms on that, then we have an equity kicker. It worked for the sponsor, it’s really negotiation, right? That depends on what you can work out to the right sponsor, and what are your kind of risk adjusted return dynamics

J Darrin Gross 36:31

Got it. Hey, Mike, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker, and work with my clients to assess risk and determine what to do with risk. And there’s three strategies we typically consider, we look to see if first we can avoid the risk. If we’re not able to avoid it, then we look to see if there’s a way to minimize the risk. And if we can’t avoid nor minimize the risk, then we look to transfer the risk. And that’s what an insurance policy is. I like to ask my guests if they can look at their own situation, your your business, your clients, investors, the market, however you want to identify. But if you can take a look in and at your situation, and identify what you consider to be the biggest risk. And for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Mike Zlotnick, what is the BIGGEST RISK?

Mike Zlotnik 37:40

So great there. And thanks for that. Three, three ways to manage to kind of risk avoided. mitigate it and obviously transferred. I when I grew up being a mathematician, so we’ve looked at risk too. And I’ve learned there’s two elements to risk. Number one, it’s likelihood. Number two is impact. So what what I do is I look at risks and try to figure that figure that out. So likelihood, and impact are the two key variables that drive all the decisions. And I would say the number one risk on a grand scale of things, and for the entire real estate market. And I think about it, it’s not necessarily my biggest fear, because I feel that the the impact is huge, and likelihood is low, very low. But the interest rates going up a lot. So take a look at what has happened to the 30 year bond, where we are recording this February 10. I don’t know when it’s gonna come out, maybe it’s live. But I looked at the data since the beginning of the year, and the 10 year Treasury and in a 30 year Treasury moved quite a bit. The yields have gone on on a 10. year from from point 94, up to 118. If I if I’m committed fluctuating obviously on on a 30 year from 1.66 to 1.9697 in that range. And these are very substantial moves. If you’re a bond investor, you lost 20, maybe even more percent of your investment in 30 days. This is how sensitive this stuff is. And the whole real estate industry is heavily dependent on low interest rates. It’s like a fuel when the rates drop, it’s a fuel for real estate fire. When the rates climb, cost of capital goes up cap rates go up now. This is directional moves. But what the United States is doing, they’re printing huge amount of debt basically borrowing and spending the money for the stimulus and everything else. So our debt to GDP ratio is getting out of control. Nothing new here, right? We’ve known about this, but it’s getting progressively worse, it’s that the risk is accelerating. So there’s only one solution, unfortunately, that we’ve seen it in the world out there to Japan model there is going to go negative. Now, as crazy as it sounds, it’s the opposite of the risk that I’m talking about. So the rates go negative probably will be pretty good for a lot of real estate investors, as the cost of capital will drop. But there’s also a possibility of effectively runaway inflation, as the government continues to spend without the brakes, unless fat comes in, that’s basically manipulation of rates, that the Fed has unlimited checkbook, and they can buy all the bonds that are issued by the Treasury and push other rates down. But at that point, what do we have, we have a central bank that buys everything, just to get the rates to the point where they can service the debt on, you know, one, the liabilities of the United States government, unfunded liabilities plus the real debt. So the problem is, this could turn into a runaway hyperinflation. And the rates will actually jump substantially. And it happens, it will be essentially devaluation, massive devaluation of the dollar. And it can happen, I’ve seen other countries do this. So your strategy of artificially keep the rates lower and lower and lower. It works until it doesn’t. And if it doesn’t, that becomes a cliff. And that cliff triggers hyper inflation. And it could cause substantial grief on the on the older all the lines, everything rolling the debt service, it’ll be massive squeeze, because of the debt to GDP ratio is so out of control, that if rates climb, we have a massive collapse of the of the of the over oversized debt portfolio, the whole the whole national debt plus all the private debt. So it’s a possibility to risk, what can you do about it? It’s hard, it’s hard to come up with a great strategy, obviously. likelihood is, is pretty low, I do think that the Fed will not let that happen. In the long run, it’s just they can’t, I mean, we’re gonna have a bigger crisis, a different type of crisis than we’re dealing with now.

You could, you could sort of play some, some derivatives to protect yourself, you can build in if you’re, if you’re if you’re an expert trader, you could hedge against that. But in the short run, I would essentially caution people who don’t think the rates can go up, they actually can, and they are showing some movement today.

J Darrin Gross 42:57

Now, I appreciate you, you know, getting into that. It’s, it is something that I think I’m I’m aware of, but like you said, not much I can do about it, but more I guess, you know, be aware of it. And and I would assume is a defensive strategy is is not being over leveraged, you know, or keeping a higher degree of, of, you know, cash in the deal kind of thing as opposed to, like you say, going all the way in on on debt.

Mike Zlotnik 43:30

Well, that’s right, it’s a sensitivity study theory to fly up fast. These assets will be selling at higher cap rates. So just doing some analysis, on sensitivity study, as a sponsor, what you can do is assume, hey, the pro forma sale price is based on a six cap, right? What happens is seven, can you can you still survive? It’s exactly lower leverage. So be more conservative in your investing decisions, and have more cash, the solution when the rates go up, and you got to refi. And the cost of debt is going up is to bring more equity. So not a very popular exercise, but it’s an option, can you deal with that type of situation? We haven’t seen this in a longest time. And honestly, you’re asking about a risk, it’s a risk likelihood, I think it’s slow given where the world has gone. And we’ve seen examples of Japan is a classic model because their debt to GDP ratio is worse than ours. And they’ve had no choice but to go there. So I think us is more likely, from a likelihood perspective, that scenario is a higher likelihood than the scenario of a hyperinflation and the rates getting out of control, you know, on the on the higher side. So both scenarios present different types of risk and different type of problem but As an investor, you have to be sort of prepared and please think about what would happen in either one.

J Darrin Gross 45:09

Well, hey, Mike, I want to say thanks for taking the time to talk today. I’ve, I’ve enjoyed our talk, learned a lot. And hope we can do it again soon.

Mike Zlotnik 45:19

Darrin, Thank you kindly. I very much appreciate have been a guest on the on the show

J Darrin Gross 45:26

Before I forget, Mike, I apologize. I meant to ask you, where can listeners go if they’d like to learn more connect with you?

Mike Zlotnik 45:33

Sure. So it’s a little cheesy, but it’s a personal brand. It’s just people, this whole Big Mike. It came as a suggestion from my mastermind guys in the collective Shinya. They said you’re a big guy here, six, four, and a heavy set. So Big Mike Fund. So Big Mike fund.com is the way to find me. And if you misspell it, and you forget to do it on the backhand, you type Big Mike fun. com, I promise. It’s not a kinky site.

J Darrin Gross 46:05

That’s hilarious. All right, well, hey Mike again, thanks for taking the time today. And for our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks, CRE PN Radio

Announcer 46:27

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