Scott Choppin 0:00
Then when income inequality becomes more and more divergent, you know, you either look to crimp the market, right via rent control, or you do what we’re doing, which is to provide a, you know, a naturally occurring workforce housing, meaning through market mechanisms. Were able to produce housing that’s affordable at non subsidized or non government, you know, sanctioned or subsidized projects like you know, artificially subsidized and so it’s a you know, sort of a capitalistic, you know, naturally occurring affordable housing.
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J Darrin Gross 0:54
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 Scott chop and Scott is the CEO and founder of the urban Pacific Group of Companies along the Long Beach, California based real estate development company, founded in 2000. They focus exclusively on workforce rental housing communities throughout California. And in just a minute, we’re going to speak with Scott about multifamily opportunities for workforce housing in California.
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Scott Choppin 2:20
Darrin, great to be here. Thanks for the invite.
J Darrin Gross 2:23
You bet I am really looking forward to our conversation today. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.
Scott Choppin 2:33
Yeah, we’re like you said we’re based in California. I’ve been a developer, real estate developer and the real estate development industry and the career my entire life. I’ve never done anything but that have a family background. And that’s part of reason why, you know, spent, you know, several years working professionally for major, you know, national ranked real estate development companies. You graduated from Cal Poly San Luis Obispo, California with a finance degree. And after I work professionally, for a few years in 2000, we started urban Pacific. So we’re actually now we’re coming up on our 21st year of operations. This coming March will be 21 years. And as you know, you know alluded to in the introduction, you know, we’re specializing in urban infill housing, and particularly workforce housing. That’s, in fact, our sole exclusive focus as of about four years ago. And, you know, part of the reason you know, we’re based in California, that’s a big need. But you know, looking forward to doing workforce housing, really for the rest of my career.
J Darrin Gross 3:45
Got it. Well, there’s a lot of things I’m really looking forward to talking about with this. And I guess one of the first things that to address it seems like most people I talk with, there’s this almost a repelling force from investing in California based on lack of return or tax structures, landlord, not friendly state, you know, tenant friendly state. And yet, it’s almost like you’re running into the center and saying, here I am. I wonder if you could start with just kind of a little bit of perspective on on what you see as far as the market and then we can dive into the particulars.
Scott Choppin 4:36
Yeah, I think you know, the way you describe it is is exactly right. Like you know, we California has the highest housing price marketplace in the United States, predominately driven by, you know, our political environment, which is very resistant for anti development and has been for really several decades really since the mid 70s. We created prop 13. And we created something called Sequa. And what that basically did is that that created a, a arbitrary and artificial bottleneck and cramp on real estate development activity. So if you’re a developer and you want to produce new housing, like what we do, or any, any real estate development, you have to go through, you know, the governmental entitlement process, you approach the City Council of the city, your private size based in and you have to get their approval. And then the Sequa basically made it a really big effort to do that. And we had to take into account all kinds of Environmental Quality sequence, California Environmental Quality Act, and that just made it very arduous and also a subject to attack, right. So neighbors or other developers wanted to derail your project, they have this legal pathway to do it, and you know, very costly and time, and then prop 13 is our limiting on property tax. So in relative terms, we have, you know, good property tax base versus say, like a market like Texas, which has, you know, no state income tax, but higher property tax. But what that ended up doing is that drove cities throughout California, to because they didn’t have these property tax revenues, they had to seek out different avenues to produce income for their cities, and the main one became sales tax. And so there’s a term called fiscalization, of land use. And that basically, is where cities were choosing retail projects, because they’re pretty sales tax. And we’re against housing, because at least in their, you know, logic, housing was a drag on budgets, not a help, like it didn’t produce revenue. So anybody who thinks about California, you know, they may not know these particulars as to why California is difficult, but of course, it has that reputation. Lots of regulation, you talked about the, you know, landlord versus tenant friendly. We, we’re fairly fortunate as a new housing builder, right now, at least under the regulations for rent control, as an example, we have an exemption through the 15th year, you know, when we start the project with 15 years that were exempt from rent control, that can’t that may change. So we’re certainly not, you know, indifferent to the legal maneuverings that are happening right now, particularly where we are in the economic cycle. calls for rent control are, you know, increasing and, you know, at a highest level that I’ve seen, really in my career, but that makes sense, in certain sense of because of income inequality, right? When, when income inequality becomes more and more divergent, you know, you either look to crimp the market, right via rent control, or you do what we’re doing, which is to provide a, you know, a naturally occurring workforce housing, meaning through market mechanisms, we’re able to produce housing that’s affordable at non subsidized or non government, you know, sanctioned or subsidized projects, like, you know, artificially subsidized and so it’s a, you know, sort of a capitalistic, you know, naturally occurring affordable housing.
J Darrin Gross 8:09
So, you’re talking about workforce housing. Help me understand, are you guys building multifamily? I’m going to multifamily. Is it gonna is it what kind of a number of units are we talking about a typical project?
Scott Choppin 8:25
Yeah, so so people like so what we do is is like, pretty new in the context of what historically what the development marketplace revolves, as, you know, new housing, so definitely multifamily, definitely a rental product, right on Brad cat categorization. But what we’re our product type is called urban townhouse or eth, we call it for short, and that’s a five bedroom, four bath, townhouse row home style unit, meaning it’s attached and units are next to each other. But you got a front door and you walk up and down three floors, and it’s got a garage, right? And so that’s differentiated from you know, leasing California from most new housing really all new housing because most of that stack flats, right, you’ve got you live in a, you know, five storey building, and every floor is a different unit, you got people living above and below you. Because of the way we’re able to facilitate the land purchases, the construction, meaning construction costs, and also the rental income stream, the way the rents produce income for the project. We’re able to make it a viable profitable model like in your first question, you said hey, people can’t make the numbers work. He didn’t say those words. But people avoid California cuz you know, you got to pay a higher price. Yes, you’ve got high rents, but a high price just increases your risk as an investor if you’re acquiring an existing product, versus if I go to you know, Columbus, Ohio, right, I can buy at a much lower per unit but of course the rents, you know, lower also. So it’s a trade off right, the risk is higher and a higher cost. market because you have to invest more dollars of your investment to produce a given income, you know, through the revenue stream of the rental income. So our model basically sort of takes account of all those different factors. And we figured out a way to thread the needle to be able to build in California, given all this government regulation, producing rents that are affordable to the families, predominantly working class families is our main demographic, we also serve roommate groups. And so the combination of all these different things basically makes this a feasible model. And, you know, in many arts, many other models aren’t even value add as a is a difficult, you know, way to produce feasible, profitable yields. And we understand that, like, We’re from California, and I’m a native, my kids are fourth generation in California, and in where we live in Long Beach. But because we came from that marketplace there and and no, it’s so well, and I’ve been a developer here for so long, you start to look at it and you go, Okay, what the what is the mainstream market doing? Like, what kind of new projects are they producing unit types, the market demographic that they serve? And we’ve always been a company and me as the, you know, main strategist, as the CEO, like, where do we go where everybody else is not? Where do we go where there’s less competition, of course, we need demand. Right. But we also want to try to serve under supply. You know, in the early days, for us as an example, you know, we were doing urban housing, in fact, that company name is based on, you know, what our original product offer is, and you know, we still do that predominantly. But we were going into downtown LA Long Beach, and that’s how Los Angeles when people thought that was crazy. And so, like the model of contrary and innovation and looking for uncommon and scarce offers and high demand locations is like, you know, very much our theme. So this u th model is just an extension of that, but it happens to serve families, which is, you know, good social impact story as well.
J Darrin Gross 12:05
So, if I heard you rate five bedroom four bath is kind of the model now, is that a is that rent into one family unit, then are you are you renting to multifamily? is renting by rumor? How do you?
Scott Choppin 12:16
Yeah, so really, originally, it started out as a is a a single family, like one family living together. And we have several ways that we describe them. But the main way to think of it is these are multi generational working class families. So multi generational, basically three or more related generations living together. But we also start starting to call them multi earner households, right. So in these multi generational families, you might have, you know, Mom and Dad, adult child, maybe younger kids of either the parents or the adult child, and then in laws or grandparents, and culturally, and you know, their family lifestyle has always been this way, right? They just didn’t have a product in California in most marketplaces that served. They them as a renter family that also wants to live multigenerational, that’s one of the unique characteristics of eth. So we don’t, we don’t rent by bedroom. But what we do now do and we have always anticipated and actually rent into roommate groups, you know, we’re still a market driven product category. So we have to, you know, remain open and, you know, generally flexible that who we rent to, of course, you know, normal, good property management, you know, tactics and practices that are, you know, part of our, you know, overall systems. But what we’re finding now in the pandemic, enough is that we have roommate groups that are like very unusual, meaning they’re usually a little older than what you would typically find in roommates. So it’s a mid to late 30s. They are often unmarried. And what’s happened is their companies have released them to work virtually right? The company said, like, Hey, you don’t have to come to the office anymore. You’re like, good to go wherever you want. And so what we’re starting to see is what I call affinity roommate groups, meaning they were roommates in college, and they loved living together. But of course, they went work, you know, move to the various cities and work professionally and had to be in the city or that city, and they’re separate. But now because they’re location agnostic, they go, Oh, well, it’s cool. Let’s like be roommates again, and then we’ll live wherever we want, that I’ll have to, you know, live in a certain place because of the job or otherwise. And so what we’re finding is we’re attracting these these, you know, pandemic, pandemic roommate groups, because we’re of our unit type, like if if you have, you know, three or four or five roommates, your choices are house, right, a rental house, or, you know, if you’re looking for something new, and that’s like more like a multifamily type lifestyle. We’re really the only product available at scale. I mean, there’s other people that do five bedrooms, but usually much smaller scale stuff where you know, as best we can tell the only developer that’s doing multiple projects, you know, throughout the Southern California region generally. And so we get these roommate grips about great a five bedroom unit and two car garage, and a laundry room and four bathrooms, like that’s a big deal having four bathrooms, as you’d imagine. And then I’ll finish with this final point. A lot of these roommate groups, what they’re doing is they’re basically there’ll be three roommates, and they’re renting the unit amongst the three, and then they use the two bedrooms that are extra as their work from home space. That’s not anything we ever could have anticipated. I mean, we’ve started this four years ago, as I mentioned before, and we knew that in a recession, a downturn or some disruption in the marketplace, that we would be a product where people move to defensively right families, particularly they go, Oh, hey, well, you know, kids are moving home, hey, we want you know, Grandma, grandma to come live with us. And then they start looking for a unit that can fit that new, like reconstituted or recombined family, which happens naturally in a recession, right? People get defensive, they share the economic shares, the style, we call it. And so we anticipated in a an acceleration in our business plan and a downturn like we always knew or anticipated that that would be the case. And it’s been, you know, now with these roommate groups also added to that, more way more accelerated than we anticipated. Good thing.
J Darrin Gross 16:29
No, I it’s fascinating. I always should say always, but most often when I speak with investors, they’re looking for, I think, two bedroom units been kind of the ideal. There’s always been, especially in larger multifamily rental projects. I’ve always kind of it’s been inferred. I don’t know that’s been stated so much. But the larger units were less desirable. It was more of kind of like a two bedroom was ideal one beds if it was the right market. I mean, there’s a there’s a right market for one bed, but but the larger units didn’t really appeal unless I guess the exception would be like if you were in like a student housing thing, kind of like what you’re saying the the affinity groups. So I’m curious, how did you what were the thoughts going into to recognizing that was a mix that was, you know, needed?
Scott Choppin 17:23
Yeah, great question. So a couple different answers. So my background and at that professional companies that I described to you, one of them was called koplin, abroad multi housing group kvms for short, and I worked there for getting my costs. And that was a subsidiary of what people now know as KB home right subsidiary of a big national building company. But that division built apartments like new construction, real estate, apartment development happened to be utilizing something called the low income housing tax credit program, and light tech, which is a true affordable, you know, government subsidized, you know, housing, you know, development style or model. And one of the things that we did at the time when I was there, which was sort of the mid 90s, through 2000, was, at that time, there was a trend towards building much bigger, affordable housing, apartment units, like we did a lot of four bedroom. You know, fam, like the affordable is either family are senior, those are the product categories, always apartments always rental. And the family projects were created time we did some units as four bedrooms or like a few projects were involved in, we’re actually all four bedrooms. And the interesting thing I always remember and it’s sort of carry with me was that the four bedroom units were like in huge demand, right, like the families that needed them. It was such an unusual product offer, that when people found out about it, they were like coming out of the woodwork. And so we were always way oversubscribed, with applications to rent those units versus the units that we had available. Now these projects had three bedrooms, two bedrooms, one bedrooms, right, rarely studios, you know, to sort of, you know, give a appropriate, you know, protective or, you know, risk mitigated, you know, mix of units. So you weren’t all in on one particular unit tight, but I always carried with me like those units like we would get them and it just was insanely oversubscribed. Right? So coming forward to about 2016. We were finishing up a series of projects that we had fit it started at the beginning of the recovery of the 2008 recession. So I think around 2011 2012 started backup development operations. And at the time, the product category that was you know, that was in vogue was what we call a podium building. Urban style products think, you know, four or five levels over a parking structure below it right cars parked below in a garage, that’s a podium. And the mix was Studio One bedrooms, right? Like all that was it. There’s maybe little bit of two bedrooms here and there, but really is probably studios and ones. Well that was reactive to the demographics that were accepted. At the time, which was millennials predominantly coming out of the, you know, living with parents getting their first job coming out of college? And of course, you know, they wanted to, you know, get the cool unit downtown this or downtown that right urban housing close to cultural naomasa micro
J Darrin Gross 20:17
housing was kind of a big trend there. Yeah,
Scott Choppin 20:20
that that was inside there. I mean, we didn’t do that that year, right. I mean, that’s that was in the mix of that. And that came later, as affordable as rents went way up. In these markets, they became so expensive that your one bedroom unit with far out, like, you know, our cost and people’s ability to pay, you know, the, you know, generate the income to pay the rent, right. And so in 2016, we finished up a series of deals. Did you know really well bought Well, in 2012 2013, developed and finished them were really like the early phase of this demographic trend in this, you know, studio and one bedroom product, right. And at the time, late 2016. A couple things happened debt and equity sort of at the same time, at least in our markets in Southern California pulled back, right, they said, oh, we’re not going to lend so much. And if we do, you know, we need a lower LTV or LTC, the lender said the equity guys said, Hey, I need better returns, you know, in parlance, it was a higher anoeta cost, right, more income generated given that, you know, dollar of cost, they said you got to find us, you know, you know, projects that produce more income relative to the cost to build it. Of course, that’s like you can’t turn around and just find deals that are like cashflow better, and the development model because everybody wants that, you know, that’s like the Holy Grail. And so really, you know, we sold so we had a like a gap in our business plan to say look like we can start to think about something different or new to be able to do here. And we didn’t know what that was going to be. But I started work on some various projects, you know, looking for land that was, you know, new opportunities that could be bought. And there was one particular piece of ground in downtown long beach where we’re based that the city was selling, right they city owned it, they were going to do a housing project there decided not to and it was for sale, and we bought it really well, like 45,000, and door, which in California at the time was really cheap. rd zone didn’t need to do any zoning. But it was interesting, because we took that project on and bought it because we bought the land. So well gave us this capability to experiment. And the experiment turned out to be on that project that we had a limit on the unit count, but not a limit on the size of the unit. Right. The zoning didn’t, you know, didn’t go into the size of the unit. He said, Hey, you can get so many units on this property. So when we figured that out, as we’re in our due diligence, like gave instructions to the architect, I go, okay, we can’t do more units, but we can do bigger units, right? And he said, Yeah, but I go well, like what could we do? And so we debated on this three or four bedroom model? What could you do that? And would that make sense? Does that be you know, I’ve never done a four bedroom market right unit my life, right? It’s totally just, you know, Anna Thema to you know, the market trend at the time. This is about four years ago. And so we basically settled on a two story townhouse style unit with four bedrooms, three baths, and a two car garage and unit laundry. And basically, you know, closed on the land, built the project out. And then at the time, early phase of the U th business plan, we’re going to sell all the projects, just you know, finish the corporate buildings, lease them up, sell it, right monetize the you know the value, add for the development process and move on to the next one. So we sold that building to a buyer who didn’t want us to build the units, they said that we want to pick our own tenants, and they were willing to pay us, you know, basically full market price. We said, Great. And we had, at the time there had been underwriting this four bedroom units at 2650. And you know, we have been monitoring the market but hadn’t seen any particular trends that 2650 for a monthly rent
for a month he ran for for better, right 20 650? Well, we sold it, and that’s that buyer turned around like the next day and put the units out on the market for 30 to 50. Oh, and we’re like I called my, my the investor in the deal is our partner slash investor. And I go, what do we miss? Like, what is that? And so they ended up running some of the ads of 3050, another of the units at 2950. But either way, way over our performance. And so this was a real eye opener where like we knew the product was differentiated. And it was special and unique and sort of a new offer in the marketplace to renters. Right, particularly what we couldn’t have anticipated, although we knew we had a solid offer was that the rents would be that high that families who want to live in that unit would have a willingness to pay those higher rents. And so this really opened our eyes we go Hmm, maybe this is maybe there’s something here so we started looking at other sites, designing more site plans, we ended up changing from a two story. four bedroom to a three story five bedroom, you know, we sort of got into the story of we got oh well. Four is good. Maybe You know, more is better, right? Five, six bedrooms. Good. So we settled on a five bedroom product because that’s what we could fit in a three story unit. Right? So we shrunk the footprint went up a story. And that allowed us to do more units on a given piece of land, we basically increased the density by going to a three story model. And so from there, that five bedroom unit that we explored and then sort of solidified became really our go to product so that we do that same unit. Basically, in every project that we do, we only do these uch three story townhouse units. Now we’re starting to add, baby, if we got a little bit of extra land, we’ll do a three storey two bedroom unit, we’re starting to do what’s called at you or accessory dwelling units, where you can take what would have been a garage and make some rentable space out of it under California while that’s allowable. So we’re juicing the density a little bit, helps us on the returns, you know, fills the projects out a little bit more from a design standpoint. And so, just to finish up the point, we did four projects in the beginning, what I call the demonstration phase, we wanted to test the model because basically, nobody had done five bedroom units like that scale, right? It was an untested, you know, as an experiment, right? So I said, let’s do, you know, series of projects that, you know, were weren’t big projects. If they fail, you know, we would, you know, we, you know, lick our wounds and keep moving. But, you know, this experiment gave us capability to learn about the product, how it rented what it costs, and what value that when we sold it or refined it. So by the time we got to the fourth project, we were solidly profitable. In fact, we basically over that portfolio, the first three projects that we sold is 22.6% IRR on a better two year investment period. And, you know, solid rental history, great demand, in fact, we the rents in that four year period have gone from about 3000 a month was our next deal to underwrite after that first one I described. And we’re now right now at about 3500 a month. And ensuring that during the pandemic continue to lease units to families, but also these working roommate situations that I described earlier.
J Darrin Gross 27:13
So let me ask you, so I get the the the unit makeup. In a particular project, how many units are you putting in any one project.
Scott Choppin 27:25
So in the beginning, it was small, like during this demonstration phase, we purposely stayed small. So at the time, the units range from two to 15 units, and particularly the first three, were all very small. We I intentionally like you know, we had never done anything that small in my life. But I also said, Look, if this thing screws up, I don’t want to, I don’t want to be owning, you know, a bad project. And so as we as we got, you know, more proof of the model, the projects got bigger, right? in real estate development, it’s always better to do bigger projects, there’s more efficiencies, you know, there’s more capability spread fixed cost across a larger project. So right now we’re ranging between basically about 15 and 85 units, is our now what we’re in the production phase. So we’ve moved out of the demonstration phase, we completed that experiment, call that successful, you know, prove the model with the returns that we generated, sold and successfully got the values that we anticipated, happy buyers, happy investors. And so now we’re carrying it on to you know, we have now are up to our eighth and ninth projects in this series, this u th business plan. And they’re, you know, continuously getting bigger. And, you know, we’re basically we don’t see any limit, at this point time to the demand in the marketplace for this product categories. Because we’re in California, we have the highest priced your real estate rental market, particularly but also for sale. And you know, incomes are stagnant for middle income families. And so you got, you know, incomes here and you got housing price there, and particularly inflation’s coming, we believe from the stimulus, housing productions not picked up, in fact, if anything, the pandemic, you know, squelch the development pipeline for a period of time. So we’ve even exacerbated our supply story. And so we’re long run, look at a 5000 unit portfolio of U th, projects that we’re going to hold long term. So all of our capital raising efforts are now for basically six to 10 year periods. Like we want to hold these long term for two reasons. You see
J Darrin Gross 29:28
if that 5000 units is what you’re getting 5000 units.
Scott Choppin 29:31
Yep. And that will be predominant California, you know, so we’re in Southern California, LA, in which counties we’ve moved to San Diego next very after that. But this is a model that we’ve like done test on writings in Portland, Seattle, and Denver in this product works in all those markets. And in fact, we’re, you know, in a story a little bit about, you know, extending even further east, you know, maybe into some of that higher density, you know, metros and places like Texas, I mean, we have to be major urban metros, this is not a suburban product, this is not a rural product, we have to be in that place where housing costs and incomes have a gap. You know, maybe in all markets have a gap in summer, you know this much, we’re this much in California. And even in California as we go out to further outlying areas like Inland Empire, Riverside at Santa Maria counties, the model doesn’t work, because basically, you know, rents drop, although the cost of build the unit or per square foot doesn’t drop to the same degree as the rents drop, right? Down read, there’s more available land land is cheaper. So you know, our high density really in the city model, and we’re not in like downtown LA or downtown Long Beach in the middle of the city center. What we are is what I call urbanized suburbs. So they’re still a suburb model. But there may be two or three or four neighborhoods outside of the central business district, in when you drive around and a suburban community, right. It’s like, you know, single storey retail and the gas station and two storey apartments and some single family homes. Like that’s the mix. In fact, vast swaths of Southern California are, you know, that way? I mean, people call sprong. You know, that’s suburbs. But it’s urbanized in the sense that it’s not the you know, masterplan community suburb that most people, you know, I think mentally envision when they think of suburbs. But yet, these are still suburbs now, in Southern California happens to be that the predominance of people that are middle income, middle class families, working class families live in these neighborhoods, because this is where they can afford housing, the little less expensive, because it’s, you know, it’s not new, or it’s an older neighborhood. But also slow enough, we’ve seen in amongst our tenant base that the commute range is 10 to 20 minutes. So these are not families that drive, you know, one and two hours and people do it. I mean, we’re Southern California, we still got, you know, traffic jams like nobody’s business, although under the pandemic, that’s, you know, been relieved a little bit. But the reality is these families, they pick the housing, coherent with their job location, where they’re, you know, where their kids go to school, where their extended family, maybe churches down the road, historically, maybe they lived in that city, and they just sort of looking for a different unit to upsize, because their families growing either through recombination, meaning kids moving home or in laws or grandparents moving in, or they just need to upgrade. And then we do import some people out of market, like the roommate groups would be predominantly that
J Darrin Gross 32:37
it’s fascinating. I was talking to somebody a little while ago, and we were talking about this was, I think it was in Texas, kind of a rural area. And there, you know, it was common for people to drive 50 to 70 miles to work one way. Yeah. And I was like, wow, I mean, it’s just a totally different mindset from Yeah,
Scott Choppin 32:57
well, they don’t have to worry about traffic. Obviously, they’re driving, you know, highway Oh, but just just a quality of life. I
J Darrin Gross 33:03
mean, you know, I mean, I don’t mind getting behind the wheel and you know, to live down the road if I’ve got something to listen to phone calls I can make while I’m driving 70 minutes every day. Yeah. Yeah. On occasion, you know, when when I make that my twice a day kind of commute. A couple of questions. I got the, the unit footprint. Can you tell? Tell me? How many square feet do these five bedroom, four bath units average? And then what kind of a ground footprint? Do you need to to build these on? Build a unit on?
Scott Choppin 33:41
Yeah, great question. So the units are five bedroom, four bath, three stories, on average, about 1700 50 square feet. You know, I’ve never done the math of each floor. But you can survive that 7050 by three and you get your number. Unit footprints about 21 to 22 feet wide by about 35 feet deep. Like that’s our standard footprint. So that’s when
J Darrin Gross 34:04
you could do these on like a standard like a 50 by 100. Lot. You could squeeze two I mean, like a duplex kind of things. If you had a couple of years, you could go quite a ways.
Scott Choppin 34:15
Yeah, in fact, are, you know, in that demonstration phase, and actually, we’re in a series of mid size projects right now sort of like, you know, pandemic, you know, nimble I call it and they’re all on these like 50 by 150 by 150 60 by 150. In fact, our internal design criteria is we’re not going to do a site any less than 50 feet, because basically 50 feet is what you need to, like comply with the setback for the zoning, and the unit and then a driveway because all of our units have a two car directs access private garage and do you have a driveway that goes into each unit on the ground floor into that garage and so this format of 50 feet ends up being the minimum So on the bottom floor, it’s a garage, two car garage. In fact, the 22 feet really is driven by the width of a garage, which is usually 20 by 20 by 20. standard for a two car garage.
J Darrin Gross 35:13
Got it? And then so what is a, like a, I guess a two bed, two bath apartment, renter and in the marketplace that you’re in?
Scott Choppin 35:27
So like I’ll get, I’ll get, I’ll answer your question range, slightly different. So So on average, you could say the market somewhere between 350 to 450, a square foot, you know, for for any unit type. And so we show up in the marketplace, and we’re at about two bucks a foot, just to give you a sense of the value proposition that we offer to the tenants. Now the whole dollar rent is bigger, right. But it’s also generally shared between this multi our household. So usually were three or four or five earners in a household, which any earner on their own probably makes, you know, 30 to 50k a year, depending on their employment situation and the industry. And so by themselves, in fact, this is the statistic you always hear in the media, they go, Oh, it takes you know, $57 an hour to for the average two bedroom unit. And I’m making those numbers up as I’m preparing. And you go, of course, and it sounds awful. It is awful, right? affordable housing is a real issue. But this economic sharing this sharing of costs and incomes over the family group is culturally a very classic. In fact, historically, you know, most of the people in the world still do live that way. And, and historically, you know, we live that way, right. And it’s sort of was lost, right? The nuclear family was Anna Thema, to, you know, multi generational living. But it’s definitely returned. In fact, we’re at 160 year high of families living multi generationally, I don’t know how they went back hunter six years to find this. But you know, somebody did the study, and he was Pew Research. And we, you know, we went down, down down on multifit, multigene, living and sort of got flat like a few years ago, and then we’re actually starting to grow back meaning more families with growth and families that are living multi generationally. And that’s really important, because if you look at poverty rates, and particularly in California, we have high housing costs, high rents, right, stagnant incomes for middle income families, well, those families are under evermore pressure to afford a nice house, right, that housing cost is inflated and their wages are not right. It’s a terrible position for them to be in. But when you start to think about them sharing, right living multi generationally, the poverty rates amongst multi generational families drops dramatically. And that’s not something people speak about on the mainstream, like, you’d never see them a mainstream meand on the why that is, it’s just not something that they’re focused on. But you know, through what we’ve researched through recessions, and also just when, you know, the opposite of when markets are peaking, right, when we’re at our highest housing costs, this multi generational model really is good in both environments, right? So in a downturn, where employments disrupted so if you’ve got five earners in a household, and somebody loses their job, the family can sustain, right, they’ve still got four incomes to live off of right. And a high peak housing market when housing cost is high. Well, now you’ve got five income earners to spread the load of the housing costs amongst those five earners. Right. And of course, people say, well, would be better to not have high housing prices. And I agree with that. But the reality is our political system in California is what it is. We’ve been this way for decades, you know, that housing production has been, you know, under supplied for, you know, 30 4050 years, right? We’re not going to catch up with that anytime soon. And there’s legal changes happening at the state level, there’s a whole new generation of you know, millennials and Gen Z young bees, they call themselves Yes, in my backyard, which is the opposite of no in my backyard NIMBYs. And I think they’re really doing some great work. And then they’re starting to change the legal landscape. But the reality is, we still have these deeply seated political structures like Sequa, and prop 13, that drive, you know, development decisions. And then we have a whole group of people who are like single family homeowners that, you know, maybe, you know, call them, you know, baby boomers is the biggest demographic and that, who are just like, Look, I got my house. I don’t want apartments in my neighborhood. No, thank you. And so they’ll be active against, you know, somebody like us, a developer who wants to entitle a project and build apartments in their neighborhood. And in fact, from a business standpoint, we know this and so we actually, part of the reason we love the uteach models because our family demographic generally lives in working class neighborhoods. And so we go build in working class neighborhoods. Well, it has the natural effect of lowering our land costs, land bases lower But also the politics of these neighborhoods usually are welcoming. You know, it’s an empty lot in the middle of an older working class neighborhood, we show up the bill. And they’re like, great, because you know what people used to leave their junk cars on that site. And that’s where the place where the couches always ended up that people didn’t want to go into attractive nuisance. And so we’re resolving that issue. And then invariably, somebody says, Hey, we know what are those units are building like, we want to live there, right now that now they see there’s an opportunity to ratify bedrooms. So we’ve very much focused on these neighborhoods that that are welcoming or have the right political or zoning environment that you know, are attractive, and then it happens to be that we’re able to buy land worth cost efficiently as well. And that happens to be where tenants already met.
J Darrin Gross 40:45
I just love that the whole story, I mean, from the standpoint of, you know, as we started the conversation about everything else that I hear, as you know, California is not landlord friendly state, and you can’t get any cash flow, blah, blah, blah. And you’ve basically figured out the problem, or the solution is to build a unit that people that doesn’t exist, that people want. That can through multiple income, income sources, the tenants can actually buoy their, their family unit and provide more stability in the unit. And actually, then, you know, I would say, you know, create better neighborhoods, longevity and stuff. I was gonna ask you, what’s the average day of, of a tenant? moved in your unit?
Scott Choppin 41:34
Yeah. So we’re so are, you know, we’re four years into this. And the first three projects that we developed, we sold orally about two weeks, two and a half years into this long term pole cycle. But what I will offer you is sort of anecdotal story. So we were meeting with a family office locally here in Southern California, meeting with two guys, the senior guy, he just couldn’t figure this product. And he said, I just don’t get it, you know, would you put families together that don’t know each other? Like, how do you do that. And, you know, like, that’s, you know, he didn’t say we’re, but he wanted to, and, and then the other guy was a younger guy, and the analyst and so the, the senior guy had to leave, we’re finishing lunch, and the the analysts stuck around, and the other guy laughed. And he looked at me, the young guy, and he said, I get this product. My family owns units like this. Now, they weren’t five bedrooms, but they were older urban apartments, the predominant Hispanic families, that was the demographic that they shared. And he’s like, my family has had units where this family has been there for like, 20 or 25 years. Now, it’s not the exact same family members, you know, all there for 25 years, but it’s like the core, maybe mom and dad, and then you know, kids would move in and move out. But he said, they’re the most stable tenant base we’ve ever seen. And so we, you know, we’ve already identified that these families were our, like, you know, main focus, from a demographic standpoint, and some of my background on the affordable housing days, we knew this. Because, I mean, think about if you’re a family that needs housing like this, and you don’t have other opportunities to rent it, you know, one, you’re gonna want to capture if it’s appropriate and affordable, right. But also, I think it has tenants
you know, self select, that understand the product opportunity, right? Like, like, you know, we have some of our units that will rent a section eight tenants. And they’re like, five bedroom units for section eight never happens is never available. And so what they do is they’re like, they’re really, you know, the great tenants, because they don’t want to mess it up. Right? They’re like, this is a great, you know, brand new unit, air conditioning, garage, multiple bathrooms, you know, quartz countertops, like they’re like in heaven, and I’m so glad to be able to be producing a product that’s like, has this reaction that people they like, I don’t didn’t know, 500 units existed apartment units. In fact, when people come through leasing, we’ll get families that show up. And they’re like, are these for sale? Because they’re really nice. And, you know, this is this can’t be rental housing, and they’re leasing teams, like I know, this is this lease. And in fact, if you want, you can move in here. And what’s interesting is they don’t like that. two things. One is they say, we didn’t know this existed, and because it didn’t exist. So that’s a highly attractive force. But also, I had always anticipated that houses that rat would be our main competition, like a family had their choice, and they could afford either our unit or a house and they were relatively comparable and equal the family would always choose the house you know, that front and backyard the white picket fence, I mean, the American dream and a rental format, right? But as soon as seen because the tenants for the most part, the families, they don’t rent houses, you know, we go so you’re looking at houses, you know, our leasing teams want to find out what else they’re looking at. And they’re like, No, we rent apartments. I mean, they don’t say the word It’s exactly like I’m seeing them now. But, you know, they, they look on, you know, the apartment websites, they look on, you know, Zillow is a good source they read, you know, they look on Craigslist, right to find an apartment that’s local to them, that’s appropriate and affordable, we show up in that stream of, you know, research and thinking, and they’re like, she’s This is like, never seen this before. Better go check it out. And, and that’s actually perfect, because that’s the, the, you know, the one of the main aspects of innovation and creating uncommon offers for us, you know, we we serve tenants, we have to produce a product that’s attractive to tenants in the marketplace to move in and pay rents and our properties. But the second and main, you know, customer we serve is investors, right. And the beauty of you th is that you get to pair investor capital up with these very, you know, steady, you know, sustainable tenants who want to stick around love the unit, you know, will occupy virtually forever, you know, we will tell you, we’ve had really zero collection issues, and during the pandemic, amongst the, you know, small portfolio of units that we were, you know, had rented and were occupied managing at the time. And I think, I think that is a testament to, you know, people really want to keep these units. And, you know, we don’t think we’re bulletproof, by the way, like, we don’t sit around and like, you know, think we’re, we can just do whatever we want, like, we got to continue to work to innovate and serve these families and these roommates group appropriately. And, you know, and that’s going to benefit us and investors as well, right, that’s going to serve to create more sustainable income streams, you know, better rents, better values, right, and the properties when we do refi, or sell them, so all that, you know, serving the family and the tenant serves the investor. Also, that’s the beauty of it.
J Darrin Gross 46:55
No, I love it. I you know, as an investor, having the multi multiple income streams, I mean, that the tenant has multiple income streams to, you know, keep them afloat in difficult times, and, and just an inviting place, that they that they end up staying for a long time. And, you know, I just think it’s a great, great concept. And also new construction. I mean, I can’t, you know, I can’t stop thinking about the fact that it’s all new construction to where your capital improvements. Yeah, virtually none. I mean, you basically just, once you get somebody in there, then you take care of any of the utilities, is there any kind of trash or anything like that? Is there any kind of common lawn care or anything like that, that you use?
Scott Choppin 47:41
Yeah, so the way we orient is we want to shift all the utility costs to the tenant, right, you know, that they use at their discretion. So and, and California, you know, you almost cannot have any units that are master metered anyways. I mean, it’s not barred by law, but more and more of the codes are saying you shall have this and show that right. And so we, you know, electric, of course, is separately metered gas separately metered. But what we’re starting to do now, just to answer your question, Porter is we’re starting to privately sub meter all the water. So we’ll have one water line that comes in to serve the property for the domestic use, you know, landscape and fire flow for sprinklers. But then we’ll have a branch that serves each unit for its water supply, right, and then there’ll be a private sub meter that goes in line on that on that branch line to the unit. And then we’ll pair up with a company that supplies the private meter does the meter reading, and then we’ll build a tenant separately for their water usage. And then what we’re doing is we’re adding the sewer costs onto that because in California sewer is charged as a as a fraction of your water usage, right. And then trash we’re doing sort of like a beer rub style calculation, where the trash is prorated across the, you know, the entirety of the project. And so, but other things are, you know, standard lawncare, right, like lawn maintenance, you know, that’s, that’s landlord cost insurance, property taxes. May maintenance is ours. But of course, as you as you point out, like these are brand new units, and in fact, generally when we you know, first occupying the building, we’re usually most of the time falling under the subcontractor you know, you know, one year warranty period for whatever so we’re usually getting subs to come back you know, that door on the cabinets is loose and fallen off, hey, come back and fix it. You know, that doesn’t last forever. But we’re definitely have a new product. So your life cycle is obviously great long, but also you’ve got brand new systems, right? So all the plumbing is, you know, today’s standard, which you know, we’ve all owned older apartment buildings, you know, the plumbing, clogging up in the showers, you know, just notorious for that. And so we avoid a lot of those issues, you know, got, you know, fully code compliant electrical, right? I mean, any more, a 1700 50 square foot unit is probably pretty soon going to move to 200 amp panel for an apartment. We’re not there yet, but I think it’s common in California. One of the one of the fun things in California is we actually now as of this year, or last year 2020, we actually now each unit has have its own solar. So we used to have to put solar you know, conduit in for future solar, now, we actually have to install the solar, like actual right. And so we’re, we’re back to our first project coming up that will do, you know, full solar voltaic system in in for the building, we’ll be doing our first project here. All future ones for that matter. Interesting.
J Darrin Gross 50:52
Well, that’s, that’s a, it’s an incredible project, I mean, just kind of the A, that you identified a market that, you know, didn’t exist. And that has been so well received. And just the economics of it makes so much sense on all sides. I just applaud you guys for, you know, figuring it out and running with it. Appreciate it.
Scott Choppin 51:15
Yeah, it’s, I’m super excited, right, because I’ve spent the majority of my career as a developer, I mean, developers are notorious for falling following each other, you know, sometimes down the hole, right into a recession. But we’re seeing that right now, a lot of people are sitting on brand new studio and one bedroom product, and, you know, perfectly appropriate when the market was good and peaking. But now that the markets resumed reversed, I mean, some of the stuff we could have anticipated, you know, we couldn’t have anticipated pandemic causing people to move out of the city of San Francisco at such a rate that the rents have dropped 27%. And that’s, you know, a black swan event like that can’t be anticipated. But, you know, so it’s such a peak already, right. Even if you couldn’t know what the Black Swan is, you got it’s very exposed and very vulnerable and fragile, right the market is, and this is one of the lessons we were, you know, learn from the 2008 is that, you know, you don’t want to be fragile when there’s a lot of competition amongst other projects, and product type and unit types. And this is one of the reasons why we created eth, as a, you know, 2016, this this gap I talked about, we specifically said we don’t want to do what everybody else is doing. In fact, part of the flat spot was that developers were flooding into markets in California, Southern California. And they were doing all doing the same product. And the demographics were there. But where I went with as I go, at some point or recession is going to come we know it’s going to come we don’t know if it’s in a year of two years or five years. But whoever’s the last few projects into that market with that product, where everybody else is doing that product that the early guys all leased up, and they can play with the rents and that kind of stuff, but it’s the last guy in the new development marketplace, that get crushed. And then also that the small and mid sized developers get crushed, because the big guys can sustain rent decreases, you know, for longer than the smaller guys can. And so that’s just what’s a, you know, we look at the marketplace, we see all this product coming online, and we just go we know it’s going there. You know, we’re not a bad mood about it. But we just say we choose not to be competing in that place. And that’s part of the marketplace, let’s go somewhere else. Now the trick is to find the somewhere else that’s viable, right? Because sometimes markets are, you know, under supplied, because there’s no demand that that’s in the early days, and you th investor would be like, well, gosh, and great product. And you’re the only one doing it, you have no competition, that must mean there’s no demand. Right? And we’re like, No, in fact, it’s the dead opposite. We’re serving a marketplace that’s never had a new product, like these families have never had a new housing unit ever. And we’ve got an enemies that have never lived in a new unit ever in their entire lives. And it’s like a miracle for that. Darren, it’s like, wow, you know, they don’t even know of course, countertops, it. I mean, you know, they’re good people, but just never never had that option or opportunity. That’s such a great, just the social impact characteristic of alone. I mean, you know, we’re, you know, based on a certain set of ethics and, you know, ways that we would approach helping people. And this falls like so much into that we didn’t know go that far. When we first started the the idea of eth, we knew we want to serve middle income families, of course. But it’s just turned out to be such a great, you know, feel good story. And that’s why in fact, what I said earlier, I’ll do it for this for my career. We were doing nothing about this, like I’ve stopped doing any other type of development will only build this kind of workforce housing or some type of workforce housing least for the rest of my career. And then you know, hopefully my kids might you Continue in the business and, you know, extend that legacy further.
J Darrin Gross 55:04
Well, like I said, I love the fact that you guys uncovered it and figured it out. Because I think one of the things it’s probably, you know, impossible to quantify and why others couldn’t see it is how many times do you have a three bedroom unit, but you’ve got the equivalent of the five, you know, a five bedroom property like yours, but but people are living in a three bedroom unit, because it couldn’t find a five bedroom unit. Yeah. I can tell you lots of crowded about Yeah, about that. And it’s a mass, you know, because there’s just not enough space for people.
Scott Choppin 55:36
overcrowding is a huge issue. Yeah, I’ll fornia. And I mean, it’s like awful the living conditions, and those kind of environments are awful. And you know, it. That’s a, a bad version, a negative version of economic Sharon.
J Darrin Gross 55:50
Right. But right, because the product didn’t exist. They were, there was a need there. But it was recognized as the it was recognized as a problem, rather than there was a need kind of thing there. So
Scott Choppin 56:02
yeah, exactly. Appreciate that. Yeah. Hey, Scott,
J Darrin Gross 56:05
if we could, I’d like to shift gears here for a second. I can mention before we started recording, 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. If that’s not a possibility, we look to see if we can minimize the risk. And when we can not avoid nor minimize the risk. And we look to see if we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And I like to ask my guests, if they can look at their own situation, whether it be their clients or investors, attendants, markets, however, they want to frame the question. But if they can take a look at their situation, and identify what they consider to be the biggest risk. And for clarification, I’m not necessarily looking for an insurance related answer. Yeah.
But if you’re willing, I’d like to ask you, Scott choppin. What is the biggest risk?
Scott Choppin 57:16
Yeah, no, great question. You know, like I mentioned, when we before we began the interview, like real estate development, and you could say a real estate investment really is entirely a risk mitigation, you call that minimize? So I’d say squarely in the in the middle there. Really, at the end of the day, you know, investing and development are a risk you like there require risk to be taken to produce these returns that we’re describing. Right?
Always the trade off. And so really where I’ve arrived in my career, where I am now, is to be risk mitigating everywhere we can and so like, I’m not, I’ll fill in the answer some more. But, you know, there’s many, many places that we’ve mitigate risk. But here’s, here’s my answer. Is it really around a philosophy and a style and approach to how you mitigate risk? And I’ll give you an example what I mean. And by the way, this like this risk mitigation is a fundamental tenet of our business. In fact, I would say it’s probably the most important one because we have so many different exposures to risk in so many different areas, right? market demand with tenants, interest rates with like, debt, return here six with, with investors, governmental agencies who oversee us, right? talked about California, right, that’s a that’s an increased risk. So when I was a young project manager, I worked for my costs. And basically, part of my job, the way I work with Mike and the way he had his project management team structures, as a project manager, you basically were responsible for the full life of a project, from finding the land all the way through to completing it and handing it over to the asset management team after his lease. Right. And that was very unusual. You know, maybe call it cradle to grave, you know, beginning to end have your describe it. So what that did is that threw me as a young project manager into, like, you didn’t have to find new deals if you didn’t want to, but I was, like, incredibly ambitious, to, to grow my knowledge. You know, I knew I wanted to be a developer, you know, running and forming my own company, like I knew that, you know, to have the wave, you know, since I was 18. And but what I remember was looking at land, and I had good teachers. But when I would look at stuff, it was everything, I couldn’t make it work. There was no project that I looked at that I couldn’t figure out or thought I couldn’t figure out how to problem solve, right? There’s no deal. I can’t figure out the hairiest deals with environmental issues, tough neighborhoods, tough cities, whatever, right? I go, Oh, I could go in there. I could figure out a way how to do it. Right. And what I figured out dawned on me years later, is that by having that approach, I took on an incredible amount of additional risks now when I worked for the company was their risk. And of course, they were smart about it and only gave me so much, you know, rope to hang myself on a deal. But when I got out on my own, you know, I continue to learn these lessons. And now it’s, in fact exactly the opposite. There’s almost no deal that makes it through the underwriting, right? And I’m, in fact very fast. And we can talk to our internal teams who bring us deals, people, partners, people bring the like, I’ll No, no, no, no. And why that’s important is because it’s a philosophy, philosophical approach to mitigating risk, meaning, acknowledgement of a risk and a willingness to mitigate it. And I’m willingness to say no, if it’s unmitigated, right, that’s up for us, there’s some risk that can’t be transferred. Right, the construction risk, under a personal guarantee to a lender is not, I can’t shift it to anybody else. In fact, it’s funny, in the old days, we was used third party GC is right to construct our buildings. And then in 2005, the market was really peaking and we had a hard time getting GCS. And we brought all of our construction operations in house, like our project managers are superintendents, they’ll work for us, you know, we were the, you know, became the default builder, if you will. And I remember a headhunter does to you don’t do that, you have to shift the risk to the GC. And this is what I told them. I said, at the end of the day, I hired the GC as the developer and I give the bank a personal guarantee, I sit in between those two people, or those two companies. And if the GC screws it up, I still own the risk. I mean, it may look like I shifted it to him. And contractually, I did shift the obligations of building a building. But if he screwed up enough, or in the, you know, time or money, like it’s gonna flow back to me. So where I told this headhunters I go, look, yes, I’m bringing some of these risks in house, but it also allows me to control and get direct access to the field, to the subcontractors to the owners of the subcontractors, because the GC that sat in between me, he had his own agenda, he had his own profit to increase, he had his own stories that he told the subs, you know, and, you know, sometimes that was good, but if the person didn’t have good ethics, or they were trying to, you know, manipulate which people do in that business, I mean, all business suppose, I found it to be incredibly like it was I took on more risk that I could then not even control, or I had to, like, go through people to try to control it. And of course, when they have their own agenda, they’re not gonna let me control it if it’s against their agenda. So this is a way for us to can control really minimize that risk, we still took on risk. But by having that direct access, we minimize that. So if you take that story, and then you apply it to every possible facet of the real estate development process, at every time we underwrite, every time we buy land, we build the building, we rent units, we’re looking to constantly always look at it from the standpoint of what if this fails, what if the spread doesn’t achieve what we think it’s going to achieve? Maybe we better look at it at a lower rate to be more comfortable that we’ve mitigated that risk. And why save that way is because people who are entrepreneurs are naturally risk takers. And you’re, in most cases, your own worst enemy. And that, you know, in other words, you’re a risk taker, you’re built to take risks, and you do take risks, then the job becomes how to take risks that don’t blow you up. And that’s your own learning. That’s, in fact, networks of people around me that I use that my teams internally, like, I encourage people like, dude, you got to tell me, no, more of the famous saying, I’m as I’m a great problem solver, I cannot solve a problem I don’t know about, bring me all the problems, don’t hide anything, don’t cover it up or try to mean you know, if I can help solve, you solve a great, I’ll do that. But I want everything fleshed out. Because you know, when you then get all the full picture, it’s then I mean, my job, our job as a company is to problem solve and mitigate risk. And we do that 1000s of 1000 times in a deal to every day, you know, over you know, the two or three year lifecycle of that development project. So I know that was a really long and winded answer, but it’s really like, it’s like having a mental model of how you approach risk and you do it, you know, every day in your business, you know, as you know, your insurance and underwriting risk. But I would always advise, particularly people who are coming new into the business to like, you know, hear these words. And you know, a lot of times go here and they go, Well, I’m different, I can do better. I’m a better problem solver than these guys. And that’s fine. But like know that that risk doesn’t go away just because you think that way. In fact, arguably you increase your risk because there’s stuff you don’t see. You can’t admit to yourself that you have blind spots and need help from others to go dude, you miss that thing. Better watch out for that right and, you know, got all kinds of betters around me that you know, I’m like, dude, tell me like, donate it. You know, I don’t like bad news. I don’t like surprises. But you know, what I like worse is, you know, bad news and surprises that now I’m late to the game on.
J Darrin Gross 1:05:10
It’s it’s fascinating how you’ve gone from, you know, the guy that was just starting out and and, you know, assuming you could solve all the risk. But you had the backstop of the company that had the controls to say no. Whereas now you’ve kind of gone into more of the No, you’re the front end. No. But then you’ve also taken on more of the risk, but I’m assuming that based on your process, and in having the experience in bringing everything in, like you said, that control is really what what has helped you. You know, control the risk?
Scott Choppin 1:05:47
Yeah. And that in that particular example, for sure. But other risks are mitigated. Just you know, when we underwrite rents, like in this example, all your investors and people in the multifamily. You know, it’s like the age old and your new person, the business, you got, oh, well, rents are 900 for two bedroom. But I think I keep paying 25, right? Why is my location a little bit better? I could, I could do it, right? I’m like, No, I’m either going to be below the market, because I know I got to compete those guys are I give the same rat for better value, I got a bigger unit, I better be at the same run is that smaller, you know, that smaller unit mix down the road, like you know, where we underwrote our unit rents in the beginning, and we still assess them that every deal, we look for that for the most comparable single family rental house, and then we want to be two to $400 a month in rent below that closest car. Right? So if somebody saw it, they go, Oh, I got this, you know, of course, brand new unit always, like sells nicely in that market. But they go oh, but it’s also below, you know, this house that I’m looking at, right? If they did look at it that way, always making decisions and that like, you know, call being conservative, however you want to describe it. Because at the end of the day, if you’re if you make your 20 or 30 or 50, you know, variable choices about rent and operating expenses and land costs and build costs and market cycle interest rates, and you’re conservative generally at all those I mean, you can be so conservative that you kill the deal. So there’s that, and I’m not talking about that I’m talking about being marginally safer. Right. So rats 900, I’m going to be 875. Right, since still, there’s a story there and you know, maybe got a little room to drop if I need to. And then you do that, like in many parts of the deals you can, then what we’ll do that we’ll set up is when you go do the deal, you’ll still get clipped by something, right lumber goes up, like right now we’re in the lumber, the lumber markets went up like triple in the in the, you know, board fee price. And, you know, I had a practice in our teams to always increase our construction costs 10% on a per square foot basis, every deal or batch of deals over a period of time, we go up 10% just as that standard, like inflationary increase. That might not be enough today, if lumber is at 900, where it used to be at 300. But I think we can shape enough for the other hard costs and the other trades, that you know, we there, we give volume discounts because we give the subs a lot of work, but well massage that process. But we’ll also say, okay, on this deal, we learned this lesson, then we need to carry that over to the next one. So we actually have a database, it’s a spreadsheet, basically, of all these little lessons that we’ve learned, right? Oh, you know, we missed the lumber better, you know, plan for that better. Sometimes that goes directly into underwriting, sometimes it doesn’t. But the key point is that we are always continuously assessing the risk, we’re looking for that, you know, the increase in risk or the market to move against us. And then, you know, that gives us enough time to shift I mean development. So long cycle business, right, two or three years, until you’re running units in most cases. I mean, you know, markets could change dramatically. And you know, three years as you can imagine, so we have to be, you know, continuously vigilant really is the way I talked about it internally.
J Darrin Gross 1:09:13
No, makes sense. Hey, Scott, where can listeners go if they’d like to connect or learn more?
Scott Choppin 1:09:20
Yeah, I appreciate that. So for your listeners, I’ll make this offer if they go to our website, triple w urban Pacific comm forward slash ebook, you can sign up there and get our ebook, which is called How to survive and thrive in a recession, which I think is a good topic in this environment. Now, it came from my lessons in the 2008 recession as a real estate developer and entrepreneur going through, you know, really the worst real estate downturn, you know, that I think it’s happened even, you know, worse in a written lease residential real estate than the one we’re going through now. But anybody who’s going to get into the business needs to understand that and you know, really, these are lessons have specific tactics and actions you can be in both to prepare for a recession as ahead of time, do some of that planning and risk mitigation that we talked about earlier, but also what to do when you know, it hits you. Right, and maybe you are unprepared because that happens too. And so you know, it’s got a lot of good lessons in there. While people on our website, I would encourage them to go to our investor education section, tons of videos, articles, blog posts that cover tons of, you know, broad categories of knowledge, you know, how to underwrite deals, how to assess sponsors, you know, a lot of work that we do in the economic cycle tracking, like we have a whole set of practices internally about looking at the long term macro economic cycle, and figuring out where that’s going, you know, what are new trends, new innovations, and the real estate development and housing space, so a lot of good stuff there. And then if people want to get a hold of us go to the contact page on the website, and our entire team’s email addresses are there and you can reach out to any of those folks, including myself.
J Darrin Gross 1:11:07
Awesome. Scott, I can’t say thanks enough for taking the time to talk. I’ve enjoyed it learned a lot. And I hope we can do it again soon.
Scott Choppin 1:11:15
Thank you, Darrin. Appreciate it.
J Darrin Gross 1:11:18
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.
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