investment Archives - J Darrin Gross Podcasts

Investment Real Estate Investor Loan with Brad Hansen – CRE PN #390

Brad Hansen 0:00

The typically unless it’s a portfolio loan in the bank or investors keeping it, but your typical Fannie Freddie, Ginnie Mae loans, these are packaged and sold as mortgage backed securities on the secondary market. And then that’s what determines the rate. So those rates will go up or down based on inflation based on demand. And so, you know, during the 2120 2021 time, what the Fed was doing, not only did they take their Fed rate down to basically zero, but they also were buying mortgage backed securities and just like anything else, it’s kind of a supply and demand right? So they’re buying up all these mortgage backed securities that’s driving the price down, right so that’s part of the reason why we saw rates you know, 30 year traditional conventional loan rates were in the upper upper twos low threes, you’ve got good credit and you know, now they’re they’ve more than doubled.

Announcer 1:00

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 1:19

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’s interview is sponsored by building insurance and risk. When you invest in real estate, you need to protect yourself and your investment from catastrophic loss. The experts had building insurance and risk provide you with multiple offers and a side by side coverage comparison. To learn more, go to building insurance risk.com.

Today, my guest is Brad Hansen. Brad has been in the mortgage business for 18 years helping clients meet with home financing goals. He also is a real estate investor and loves to educate others on how to build wealth through real estate. And in just a minute, we’re going to speak with Brad about great products and strategies for becoming a real estate investor.

But first couple reminders. If you’d like her if you if you can, we’d love to have you. Let me say this again, if you like our show, like I’m nervous. 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 lawyer there. Please subscribe without a warm welcome my guest, Brad Hansen, welcome to CRE PN Radio.

Brad Hansen 3:11

Thanks. Great to be here with you, Darren.

J Darrin Gross 3:13

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

Brad Hansen 3:22

Yeah, you bet. Like you said earlier, I’ve been in the mortgage business for about 18 years. I’m a branch manager. And so I’m also an originator. So I have worked with clients 1000s of clients over the last 18 years and like you said, I really love helping people achieve their goals. And we do everything from really primary residents, second homes, investment properties, construction. But it’s all very residential focused, right? So rigid residential investment, typically includes one to four units, although we have some options to go pay units. So yeah, I really love what I do. I think it’s homeownership, I believe really strongly in homeownership and investment as you know, investment properties as a way of investing as well.

J Darrin Gross 4:13

Now, I love it. So if you could, Brad, what’s the difference between an investor versus a an owner occupied as far as lending requirements or it gets kind of you could differentiate between the two?

Brad Hansen 4:31

Sure. Yeah, I mean, it’s a good question. I mean, really, when it comes down to it the the lender, and we use a number of different lenders that help provide the funds right. So we’re the originator, little bit about Academy mortgage, we originate the loan which basically means take the application, we work with the client directly. We will we will underwrite the loan will fund the loan, but then the loan will sometimes go to different investors. So it might be Fannie Mae, Freddie Mac, FHA, VA, USDA, but then we also have private investors, right, they portfolio these loans, we see that a lot with Jumbo. And all of these investors, they will categorize their loan risk based on is it a primary residence, are they going to live in that home for 12 months, up to 12 months, because normally when you when you get a loan, you say, this is going to be my primary residence, you’ll say, Hey, I’m gonna live in this for the next 12 months. Now, things can change. And sometimes there are exceptions to that. And then, of course, a second home is a home that you don’t live in primarily. But it typically will be in a place where people vacation, you know, here in Oregon, it’s at the coast, it’s in the mountains, it’s out in Bend Sun river, you can’t have a second home, that’s next door to you, right, that doesn’t qualify. And then of course, an investment property is one that you’re not going to be living in. And those can be really anywhere. It could be the house next door to you if you want. The other thing that’s really interesting about the last few years is we’re beginning to see what I’ll call you know, I think the term house hacking is kind of the term for this, but people will see their primary residence and say, Hey, how do I leverage my primary residence to also make money with it? They might use Airbnb move out for the weekend, they might get an adu. So the thing that’s exciting about real estate right now is we have more products and tools and options than ever before, to help people finance. But also there’s more options for investors, right. It’s not just a long, you know, long term rental, you can do short term, you can do all kinds of different things with it. So that’s, I think one of the exciting things about being in real estate, and even if you’re a primary, even if it’s your primary property, it’s still an investment to I mean, you get to live there and enjoy all the benefits. But I’ve personally made more money from the homes iPhone than I might have from the stock market in terms of return on investment.

J Darrin Gross 7:10

Yeah, now, it’s a good case to make for the positive market with real estate there. So I’m curious. So between the two are the multiple different options, you know, whether it be a primary or a vacation, or a rental? How, how is it that the lenders view if you could kind of is it like, percentage down payment required? Is it the I mean, when it comes to, you know, your ability to qualify for a loan? Yeah. What are some of the factors they look at in those different scenarios?

Brad Hansen 7:45

Yeah, you bet. So, with a primary residence, you have typically much more options when it comes to your downpayment, right? So we have primary residence, if you’re a first time homebuyer, we have zero down loans, multiple different zero down loans, or downpayment assistance programs. Typically for those, you have to be a first time homebuyer. But even with that you we have 3% down, we have 5% down some low down payment programs, right? Those are what available for a primary residence, but you’re gonna live in that home. When it comes to investment properties. The minimum down, we have a loan that you can put as little as 10%, down, but 10 15% down, depending on the the investor that we talked about, those are kind of the options that we have. We have a great portfolio loan that I’ve used myself, that’s a 10% down no mortgage insurance. And it’s a portfolio investor product. So still pretty good. But most of the time when you’re getting into higher units, so 344, plexes, they’re wanting to see 25% down and typically, the larger the downpayment that you have on an investment property, the better your your interest rate, and your fees are on these. So any again, well, I’m not necessarily going to quote interest rates, because everyone’s situation is different. We’re seeing right now, interest rates are a lot higher than they have been in the last couple of years we’ve been, you know, in these COVID lows we had the Fed and their actions created, the lowest rates we’ve seen in history, I think, during 2020 and 2021. And as we came into 2022, really, toward the beginning, we started to see rates climb, because of inflation. And again, that has caused a lot of people to slow down, take a pause. But anytime the crowd is going one direction, there’s going to be opportunity for others, right so I’ve talked to a lot of investors and they they feel like now’s a great time to buy because number one they’re not competing with 456 other people, right? So they can go in, they can typically get concessions from, from a seller to help cover some of their costs. And they feel like even though rates are higher, maybe their cash flow is not going to be quite as good during this time, they can actually take advantage of get get some more more opportunities to buy properties during this time.

J Darrin Gross 10:21

Yeah, I was gonna ask you just about the kind of the current situation. Like you mentioned, fed rates are increasing and kind of the mortgage rates, I think everybody assumes that they’re always coupled to the rate. But are you seeing that? Is that the case today? Or is there is or where we’re in relation just to the spread, I guess, or is? Right.

Brad Hansen 10:47

Right. Good question. So there’s a lot of confusion, people sometimes think when the Fed takes their Fed rate up, right, that’s the money that banks lend to one another, it’s kind of the overnight rate, they, they think that is how mortgage rates are determined. And actually, it’s sometimes what we’ll do is we’ll see the Fed take the rate up, and interest rates will actually drop. And the reason is, because the Fed is taking their rate up to fight inflation, right? Inflation is the enemy really, of bonds. And mortgages are bonds. So you hear about mortgage backed securities, those are bonds, those are sold on the market, they’re the you know, the when we, when we do a loan, the typically unless it’s a portfolio loan in the bank, or investors keeping it, but your typical Fannie Freddie, Ginnie Mae loans, these are packaged and sold as mortgage backed securities on the secondary market. And then that’s what determines the rate. So those rates will go up or down based on inflation, based on demand. And so, you know, during the 2120 2021 time, what the Fed was doing, not only did they take their Fed rate down to basically zero, but they also were buying mortgage backed securities. And just like anything else, it’s kind of a supply and demand, right? So they’re buying up all these mortgage backed securities that’s driving the price down. Right. So that’s part of the reason why we saw rates, you know, 30 year, traditional conventional loan rates were in the upper upper twos, low threes, you’ve got good credit. And you know, now they’re, they’ve more than doubled, right? And then typically, an investor rate is about anywhere from a half to a point higher than a regular conventional loan. But it’s interesting, because right now, we’re actually seeing the conventional rates, the Fannie, Freddie, you know, driven rates are actually higher than jumbo right? So we’re seeing some jumbo rates that are lower. And it’s really a little bit interesting right now, because you’re not a lot of the rates are not following their traditional rules. Typically, a jumbo rate is slightly higher than conventional rate. Right now, they’re lower, right? We’re seeing them anywhere from a half to point lower, because a lot of those are driven by the banks, right, some of these big banks, they’re, they they’re in maybe the sixes, and if the conventional rates and the sevens there, they’re thinking, hey, I’m make we’re making enough money on this, we don’t want when rates start to drop, we don’t want those rates to run off, right. We don’t want them to be refinanced right away, because the banks or the servicers, they make their money and investor, they make their money on holding those loans in those notes for a while. And they’re making the interest on him. Right. So it’s really changed the dynamic. We have the we have, I think, the highest rates in 21 years I just read recently. And that scares a lot of people. But again, anytime you have a lot of people that get scared to say, hey, I don’t want to, I’m going to wait on the sidelines to buy that home. What that means is it means opportunity that’s out there in some markets are worse than others. Right? I’ve heard Arizona right now that home prices have dropped significantly, inventory is gone, you know, triple double or quadruple what it’s been since the beginning of the year, here in Oregon. While we’ve seen inventory go up. We haven’t seen it go up significantly. I think the last number I saw it went from 1.8 months, up to like 2.2 months. So again, supply and demand has a lot to do back in the Great Recession. You know back in, oh 809 We saw inventory up to 1112 months, right there was too much supply. And now we don’t have that problem. And it’s really different a different time than we were back in Oh 809 When we had the those market that market volatility right now. Back then, I had my my loan options went from you know, 15 pages of Luna options to one, right I had a, I had a 30 year and a 20 year loan, and nobody wanted to do the risk was way low. Now, we still have a ton of opportunities and products for homebuyers, whether it’s for primary and investment property, things like that, we’re starting to see, you know, more credit. And part of that, the thing that has helped, is they’ve tightened up a lot of the guidelines, right. So they’re not giving the old no income, no asset loans or stated loans. They’re really solid loans. It does help that that, you know, unemployment slow that jobs are strong things like that. So, you know, the economy does impact our you know, what we have what we can offer as well.

J Darrin Gross 15:48

And it it is kind of a, you know, weird how, you know, when we go through these cycles, especially like the oh eight cycle where everybody, I mean, just the lending environment was basically anybody could get a loan and, and multiple, multiple properties. And, you know, probably I don’t know what the percentages were, but enough people had them that it created this, this false market that basically couldn’t support itself. And so then, and I forget what were the measures they put in place there? Because it was like, weren’t me I know, they tighten up the the inspection with the appraisals and, and some of the the loan requirements and that but I mean, basically some of the the they narrowed the opportunity for this problem to reoccur. And now we have I mean, the last couple years, like we’re talking about how rates have been so low? Is there any kind of number industry wide or like a percentage of people that actually refinance to a lower rate, as opposed to still have a writer?

Brad Hansen 16:58

Right? Yeah, that’s a good question. I’ll answer your first question first. So you asked about what were some of the main things that changed. On the appraisal side, they instituted a home value code of conduct, which was really good. And what that did is that created a separate function. So you couldn’t just have your own appraisers go out and give you values. And you know, I think, you know, that was really good, I think having some accountability with appraisals and banks and lenders, so you weren’t just getting false values, right? So bringing more guidelines into that and more rules, I think was really good. Now, maybe they’ve gone a little too far. And we’ve actually had appraiser shortages, but then they’ve instituted things in recently, like appraisal waivers. So if they’re doing a lot more electronic appraisals, that’s your primary residence. And so that’s that actually has helped. Then the other thing they did is they’ve instituted and I won’t go into all the details, but basically they instituted an ability to repay rule, right. So we’ve as a lender, we have got to make sure when we underwrite that loan, we can show that this borrower has the ability to repay, right, are we verifying their income or re verifying their assets, their credit, their debts, all those things, and then we have very specific guidelines. Typically 50% debt to income ratio, when you look at their your housing costs, as well as your all of your other debt is pretty much the maximum there are some exceptions with FHA and VA. But that’s kind of about the max when it comes to an investor loan. Typically 45% debt to income ratio is about the max. And when it comes to a jumbo loan, most of those loans have been limited to 43%. Now, again, we have other loan programs, the old subprime is gone, but there’s a new category they call non qualified mortgages. And non qualified mortgages are an opportunity to for self employed borrowers to use bank statements or assets for income, they’re still have, they still have this ability to repay rule as part of it, but they’re just using they’re using bank statements or maybe it’s a 1099 employee or some things like that they don’t fit into the box, we’ve got options for some of the people and then typically those rates will reflect the risks that are associated with that type of product. So I really feel like there’s been a lot of really good things that have happened over the last you know, what is that now 14 years or so? Since that happened you know, just the basic rules and and they brought some more sanity to the I started in oh four. And I still remember when I came in and someone was telling me about the no income, no asset, no employment loan night and, and the rate wasn’t even that much different. I was a little bit surprised by that and really didn’t do most of those kinds of things. A lot of those people that focused on subprime, many of those people got out of the business or switched out of subprime. And the, you know, obviously, you don’t need to go into the disaster that happened in Oh, 809. But took a while to get through that.

J Darrin Gross 20:22

But I think, you know, kind of where I was going with this is that, you know, the fundamentals in the market in a weight are entirely different than the fundamentals right now. Absolutely. I think that there’s a sense that history is gonna repeat itself. Now, we’re gonna have this big wash of closures, and and there’s going to be all the supply on the on the market. In fact, there’s, I mean, what I read and see is that there’s a housing shortage. It’s right, but most markets, there’s still demand. I think the challenge we have in any, any market or any situation where there’s change, it’s there’s, there’s a sense, or there’s a time for people to kind of read get their, you know, get their footing to understand what is the market, as opposed to feel like, you know, it’s too risky, or it’s not what it was, or it’s not what I think it’s going to be Yeah. And so I don’t know if if you have any kind of thoughts on that, or if there’s any kind of, you know, what you’re seeing Yeah, I’m guessing the activity level has changed for you in the last couple of months.

Brad Hansen 21:25

Absolutely. You asked a question about, you know, how many people refinanced right? What percentage, and I don’t know that I’ve seen a percentage, but it was a lot. I mean, it was it was, if I remember correctly, the the number of mortgages that were done, was last year in 2021, was like 4 trillion or something like that. I mean, it was a giant number. And this year, I think it’s expected to be closer to like 1.5 trillion or something. And again, my numbers are probably off. But the the percentages are similar in the sense that, I know it’s funny, because every once awhile, I’ll talk to a client whom that didn’t refinance. And I’m actually really surprised that they didn’t refinance during that time, but you don’t know what they were going through. Right. So there, they might have been unemployed during the time or they might have had a foreclosure or bankruptcy or other things that happened, that are going on. And the one thing that we’re seeing this year is we’re still seeing people that want to upsize or downsize. There’s a big demand from millennials, that, you know, they were competing with 456 10 other people last year, and they couldn’t get into it, now’s the time for them. And like I said, even as an investor, now’s the time that you don’t have to necessarily overpay for a home. Right, you might actually get it for less than asking, get some concessions. And I know we’ll talk about some products here. But we do have a we have a lot more. That’s the other big difference, like I was was saying, I went down from the 15 page rate sheet down to one page. And now I’m with the change that we’ve had with rates going up, I still have even more loan options than ever before.

J Darrin Gross 23:09

Well, let’s talk about some of the products. Yeah, that you have.

Brad Hansen 23:12

Yeah, you bet. So, as I mentioned, you got your kind of traditional agency loans and you’ve got portfolio and private so I’ll just kind of walk through a few different ones. But I’m gonna start with actually one that I think is kind of one of my favorites. It’s a new one. Fannie Mae just came out with a new, they call the Fannie Mae adu product loan. So I could, if I have a home, I could actually, you know, get a line of credit, build an adu on my property. And then this loan allows you to basically pay that off and consolidate the loan. Or you can even purchase a home that has an adu and you can use the rental income from that adu from the auxilary dwelling unit to to qualify, and, you know, that’s something let’s say you have a someone who’s buying a home, and they’re buying a duplex, right. So you could buy a duplex live in one side and rent out the other side. And we can actually use the rental income from the other unit to help you qualify for a home. So what’s really interesting is, a lot of times it’s easier to qualify when you’re buying an investment property or some sort of property that will whether it’s a Plex something that’s got an adu. You know what let’s say I own a home and I want to buy an investment property, I can actually get a rent schedule from the appraiser and I can use those rents to help me qualify. If I’m buying an investment if I’m buying a vacation property, I can’t use the rental income from it. So it’s a little hard to qualify but investment properties you can use those now not not all banks allow that I know. You know for us with the way we do business, Fannie Mae does So a lot of our investors do. Typically when you’re buying a jumbo, which in our market, jumbo is any loan amount that’s above $647,200. And most investors want to see, or I’m sorry, jumbo loans, they want to see that you’ve got a history of investing. So you know, one of the things I always talk to people about is walk before you run when it comes to investing, right? years ago, back in Oh, eight, I had heard about people who were buying 4567 properties at a time, right? Well, they fell hard, right, because they didn’t just buy one, they just bought multiple, because they could buy him on 100% loans. And other things are at each one is if you remember the old 8020. And he they had those even for investors. So especially if you’re a new a new investor, I would say, you know, definitely take it slow, do one at a time, or do one of these house hacks that we’re talking about where you buy a duplex, live in one side rent out the other. We’ve seen a lot of people to where they’ll buy their home. And then a year later, they’ll turn that into a rental. And then they’ll buy another home, right. So we’ve seen people build a rental portfolio by by buying them living in them, maybe fixing them up, turning it into a rental and then go in and buying another new investment or another new primary. The when you’re like I said, when you’re buying a home, you’re basically saying if it’s your primary, I’m going to be living in this for the next 12 months. So you don’t have to keep that home as a primary residence for you know, the rest of the time you own the home, it’s just for one year that you’re committed to. So we’ll see people they do it that way, do it slowly, maybe every couple of years, they’re buying a new primary, converting their old one into an investment property from there. So that’s, that’s one of my new, it’s pretty new, it’s a new favorite that you can actually use the adu because most of the time when you’re buying a primary, you can’t use room rents or border income, or things like that. So you’ve got your traditional Fannie Freddie loans. And for most of those, your minimum downpayment is 15%, down for kind of your traditional conventional Fannie Freddie loans. You can and then if you go to a

J Darrin Gross 27:25

brand new site 15% Is that is that for investors,

Brad Hansen 27:29

single family, single family investor, so let’s say I was buying a, an investment property, single family home, I need to bring at least 15% down that’s for like Fannie Mae, Freddie Mac. Now, like I mentioned, I do have a investor portfolio program that you can go 10% Down rates a little bit higher than the Fannie Freddie one right now. But it doesn’t have mortgage insurance. And anytime you’re not putting 20% down, you’re gonna have mortgage insurance that you need to bring in. So with the Fannie Freddie loan, you would have mortgage insurance, if you’re not putting at least 20% down. Now, if you go to a Plex to let’s say, it’s a two plaque duplex two or three Plex and you’re going to live, you’re going to live in one of them, then that will that will help as well, right, because you can buy it as a primary residence, we can, we can use that and that one. Typically, I think that’s 15% down on that one. You also have for people who are more low to moderate income, you can only be 80% of the area median income, we’ve got home ready and home possible, which are both that’s a Fannie and Freddie loans that they require the income limits, they have home education requirements, and with those, you can get into like a Plex for 15% down, or, again, four to three to four unit would require 25% down, right, so

J Darrin Gross 29:13

80% That’s the maximum amount of income that they can have.

Brad Hansen 29:17

80% Yeah, it’s 80% of the area median income, right. So those are for people that have lower now. Honestly, those are really challenging, right, because it’s gotten so expensive, it is difficult, but you know, on some of those, you can you can count the rental income on some of those as well. But, you know, it just gets a little bit more complicated when you do those things. I mean, for for most people, when they’re buying an investment property, they’re not normally living in those. But there are options to live in. You know, maybe buy two Plex or you know, a three Plex, four Plex and you live in one of them rent out the other So you can count that FHA is another one, you can go three and a half percent down as long as you’re going to live in the home, because FHA is only for primary residence, but you can buy a Plex, with those. The one thing you have to be careful with FHA loans, though is if it’s a three or four unit complex, then you have it has to, it has something called a self sufficiency test, which means it has to be able to qualify, just with the rents that are there. So that again, can be a little bit difficult with the price of flexes these days, a lot of investors love, you know, plexes, because you have multiple borrower or multiple renters in the in the homes. So yeah, we’ve got your traditional Fannie, Freddie, you’ve got FHA, we’ve got the investor product. And then we also are seeing more recently, in the last few years, jumbo loans are starting to come in, and with the jumbo loans, typically 20%, down for a single unit, and then 25 to 30%, for a four, three to two to three, sorry, two to four unit property. Those jumbo loans, the what some of the ones we have, they can go up to one point 1,250,000. So you got some bigger loan amounts, but you’ve got a lot more requirements on those, you’ve got the debt to income ratios, 30 43% or lower, you gotta have typically reserves anywhere from six to 24 months, just a lot harder when you’re going into those, those type of products. But we even have products that and as I mentioned that non QM, there are investor properties or investment products with the non QM, which means we can use bank statement loans, we can use asset. And then we even have something called the DSCR, which is the debt service coverage ratio. So it’s, you’ve got to have the debt to income ratio on that. One is I think it’s 20%, you gotta have at least 20% down, but it’s got the rental income on that property has to be able to support the payment, right. And then they have an option for short term rental as well, people are starting to recognize that folks will will have some properties that will be used for Airbnb, VRBO, those kinds of things. And typically, if you’re going to use short term rental for income, they want a much higher downpayment. Typically, that’s like a 35% down. So the thing that’s nice about the different options we have is everybody’s situation is a little different. Some people are self employed, and some people are using income from rental properties. And we can really customize there. You know, we’ve got a lot of different product options, depending on the different borrowers situations. But again, my I always come back down walk before you run, right, don’t try to overdo it when you’re getting into being an investor.

J Darrin Gross 33:13

And Brad, what about a, buying a property that needs some work? So you can get it for just for round numbers to say it. You can buy it for 100. You’ve got 30 down, but it needs it needs 30 or 40. Right? Is there any product that you have that will help provide funds for the renovations or repairs that are in need? Yeah.

Brad Hansen 33:39

Yeah, actually, that’s just property. Yeah, for an investment. So we just did this actually, for one of our borrowers. It was a property at the coast. And 100,000 is probably not a realistic number.

J Darrin Gross 33:49

I’m just saying for easy numbers. Yeah, I’ll give you this this exact

Brad Hansen 33:53

example. So the property was not financial. It had just a number of things wrong with it that didn’t make it financeable in a traditional sense, the borrower had 20%, down, they bought it for 300,000. And they were they ended up putting in about $75,000 in improvements in the home ultimately appraised for 450,000. In that situation, we actually used a private money lender, sometimes people call them hard money lenders, right? So the borrower was able to get the funds within within a week, they were able to, you know, get the hard money loan, they closed on the purchase. They brought their downpayment, and then we did the we did the refinance once the home was done. We did the appraisal, and we basically were able to pay off that hard money loan and to get hard money loans are meant to be short term, right. They’re meant to be able to help you get into something that maybe isn’t fun. financeable and you don’t have 100% Cash, right? In this case, in this particular case, you know, it was like three points, two for the fees and 12% for the interest. But it’s short term, you’re only they only needed it for a couple months, and then we were able to refinance them out of that into a permanent loan. And like I said that because it was not financial, they will to get a really good deal at it, you know, for 300,000 on this home. And when we appraised it, it was priced at 404 150,000. So they made money, they had a property that they’re now going to be using for probably short term rentals and then enjoying it themselves at the coast as well. And that same concept can be used in other situations where you have, you will need to close quickly, you need to be able to not have them worry about if it’s you know, got all the plumbing or it’s missing siding or whatever, right, there might be issues. We do have. So Fannie Mae actually does have a product called home ready. And that’s for something that let’s say it needs a new roof, or you want to put new appliances. So that actually is another property product that we have. It’s a traditional loan, it’s basically the rehab, Fannie Mae’s rehab loan. And we can do the same thing. That one is a little bit more complicated, takes a lot more time, because you’ve got to get bids. And this is a lot longer. So the other one went really fast. And it was more appealing to the seller, because they didn’t have this big, you know, 60 day 75 day process waiting for contractors and everybody else to come in. It’s a much tighter process, but it’s a good, that’s a good product as well. And then sort of one all in one loan. Right. So it’s the purchase when you buy when you buy it. And you could do it as a reef rehab refinance as well. Basically, you’re getting that money set aside. And as the work is completed, that money is drawn and pay you pay off the construction or the rehab part of it to the contractor. So

J Darrin Gross 37:12

yeah, I was gonna say the the speed at which you can get your funds, I think that’s probably pointing worth reiterating. Because yeah, it’s one thing that they have an advertised rate of, you know, below or super low or whatever. But you know, how much ground glass you have to crawl over to get to it kind of thing, as opposed to something you can get it, like I said, relatively easily and actually close on the deal. And, you know, have an advantage with the seller, as opposed to I think I’ve heard about this done before. And I know it’s available in my my broker says I can, yeah, and, you know, be more of an you have to

Brad Hansen 37:48

be careful, you got to have the right people. I mean, we have, we have, you know, a few different relationships. But you know, the people that we’ve seen have high integrity there, they finance these things, they set the money aside, I mean, you have to be careful with that, right. And having a history of know who can help you in the right situations, is really important. The other thing that I think is really important as people get into investments is number one, they want to make sure that they’re not looking at this as a short term, quick fix, right? I mean, we’re not talking about fix and flip kind of thing, right? We’re gonna buy it, fix it, sell it up, we don’t we don’t do that kind of thing. The hard money people do. That’s not something we do. You know, but you know, typically, when you’re looking at buying an investment property, the idea is you want to hold that for seven to 10 years, right? And over that seven to 10 years. Number one, you’re gonna have the your renter, paying the principal down for you, right, not only are they paying the interest on the loan, but they’re also paying principal. So you’ve got to, you’ve got all of this principle, buy now that you’re gaining, gaining that someone else is buying this for it, and then you have your appreciation on the home, right. So what I’ll do for investors, we have a investor analysis that we do for borrowers and we look at it over 10 710 years, we look at what are some appreciation expectations, we look at not just what’s your principal, interest, taxes, insurance, HOA fees, we also look at what’s your expected maintenance fees, right? And you want to build all that in and then you can look and see, hey, is this is this right? For me? Is this an investment and typically in the first couple of years, when you’re putting money into the home, whether it’s the cost for the closing costs, and the taxes, insurance and everything, typically, the first couple of years, you’re really not making money on those. In some cases, you can if it’s a long term investment, but most of the time, it’s more really over time, right? Because your payment stays the same over time, you can start raising your rates or your rents and soon you know you’re making more money on this through. You know, like I said appreciate One principal reduction, and then of course, cash flow over time as well. So we will do a full cash flow and investment analysis for the clients as they’re looking at those. So make sure you know, whatever they’re doing, make sure they’re partnering with people that can add value, you know, use a accountant or CPA or, you know, financial planners can help you with this kind of thing too. So that it’s important to have the right team, you know, someone like yourself, who provides insurance making sure that that the home is properly insured. And that the renters have insurance as well. Things like that are really important when you’re doing this.

J Darrin Gross 40:42

I appreciate you reiterating that I think it’s in real estate is always in vogue, when rates are low, and, you know, people have bought for low and they, they’re flipping in and out of it. And it’s almost seemed like as a stock, you know, because people are able to get in, make a big, big money or, or you hear about the big cash flow deals or whatever. But truly, it’s an over time kind of thing. And the real test of it is that it’s not easy to sell a property, you know, when you get in, you better have a plan to stay in for a while, because, you know, you know, just the transaction costs, you know, you’ve got commissions and, and all that stuff. So I think that for myself, it’s, it’s been kind of a, you know, it’s been rewarding, in that I haven’t really, I mean, I do have kind of like my little sheet that I kind of like look at occasionally just to see how things are based on whatever the, the values are, you know, presumed to be, as opposed to how much is owed and, and kind of that just as kind of a reference point, but it’s not, it’s not like money I can go spend the whole day for for an investor is to create a nest egg that is large enough that then it it’s you know, purposes that it throws off capital, as opposed to something you’re working down to zero kind of thing, which is the went to the stock market model really is is is, you know, good enough to where they can get you to the end. And, you know, get a, you know, settled up there, but definitely a different mindset. One of the questions that you have touched on a little bit about the products you have in the Ingo is pretty much one to four doors is kind of the the real sweet spot for the

Brad Hansen 42:33

Yeah, Bester. It really is for what we do, we do have a we have one product that can go five to eight units. But again, it’s a larger downpayment. Once you get over four units you into that five plus units, it is a pure commercial. And it pretty much is always based on the property’s ability to service the debt. Right. So I mentioned that we have this debt service coverage ratio product, they call it DSCR. That’s kind of how and again, I’m not an expert on the commercial side. But but really, once you get over five units and higher, that’s when they’re really commercial and hey, does this thing pay for itself? Right? They’re not. They’re not looking at the borrower’s qualifications. Whereas when we do a loan, we’re looking at it in relation to not only the property, but also all the other debts, right? Do they qualify with everything else they have? And so we’re they’re personally liable for those. And again, I think they’re on commercial too. But it’s a little different how they look at those.

J Darrin Gross 43:46

Right. And so what I wanted to ask beyond that is what are the number of loans an individual can have? I mean, at one point, there was a, there was a limit, I think it was four. And I don’t know what the what’s the current market or? Yeah, there’s a number right now that you’re limited, right?

Brad Hansen 44:08

So your traditional agency loans, so Fannie Mae, Freddie Mac, they have a limit of 10 financed properties, right? So you could have up to 10. So if I’m doing a financing for someone, and this is their 10th, finance property, and you’re gonna count your primary and every other home, that’s finance, that’s the last one I can do with Fannie Mae or Freddie Mac right. Now, there are other investors who don’t have limits. So I did, I had a customer that I helped a couple years ago, and this particular investor had over 100 properties. And, you know, 50 of them were in their own name. 50 of them were in an LLC were in a kind of an LLC and the LLC hold held them, but they had too many from vehicle to do Do that. And we were able to refinance them with one of my portfolio lenders, where they didn’t have a limit on that, save them a lot, you know, got the rates down, even consolidated some of some of the debts, once you start getting into over 10. Really, there’s, there’s other ways to look at that, too. Sometimes banks will package five, or six properties in one, if you have that in a LLC, for example, and give you one loan. And so it can really vary. We even have, you know, again, we have a jumbo option, for those who have more than 10. Finance probably doesn’t mean how many properties you have, but it’s how many you have financed, right, so you might have 20 properties. But this is only if this is going to be your 10th Finance one, then that’s the maximum we can do with Fannie Freddie loans. Now, if you’re doing that’s for purchase, if you’re doing a lower rate term refinance, if you’re doing cash out, there are some other limitations when it comes to cash out refinances. The debt to income ratios come a lot coming in a lot lower too, when you have more than four. So important to be talking to, to a professional.

J Darrin Gross 46:09

Yeah, and I just I remember, you know, just kind of the nuance of it. And at the time, I don’t remember how many I had, but I know that if he put my loan in a different category, right. And I think when the only thing blew up, and there was all these lower refinancing options available for whatever reason, I had one that it wasn’t it didn’t qualify as like a, I think it was a Freddie Mac as opposed to a Fannie Mae, there was like a differentiation between the Yeah, an agency made it available. The others didn’t. Yeah, I

Brad Hansen 46:46

think they did for a while have and I’m not remembering off the top of my head. But I think for a while one of them had a limit of six and the other had a limit of 10. And they will have different requirements, which I think is great. Honestly, it’s nice having a couple of different agencies that you know, give us different ways to help help our clients. Yeah.

J Darrin Gross 47:06

I just said, I remember thinking like, Why didn’t decide which one? You know, how did I How did I end up hearing? I think

Brad Hansen 47:13

that’s a good point. I mean, I think when you are doing, you’re looking at this, it’s important to do some planning, right? It’s, you know, not only do do the investment analysis, but you’ll also look at like, how long do I want to hold it? How many do I want to have, and just work with someone that can help you do some, you know, we call it mortgage planning, right? Do a little bit of planning around that mortgage, and maybe even I’ve had situations where I’ve been with the client, and we’ve had their CPA with us, we’ve had their financial planner with us, and we’re all there in the same room, talking about how real estate fits into their overall investment plan. Right? Those are, those are great, because I don’t have, you know, the expertise as a CPA or as an investment advisor, I’ve got the mortgage expertise, and they don’t necessarily know all the rules around. So bringing your your your team together, right, having a team that might maybe even in an insurance person. Because there’s different requirements around all those things, you want to definitely make sure that you’re protecting yourself when it comes to you know, all the all your different needs and different you look at it in light of your whole whole package really, and not just in isolation, I think is really important.

J Darrin Gross 48:31

No, well, well said and indefinitely having some some sort of a plan, and then the strategy that you can act on it, it definitely will make it a smoother go forward, as opposed to a new plan. And, and, you know, no ability to execute kind of things.

Brad Hansen 48:47

Yeah. Yeah, I mean, one other thing I will throw out there, that’s kind of interesting. We used to see this a whole lot more, but it’s seller financed. You know, in sometimes, especially in a market where things aren’t selling as quickly, you might even have sellers who are willing to provide the seller carry financing. Like I said, we used to see that a lot more and they would even do second liens or other things. But you know, something to think about when you’re in this market. There’s a there’s still different ways to do that doesn’t have to be a traditional mortgage, like we’re talking about or you know, you know, don’t trust deed, it could be a seller that carries the note for you. Maybe they don’t want they want to sell but they don’t want to take all of that money right now. They’d rather have that money working for him and maybe an investor can get even better rate working directly with the seller. But again, it’s important to have maybe an attorney real estate attorney help draft agreements and the notes and trust deeds and those kinds of things too. So like I said, Be Be sure to work with professionals because As you want to make sure that you have somebody looking out for you, and it’s not just the seller who’s writing it up, or you’re getting it off onto getting it online and writing it up yourself something like that. So

J Darrin Gross 50:12

I love I love you, the fact he brought that up, because one of the things, I think that, you know, investors that are just getting started if they’ve bought a primary home, and they went through a realtor and ended up with a mortgage broker, and you know, there’s a, there’s a marketplace, and that’s fairly routine, I mean, there’s the MLS, where you can find the homes, you know, a three bed, two bath, you know, that fits your budget and the neighborhood, the school district, whatever it is you’re looking for. And when you go into the investor world, it really is kind of like the wild west from a standpoint of flexibility. If your imagination allows you to think outside the box, and you’ve got a seller, that’s, you know, agreeable, you know, whatever you you agree to, is, is available to you. It’s not like, it is like with a primary home. And and and so I mean, the fact that you brought that up, I really appreciate that, because that’s, that’s, that’s really where the the, you know, kind of the, the, the Genesis or the ability to really become an investor might might be for somebody listening right now. So I appreciate that. Yeah, you bet. So, Hey, Brad, if we could, I’d like to shift gears here for a second. Sure. By day, I’m an insurance broker. And as such, 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 there’s a way we can avoid the risk. When that’s not an option, then we look to see if there’s a way we can minimize the risk. And when cannot avoid or minimize the risk, we look to transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests, if they can look at their own situation, could be clients, investors, tenants, the market interest rates, politics, however you choose to have to identify what you consider to be the biggest risk. And for clarification, again, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. Yeah. So I’d like to ask you, Brad Hansen, what is the biggest risk?

Brad Hansen 52:27

Yeah, that’s a good question. You know, I think, you know, there’s a couple of them. Number one, I mentioned a few of these number one, I think you have to be really careful. Trying to do too much too quickly, right? It’s like anything, the more experience you get, the better you’ll be at IT knowledge. So I always say, they walk before you run, right? And make sure that you’re not, you know, if you’re gonna buy an investment property, do it in an area that you know, do it, do it in such a way that you’re going to minimize the risks, right? You know, that you have professionals help you, right? You know, the value of the home, you’re not overpaying. It’s going to cash flow, those kinds of things. So, you know, one of the risks is that you have a home that has a negative cash flow, right, let’s say you overpay and rates are high right now, right? So your rates, your payments going to be relatively high, but let’s say you have a payment, that’s 3500. But you can only rent it for 3000. Well, now all sudden, you’ve got a $500 a month negative cash flow. So, you know, again, knowing what you’re getting into and not just, you know, it can be as you said, it could be a little bit kind of glamorized a little bit, right. That’s a lot of hard work. You know, are you going to are going to hire a property management company? Are you going to manage yourself? Are you going to hire a handyman to help take care of repairs, you know, those kinds of things? Because stuff goes out, right? Are you going to set aside money for maintenance? So there’s a lot that goes into it, I would say, you know, that’s a risk. But it can be mitigated by educating yourself, surrounding yourself with with professional so walk before you run is another one. The other risk potentially is home values might go down. Right. Now, while we don’t necessarily think the environment similar to what happened in oh eight, where we saw 25 to 30% declines, because of the oversupply and the the lot of other things that were happening with the home financing wasn’t great. We don’t think that’s the same environment we have, if you overpay, you could see values go down, but that I think that can be mitigated to a degree by what we talked about earlier. If you’re going to buy it, don’t expect it. It’s going to give you the return on investment that you want to just the first year or two might take multiple years for that. So like anything, it is a risk. It’s money that can be lost. But I think I mean, I honestly think the big Guess risk is that negative cash flow, maybe buying a property again, I always recommend that you get a really thorough inspection, you found a property that had that you didn’t do an inspection. And you ended up having to put a new roof in or you had other issues, right. So like you, you know, again, I’m not insurance you there are things that insurance can protect you from, but insurance can’t necessarily protect you from buying a home that is in disrepair and needs a lot of work. Right. So those are probably the biggest risks that I see. And there’s ways to mitigate those and be prepared for them. But yeah, those are those are probably two of the biggest ones I’ve seen.

J Darrin Gross 55:45

Now well well put there definitely insurance company doesn’t want to rehab your home therefore i That’s no good way to get yourself canceled, but it’s like you Hey, Brad, where can listeners go? If they’d like to learn more connect with you?

Brad Hansen 56:00

Yeah, number one, they can go to my website. Again, I’m with Academy mortgage and they can go to my Portland mortgage.com. If you go to my Portland mortgage.com You’ll see my website, all my contact information is on there. I’m also at Brad.Hansen@Academymortgage.com Is my email. People can reach out to me my phone number is 503-544-8504 I love helping people. You know, really just, you know, with my experience, love helping be an advisor for people to help them with that mortgage plan, helping bring other people together to help them be successful in real estate.

J Darrin Gross 56:43

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

Brad Hansen 56:54

Yeah, thanks. Thanks so much. Always fun talking about what we love. All right. All

J Darrin Gross 56:59

right. All right. Take care. 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 57:20

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Senior Housing Investment Opportunities with Stuart Keller – CRE PN #388

Stuart Keller 0:00

If you were to say, Okay, those age 75 or older 20% of those individuals either want or need to live in a senior living community by 2030, there’s going to be anywhere from a 1 million to one and a half million unit shortfall within the United States. Now, you might say, Okay, well, you know, that’s, that’s really interesting, but isn’t there a lot of development going on? Currently, there’s anywhere from 40 to 50,000 units being delivered each year. That million 2 million and a half unit shortfall number already takes that into account. So there is going to be a either huge supply shortfall or a significant demand surplus, which is going to drive the demand for senior living communities.

Announcer 0:52

J Darrin Gross 1:11

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’s program is sponsored by Building Insurance and Risk. When you invest in real estate. Work with the experts at building insurance and risk you will receive multiple coverage offers with a side by side coverage comparison. To learn more, go to building insurance risk.com.

Today, my guest is Stuart Keller. Stuart is currently the head of Investor Relations syndication division, focused on senior living communities throughout the US. And just a minute we’re gonna speak with Stuart about senior housing. But first, there are a couple things you can do to help us out if you like our show. You can like share and subscribe to CRE PN Radio. And also, if you’d like to see how handsome Our guests are, be sure to go to 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, Stuart Keller, welcome to CRE PN Radio.

Stuart Keller 2:42

Thank you so much for having me really looking forward to catching up with you on all things senior housing.

J Darrin Gross 2:48

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

Stuart Keller 2:57

Yes. So you know, just kind of high level I’ve had a very unique blend of both asset management, financial analysis operations. And as of about three months ago, stepped into the investor relations space. So right after grad school, got a job, as you know, absolutely greener than green asset manager doing acquisitions, Asset Management dispositions. This was in 2010. So we were buying a lot of stuff, you know, REO foreclosures from, from different banks, we’re reviewing their bank tapes, I did that for a few years moved over to operations overseeing some multifamily properties as a regional manager, and then as a regional vice president, then about three and a half years ago, took over the Asset Management Division here at Lloyd Jones, successfully built that led the acquisition and then in 2022, the disposition on a little bit more than $800 million in assets. And now I’m in the process of building out our syndication platform, which is actually going to allow accredited investors to own a piece of a senior living community. In the United States, we’ve definitely taken a bull position with respect to senior living communities, especially where the demographics are changing with the United States with kind of what they call the silver tsunami of baby boomers.

J Darrin Gross 4:32

So let me ask you, I guess the first thing that comes to mind is how do you define senior housing?

Stuart Keller 4:39

So senior housing is going to be really broken down into four facets. The first is age restricted communities, just anybody, you know, 55 or older. It’s going to be a lot of activities for the residents. Very similar in terms of underwriting to multifamily But the 55 Plus you’re going to see an average residence day of seven years versus one or two years in a multifamily. From there, you move up into what they call Independent Living, which is 55 plus, but you’re going to have more enhanced amenities such as a salon, a barber, more regular activities and actual classes. And you’re also going to get three to four meals a day. And those properties typically come with a full commercial kitchen. The next level of care is going to be your assisted living, which is your, your independent living with a medical component to it, where they will be actually giving the residents medicines, being able to take them to and from the hospital for their appointments. And then the next kind of step is memory care, which is typically going to be on the same kind of property or community as an assisted living. But it’s going to have its own weighing with much higher level of skilled care nursing, Director of Health Director of wellness. So there’s going to be definite, higher rents, but you’re also going to have a higher operating expense. So your operating margin is actually going to increase as you increase within the levels of care.

J Darrin Gross 6:26

Got it. So one of the curiosities I have is that, in typically when I think of real estate, and like a syndication model, if you get a group of investors to acquire an individual property, the the operations are fairly straightforward, and is that it’s a managed management issue. And it could be third party, you could outsource out or if you have your own in house management, you could manage that. But but the management is more about just keeping the property full, keeping it maintained, maybe renovating, if that’s part of your plan. And it sounds like in that senior housing the or the first option you gave there, the 55 Plus kind of the age restricted community, that may be more of kind of the similar model, like you mentioned, and in multifamily. As you get into the more involved levels, like you have the independent living, assisted and memory care, obviously memory care at the top there, but how do the is just a function of the fact that has the care level increases? So do the the receipts, and so do the expenses? Or are you operating these? Or do you do purchase the property in one entity and then have an operator as a second entity, that that’s actually providing the care and and all the day to day with the residence?

Stuart Keller 7:58

Yes, so great, great question. So just kind of starting with your last point there. So typically, to kind of mitigate risk, these properties are purchased under what they call an operating company and a property company, the property company is going to have your licenses, it’s going to carry heavier insurance, whereas the operating companies actually going to be the the building the site, the assets. And there’s there’s typically going to be a lease agreement between the Opco and the prop CO. Now, taking it a step further, the level of kind of granularity and difficult nature of managing a senior living property generally increases pretty pretty substantially as you increase the levels of care. Now, to kind of add something else to that each state is going to have its own regulations, and its own staffing requirements. So you know, and this is just completely hypothetical, let me I didn’t memorize the statistics. But, you know, within let’s, let’s say, Florida, for every one independent living resident, you might need, you know, point to five caregivers or something. So as you increase the number of residents, you’re going to have to increase the number of maybe nurses it for you know, for assisted living. Maybe for every five residents, you need one more skilled nurse. So each of the states is going to have its own requirements. And we’ve actually, here Lloyd Jones in 2019. We started our own operation side of the of the company called Aviva senior living where we’ve actually hired within the four different regions, a COO and a CIO, CIO to oversee For all of the assets within their within their region, so they’re going to become market experts, be able to closely oversee the day to day operations of these properties and make sure that we’re in compliance with both state and federal regulations. But from a from a from a staffing standpoint, you know, staffing is probably one of the key metrics and benchmarks that you’re going to evaluate when you want to invest in a senior living community.

J Darrin Gross 10:32

Got it? And the the demand, you mentioned the the silver tsunami is that just a pure function of just as the population ages, the you know, more people are going to need the care? Or are there specific areas that you recognize the numbers to be more significant? Can you?

Stuart Keller 10:59

Absolutely, yes. So. So starting in 2019 10,000, baby boomers started turning 65 Every day. Now, that was the leading edge. In 2022, those same baby boomers started turning 75. So if you were to say, Okay, those age 75 or older 20% of those individuals either want or need to live in a senior living community by 2030, there’s going to be anywhere from a 1 million to one and a half million unit shortfall within the United States. Now, you might say, Okay, well, you know, that’s, that’s really interesting, but isn’t there a lot of development going on? Currently, there’s anywhere from 40 to 50,000 units being delivered each year, that million, 2 million and a half unit shortfall number already takes that into account. So there is going to be a either huge supply shortfall or a significant demand surplus, which is going to drive the demand for senior living communities. The development that is going on here within the United States, a majority of the development is taking place in the five major Sunbelt markets, although what those developers are not taking into account is that 70 to 80% of seniors will actually move back to their hometown, to actually, you know, live in a senior living community. So they might spend, you know, 10 years living in Florida enjoying the beaches, when it comes time for them to transition to an independent living or assisted living community. They’re gonna go back home. Now, even if that back home means a smaller town in Indiana, where we actually purchased a property in Valparaiso, Indiana, you know, just looking at that small cohort of demographics. You know, there’s five communities there. There’s nothing in the pipeline. And as of today, there’s anywhere from a 80 to 200 units shortfall of available senior housing, based on the existing demand. So that’s kind of the forward looking demand curve that we’ve identified. And we’re taking very much a philanthropic private equity approach to our investment strategy, understanding that the developers are going to be targeting the top 10 or 20% of earners in the country, the middle market that 60% is being largely ignored. And that’s what we’re aiming to do, whether it’s through acquiring Senior Living properties, doing a light renovation, and still maintaining its affordability based on the income demographics or actually going through and doing hotel conversions. Typically, you know, militarize single building extended stays that have a little kitchen already in them, and converting those into independent living communities. Now,

J Darrin Gross 14:17

that makes sense from a, you know, feasibility, I mean, just the bones are there for like a hotel conversion kind of thing. That makes sense. It’s interesting, you know, the statistics there about the 70 to 80% will return to where they’re from. And I guess it makes sense. I hadn’t really thought of it that much, but or, when you say home, is it where they’re from? Or is it where they have family or or is that are those the considered to be the same?

Stuart Keller 14:54

Typically both. Now, if a family you know, for example, My wife and I, we live in north northeast Florida. You know, when it comes time for her father, if and when he needs to live in an independent living or assisted living community, he would move up here. Now we’re not from here. You know, she’s from New Jersey, but it’s mainly where the main cohort of the family is located. But typically what we’ve seen, especially in Valparaiso, Indiana, populations 35,000, we’re actually seeing an 11% net emigration of those 75 or older, so, you know, those those seniors are coming home to kind of where their roots are.

J Darrin Gross 15:40

So from from an identifying, you know, when you set out to try and identify a market, you’re not looking for job growth, per se, you know, how do you identify a market that has that inward migration of the silver tsunami,

Stuart Keller 15:59

so we’re actually kind of taking a kind of full, full, well rounded approach to the underwriting, you know, we are looking at, you know, average equity in home values, seniors will typically leverage the existing equity in their homes, to be able to pay for or, you know, fund their, their new home. We’re also looking at the average income of the children and family members, the potential residents, you know, typically in senior living, we’re not marketing to the future resident, we’re going to be marketing to them, as well as their family members. So it’s very much a family decision. Whereas in apartments, it’s more of a one on one transaction with the resident. You know, and then I think most importantly, you know, we do utilize a system called division LTC, which is a a paid service, that will actually break down not only the demographics, but actually the demand surplus, in each of the different age cohorts that you can filter out whether you want to see number of potential residents, you know, over the age 65 with net worths of x, or their kids net worth or average incomes of why. So you’re able to kind of take a full, full faceted approach to understanding what good investment opportunities are, and then be able to back in to your pricing and your underwriting and your business plan development to make it a successful investment.

J Darrin Gross 17:45

Got it? As for the numbers, I know like in you know, multifamily per se, typically you underwrite to a 50%. And why? I mean, this is a back of the napkin kind of thing. Obviously, you want to try and do better than that, if you can. Is that a similar? You? Or is there a benchmark for underwriting for net operating income based on income and operating expenses?

Stuart Keller 18:16

Yes, so Senior Living is heavily focused on operating margins. You know, their occupancy is typically geared towards what they would call a census as opposed to occupancy. Now, some of those some of those rooms or units will actually be able to house to residents. So there’s going to be a second person fee may be in a one bedroom or a two bedroom unit. So pricing is going to, you know, fluctuate a little bit differently. But as far as the kind of benchmarks relative to multifamily, you know, I wouldn’t be lying to you, if I if I knew what those key operating margins were, because it’s going to vary not only by asset class, asset size, but then also the ratio of Il Al and memory care units. So it’s going to be a kind of three or four pronged approach to what a good operating margin is, you have a property that’s 10, independent living 20 assisted living and five memory care, you’re gonna have to mold all those together into what a effective operating margin is. Whereas if you had, you know, a deal that we have on CrowdStrike right now, you know, it’s, it’s ADA assisted living and 24 memory care. So that’s going to have its own set of benchmarks from there.

J Darrin Gross 19:44

Got it? So, you mentioned a couple of different sizes of properties or just in the examples you’re talking about, is there a sweet spot for you guys or is there a minimum size of an asset that you are Developing or acquiring?

Stuart Keller 20:02

Yeah, so typically, I mean, our recent acquisitions, we’ve closed on 14 So far in 2022. Really the the average asset size is anywhere from 80 units up to 130 to 140. The the the number of staff is going to grow pretty substantially. Now, typically in multifamily, you would have a one per 100 ratio in independent living, or I guess, moreover, assisted living for a ad unit property, you might have 20 or 25, staff members on that property. And that’ll grow. So the sweet spot, the Nexus, between your staffing ratio requirements, and your occupancy is really something that you that you would need to optimize, getting that one extra resident might mean that you have to hire a whole nother full time person. And your net operating margin would actually go down. Right.

J Darrin Gross 21:09

And you said that those numbers are governed by the state regs Is that Yes, sir. That’s current level of care. Yeah. Got it. So you mentioned some hotel conversions. Is there a specific strategy you guys have in acquiring properties? Are you developing any new Is it primarily by existing and, and rehab or just by operating assets and, and make them work better?

Stuart Keller 21:42

Yes. So you know, right now, we are looking at hotels, typically single building mid rise, they typically or kind of what we like to see is that they already have a little kitchenette. So they have the plumbing available for an independent living. Community. Elevated is an absolute must. We are also looking at we’re actually doing several ground up developments, COVID supply chain issues, and inflation in the debt markets have all taken a you know, center stage in, in kind of changing how effective it is to do ground up development right now. No,

J Darrin Gross 22:32

no, it’s a little hard to get a real solid plan when everything’s changing. So

Stuart Keller 22:39

yeah, absolutely.

J Darrin Gross 22:41

So investors, what’s the what’s the interest been, like for investors when you’re raising capital?

Stuart Keller 22:50

So the the biggest thing, you know, the lightbulb really goes on. When I compare where we are in senior living today is where multifamily was 12 years ago, you know, multifamily. 12 years ago, you could see the, you know, Gen X, the Gen Y and the Gen Z all needing to move out of their parents homes and into college, those then move into apartments. We all saw it coming. But we never addressed the housing shortfall. Now rental rates, I mean, it’s making the news every day, you know, rental rental rates are going up anywhere from I think last year was 30 or 35%. It was absolutely insane. So from that standpoint, you know, definitely a as far as a investor interaction, it’s a combination of providing additional education for them. But then on the investment return side, what really piques their interest is we’re buying these properties, and, you know, high single digit cap rates, you know, yields on these deals are typically, you know, anywhere from a 7% on the low end to 11% on the high end. So, you know, COVID, as horrific as it was for our aging population, the occupancies dropped pretty substantially from 20 2019 to 2022. A lot of these REITs and major institutions have actually elected to exit as opposed to continuing throughout the lifecycle of owning the asset. So we’re actually buying these properties at a deep discount. So that’s that’s what’s really driving our big push explaining to the investor the business plan, and we’re actually getting a lot of favorable feedback and interest especially on the deal that we have on crowd Street. I think it was 2 million raised in the first five If days, so from that standpoint, and that’s minimum investment of 25,000. So, the more education the more people learn about the future of senior living, the more impactful it’ll be and the more widespread it will become, as a you know, choice investment for people with the disposable income to be able to invest.

J Darrin Gross 25:26

As far as strategy goes, you’re acquiring operating what’s the expected hold time on these snowflake syndications? There’s usually a, an advertised exit what’s your, your typical hold time?

Stuart Keller 25:41

So based on the investment, you know, we have a couple that are just absolute, you know, true opportunistic plays. Typically three years will be on an opportunistic, we’ll, we’ll buy it all cash will stabilize it. And then we’ll recapitalize it, whether we put it onto a syndication platform, or whether we bring in an outside JV for our syndicated deals. Right now, we’re underwriting to a five year old. And typically, how we underwrite to make a deal, you know, see if see if it’s truly a good investment is to be as conservative as possible, and still get north of a 7.5 to 8% yield, and a 20% deal level IRR, which typically will result in a 17 net IRR to the investor.

J Darrin Gross 26:37

That’s, that’s always impressive when you can reach those kind of numbers. You mentioned, what was it 2020 or 12k? Remember how many assets you acquired this year 1414? How long have you been doing this long enough to to have some assets have gone full cycle?

Stuart Keller 26:59

Not as of yet. So we have we have some assets, I mean, ones under contract right now. We just when we started underwriting it, it’s at it was at 7075 76% occupancy, we’re closing on it in November of this year. Property is already at 88% occupancy, just based on the current domestic demand of that market. And prior to us even taking over we’re already seeing surpassed performance relative to our year one underwriting which is which is fantastic. This year, I did take 12 assets through the disposition process, they had all kind of reached their five year benchmarks were went through led the disposition efforts on those average realized net IRR to our investment partners was because a 48. With with more than a 3x equity multiple. So I mean, it was definitely we definitely take a conservative approach to underwriting. But no, we have not taken one of the senior deals full lifecycle as of yet. Got it.

J Darrin Gross 28:09

So far, investors are pleased it sounds like you’re any lack of interest. I mean, just say 2,000,005 days, that’s pretty, pretty good. Yeah.

Stuart Keller 28:21

Yeah. I mean, you know, as far as the the interest, it’s, it’s more over, you know, typically these deals are gonna have smaller equity checks, maybe up to 10 or 12 million. Some of the more some of the larger institutional investors, they need minimum equity checks of, you know, 50 million. So, you know, there’s being able to package these in the future into portfolios, I think is going to be very attractive.

J Darrin Gross 28:57

That’s all good stuff. Or if you had to identify as their one challenge that you been in the time you’ve been doing this, that is one of the larger challenge or or, you know, for just across the board is or is there a challenge or is it all just good, good stuff.

Stuart Keller 29:22

You know, I would say the biggest challenge that that we’ve had to kind of circle up is is going to be on site staffing. I mean, labor markets throughout the US are a challenge. So being able to develop kind of what we’re calling transition teams to be able to go in and fill the gaps of the on site staff is crucial. That’s that’s probably been the the single largest challenge. You know, second to the rapidly rising costs of construction and interior renovation come But he’s relative to underwriting. So being able to figure out what truly the residents need or want, versus what we had planned, you know, maybe they don’t really care about, you know, changing out the backsplash in their in their little kitchenette, you know, they would rather have a washer and dryer put in their unit.

J Darrin Gross 30:22

Yeah, no, definitely finding those. Those things that people want, as opposed to those that they don’t really care about is definitely, that’s kind of key to marketing, make sure you get that right. Yeah, I get it restored. If we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, 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 there’s a way we can avoid the risk, when that’s not an option, and we look to see if there’s a way we can minimize the risk. And when we cannot avoid or minimize the risk, then we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is, it’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation. It could be clients, investors, interest rates, inflation, tenants, whatever, you know, however, you can take a look at your situation and identify what you consider to be the biggest risk. And for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Stuart Keller, what is the Biggest Risk?

Stuart Keller 31:46

You know, I would say, you know, I think what we all experienced, experienced collectively as a nation in 2020. And 2021, was, you know, a pandemic, that disproportionately impacted the senior population, you know, the impact to you and I was a lack of availability to get a haircut, you know, some small mom and pop a lot of a lot of small stores, and, you know, mom and pop businesses went out went out of business. For for the senior living population, there was COVID restrictions, not allowing new movements into the resident into the communities, you know, just a a significant impact, which hurt both occupancy, which drove down the net cash flow, but also the ability for new residents to want to move outside of their homes where they felt, you know, safe and secure. So I would say definitely, you know, if there was a repeat hope to god, there isn’t of 2020 I would say that that’s probably the single single biggest risk factor and senior living.

J Darrin Gross 33:00

No, I hope we don’t go there again. And I know that the, as we record, there’s a another surge of whatever the latest variant is, but it seems like the you know, the how to manage it. I mean, we’re a little bit more capable of managing just hopefully it doesn’t. Her new one doesn’t come out. And repeat. So yeah, I’m with you. They’re historic, where can listeners go if they’d like to learn more connect with you?

Stuart Keller 33:33

Yeah. So we have a our on our website, Lloyd Jones, llc.com, that’s LloydJones.llc.com. Or if you’d like to get in touch with me directly. If you visit Lloyd Jones investments.com, you’re able to go in, get in touch with a member of our Investor Relations Team. Or you can simply email invest@LloydJonesllc.com. And that will be forwarded to me, where we can actually use my calendar link and schedule a one on one call to catch up.

J Darrin Gross 34:13

Awesome. Well, Stuart, 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.

Stuart Keller 34:24

Absolutely. Thank you very much for having me, Darrin.

J Darrin Gross 34:26

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 34:47

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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.

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