Working Capital The Real Estate Podcast

My goal is to provide information about real estate investing that will actually help the average aspiring investor take the steps necessary to start and grow their real estate business!

Can Real Estate Investing Actually be Passive? With Travis Watts | EP160 09/07/2023

Can Real Estate Investing Actually be Passive? With Travis Watts | EP160 Travis Watts is the director of investor education at Ashcroft Capital and a multi-family apartment investor. He has been investing in real estate since 2009 in multi-family, single-family, and vacation rentals. Mr. Watts dedicates his time to educating others who are looking to be more "hands-off" in Real Estate. In this episode, we talked about: Travis’s Bio & Background Passive vs Active Investing Transition Into a Full-Time Passive Investing Deal Vetting Geography of Deals Finding Real Estate Deals Investment Philosophy Useful links: Transcriptions: Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica Galley And. on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. My name's Jesse Rega and you're listening to working capital. My guest today is Travis Watts. Travis is a full-time investor, Passive income advocate, public speaker, and the director of investor education at Ashcroft Ashcroft Capital. He dedicates his time to educating investors who are looking to be when it comes to real estate investing. Travis, welcome back. Travis (42s): Hey, Jesse. So glad to be here. Thanks for the invite back. Jesse (45s): Not a problem at all. It's great to see you again. We've chatted before on working capital for those listeners that wanna see the, that first conversation, I was pretty wide ranged in terms of the topics, but you know, like most returning guests we have on a lot has happened over the last couple years. So we thought we'd kind of have you back on, talk about what you're doing currently and your take on on where we're currently at in the real estate cycle. So before we kick it off, for those that didn't hear the first episode, maybe you could give a little bit of a background for listeners to what you do and how you got into, into the world of real estate. Travis (1m 25s): Sure, yeah, happy to. So humble beginnings, you know, wasn't raised by an investor minded family, not a real estate background at all, but reading some of the books a lot of us have read. The Rich Dad Poor Dad type stuff, kind of was my gateway drug into learning about Passive income and financial freedom, things like that. So, started out with single family homes, did flips, did vacation rentals, you know, had roommates, just was trying to pull every string I could early on with a low budget on how I could make more money. And then I kind of shied away from doing as much of the buy low sell high strategy. And I really started to hone in on Passive income. So in recent years I've been a full-time limited partner, mostly in multifamily, private placements with many different operators, of course, Ashcroft Capital and Joe Fearless as well. And you know, I'm just a guy who, you know, came from nothing in terms of, you know, being handed anything or, or again, coming from a family of this. And once I realized what Passive income did in my own life and how it can truly free up your time, how it can give you more options in your life, it was a complete game changer. And so I dedicated the rest of my time from that point to trying to help others, trying to explain this, simplify it. So I've launched a couple different podcasts over the years. Passive Investor Tips is my current one under the best ever brand. And I just make these short episodes five to seven minutes. I try to consolidate as much as I can into quick snippets to help people. And then I'm on podcasts like yours and I'm writing and blogging out there, and I just wanna open up an underserved niche, which is a private placement Investing, and B, not many people talking about Passive income. So that's what my passion is, that's a quick background and that's what I do to, to help others. Jesse (3m 11s): That's great. And for those that if you've been kind of under a rock in terms of real estate investing, Joe Fearless website, I mean you just Google it, you'll see a number of resources from him. He kind of wrote what's known in our circles as like the Bible of multifamily. It's a massive book on Investing. In terms of the, the Passive nature, I always find this kind of fascinating from the standpoint that people go into real estate a lot of times because they expect it to be a Passive investment. And what one person's definition of Passive is very different than another person. So maybe just from, you know, 30,000 feet on Passive Investing, what do you consider Passive and where do you see people kind of mixing in, you know, what we would consider really an operator as opposed to a purely Passive investor? Travis (3m 59s): Yeah, I think you hit on a great point. As I mentioned, I started with single family homes, don don't know. If I was so focused on whether it was gonna be active or Passive, that really wasn't my concern at that time. But as many hope it, you know, to be Passive, when you start acquiring that property, 5, 6, 7, 8, you start to realize you kind of gotta make a decision at some point. Are you going to be, you know, a real estate professional, maybe a, you know, a full-time landlord, or are you gonna work a career, you know, and then have investments on the side? And that was kind of the threshold I hit because I used to work in oil and gas, a hundred hour work weeks, 14 hour days, and I'm trying to do all this real estate on the side and scale it up with, you know, one or two properties a year. And I just completely, you know, hit that threshold in about six and a half years. And I'm like, man, this is not for me anyway, this was not scalable, even with property management companies, I was still having to make a lot of active decisions. First of all, finding the properties, underwriting 'em, showing up to closings, understanding the markets and how they shift and how they change. And then, you know, making decisions. Do I repair that roof? Do I replace that roof? Do I paint the house? Do I refinance right now? So you, you can't help but say there's a, there, there's a lot of active components to owning, you know, your own individual real estate. So my definition to answer your question about what is Passive, this could pertain to real estate or any other asset or business. If you do not materially participate in the actual business itself, then you would be Passive as an investor in it. So it could be as simple as owning some stocks. Maybe you own Apple or Microsoft stock. That doesn't mean you're active with the company, it doesn't mean you work for the company. You, you just wanna be a Passive investor. You just wanna share in the profits and let the team do their thing. And so that's what I found to be the best strategy as you start to acquire more and more capital to free up your time so that you can spend your active time on what it is you wanna do. And there's nothing wrong with being active in Real, Estate or being a general partner or flipping houses or being a wholesaler, if that's what you like to do, if that's truly your skillset, your passion, your desire, nothing wrong with that. But for me, owning my own real estate was really a pain point. It was really a headache, it was really a hassle. I didn't have the skillset, I didn't have the background, I couldn't compete with the people that were 20, 30 years into it. And, and me being this naive newbie that kind of hit a, a market dip at the right time. Jesse (6m 24s): I think the, the nature of the, the conversation of Passive versus active too, it, it, in a lot of ways it can hinder or really stop progress in Investing in general. A lot of times people get a few investment properties and they get kind of a stale taste in their mouth after a couple bad experiences. you know, even for people that have been successful, oftentimes maybe it's moving to multifamily where you can make a, a re a real argument that it's less stressful having a hundred tenants than it is having two tenants in, in a lot of ways in, in that you're dealing with a lot of emotional one-on-one conversations. You don't have enough to necessitate prop property management or asset management. And then you have a lot of times in those cases, a hundred percent vacancy when somebody leaves. So, you know, there is that argument. But to get to that scaled place, oftentimes you, you deal with a lot of this and I think a lot of investors bow out after a few bad experiences on the operating end. Travis (7m 22s): That's a great point. And statistically, what is it, three failures for the average person, they call it quits, right? And so it doesn't take much to get there when you're doing your own properties. you know, I had properties where I was cash flow and a few hundred bucks a month, and all of a sudden, you know, the, the H V A C system goes out and there's 5,000 outta your pocket, there went a whole year of cash flow or you know, tenant quits paying rent. That's the obvious one. I've had tenants destroy properties. I'm not trying to make horror stories out of it. I, I made, you know, great money too in my active deals. But it really is, it takes a lot of perseverance, let's just put it that way and time. Jesse (7m 59s): A hundred percent. And I think you've touched on something too where your definition is not material materially participating in the active business or the, the operations of the business. And you know, oftentimes depending on the country or state, there's legal definitions, you know, in terms of limited partner that you cannot participate or you lose your, your limited liability status. So it's not necessarily just a, you know, a a definition, just have a definition. Oftentimes there is a, there's kind of a legal structure in place and those definitions are important. Travis (8m 30s): A hundred percent man. Yeah, it's just my Philosophy was kind of, if I can't beat 'em, join 'em, I guess, you know, there's always gonna be people that are, are better than you at any particular thing. So it's just why not profit share with them in their journey. And so, yeah, made a lot of sense in my case. Anyway. Jesse (8m 47s): So for those that, you know, say they've been Investing in Real, Estate just on, you know, your typical active end, whether it's smaller, single family commercial or, or you know, multi res, how do, how have you seen people make that transition or, or foray into Passive Investing? Because a lot of times we see is people that have earned a decent amount of income where they can put 50 or a hundred thousand, 150, whatever the minimum is, say, for a certain fund or asset into a Passive investment. What, what's that transition or what does that process look like for your clients? Travis (9m 24s): Well, the first thing I'd point out is there's not many people that are like myself and a few others here in the industry that are literally full-time Passive investors. Meaning that every investment I have, I'm an lp, I've, I've never been a gp, I'm not looking to become one. That kind of thing. Most of our clients are what, what we're talking about here, it's the, it's the typical story that they bought a property themselves, maybe two, maybe three. They like 'em, there's pros and cons, they understand that, but they also know that if they had 20 of those, they don't want that. And so I use my dad as a good example. He got up to eight properties on his own single family and decided I wanna retire and I don't want to have 20 properties. I I like my eight and they're paid off and it's all good. But he, he transitioned at that point into becoming a limited partner in syndications. And now it's a, it's a limitless opportunity. Anytime he has liquidity or a sale or refinance or whatever, he can just do another syndication investment. And another, and another, and another. I'll tell you, it's not much harder to have, you know, two syndication deals under your belt as an LP versus say 50 of them. It's, it's still very Passive if you choose to make it that way. Jesse (10m 35s): So in terms of the Vetting or the questions that you're typically asking when you're getting into a Passive deal, 'cause often people will say, well, okay, if you grant the fact that we're gonna trust people, operators that are smarter than us know what they're doing, you also have to, you know, know how to vet them. So what's your approach to that? Travis (10m 54s): Yeah, I do. I'll answer that absolutely. But I want to point out that the foundation to this answer is one of the best things about being a limited partner is no matter where you live in the world, you can invest wherever you want. Okay? So like back when I had all these properties, single family all in Colorado, I lived in Colorado and I started to get scared about natural disaster risk or political risk. What if Colorado says, Hey, we got a 10% state income tax, now all of a sudden All, right? People are gonna move out in droves. I'm gonna have a hundred percent of my portfolio right there in the heat of it. And so I never want that. And it's a beautiful thing to be able to, to spread out. Now what I do in my approach is I start with my goals first, and I recommend people do that. So what is your actual long-term goal? It doesn't have to be the complete end goal, but maybe a five year goal, maybe a 10 year goal. Are you looking to build up more Passive income to create a backstop for your active income or maybe to retire? Or do you want a certain amount of net worth? Maybe you want $2 million net worth by the time you retire, whatever it is, I start there and then I start looking at what types of investments could potentially move me towards those goals. And so what I like is kind of a, a 50 50 hybrid, I'm gonna put my money in something that pays me on a monthly basis. So there's my Passive income, but also has the potential for equity upside if we buy low and sell high, I still like that strategy. I just don't do it full-time. There's no investment that I've ever made, well, not ever recently made where it's just solely buy low, sell high with zero cash flow. But that just fits my risk profile, my goals and objectives. That doesn't mean it's right for anybody listening to this episode. So first, identify what it is you're trying to do. Try not to just make a number goal, like 10,000 a month Passive income. Ask yourself the real why questions, why do you want 10,000 a month Passive income? What would that mean for you? What would you do with the money? Put your kids through college, retire early, quit your job, vacation more. You gotta really know what you're after. And you gotta put some emotional thought towards that because I can tell you firsthand, if you just say 10,000 a month Passive income and you get up to seven and we have a nasty recession and, and you start going downhill, you're very likely to give up on that goal and just settle for less and say, well, maybe, maybe I'm, my goal is now six and and I'll settle on that. So you gotta tie it to like, I'll fail my kids if I don't put 'em through college, you know, if I don't meet this goal and then you're not gonna give up on your family. So that's a little piece of advice. Now for the technicals to your question, I look for a solid track record. I look for reputable groups. you know, I started Investing with Ashcroft years before I came on board to, to help 'em out with investor relations and education and all that kind of stuff. I wanted more of a transparent, you know, look into the company so to speak, so that I knew where I was placing my money and I could learn the business that way. And then, you know, just conservative underwriting, conservative projections, you gotta start to learn your criteria. You mentioned Joe's book earlier, the best ever apartment syndication book. It's about 400 pages, but it can help you identify your criteria. Do you like value add business plans? Do you like new development? you know, do you like core assets or core plus or opportunistic? There's a lot of jargon to learn in this industry, but for me, I like Sunbelt markets right now. And for the last, you know, seven years or so, it's where people are moving, it's where companies are relocating to. But with that in mind, markets change. you know, we just saw Phoenix go through kind of a big boom and a little bit of a bust right now, so there's opportunistic times to get in and out. And so it's just kind of like writing down your criteria once you understand it and can identify with it. And then just trying to check off as many boxes as you can. And I rarely get a hundred percent of my criteria met on any given deal, but if I can get 70 to 80% there, then I feel good about moving forward with that particular group. Jesse (14m 48s): Yeah, and it's, it's kind of, it's cool that you, you mentioned the geographic diver diversification, where I find with Passive investments, especially on the, if you're on the LP side, you can really spread yourself or di diversify yourself, whether it's like you said geographically or it's the, the type, you know, maybe you're doing value add in this area, you're doing a buy and hold in this area. In terms of the initial kind of outreach and basically finding the investors that you want to invest with are, are you typically networking in your home state or is it something where you, you know, you, you talk to somebody like yourself and it's, you know, maybe word of mouth in terms of finding these operators. How do you, how do you typically go about that? Especially for somebody that's kind of breaking into Investing or is moving from operating some rental properties to somebody who's gonna take Passive Investing on the LP side more seriously? Travis (15m 42s): That's a great question and I'm a big believer in, you know, your network is your net worth. And I started with just simple, easy, low hanging fruit sources, like getting on Google and typing in, you know, syndication groups and making phone calls. And then it led to local real estate meetup groups and trying to meet people face to face, which gave me such a better indication of who these people were and what they were doing. And then I just started branching out more and more from there. I would go tour properties with different groups and then I would do national conferences and now I speak at national conferences. So it's kind of a win-win because I'm there to, you know, help educate on this topic, but I'm also there to network and learn. And I'd say I've found about 60%, maybe even 70% of all the operators that I've ever worked with through face-to-face contact. So the more you can get out there and the more you can network, the better off you'll be. And another key, if you want to kind of just get right to the point and circumvent some time is find other people. I've always been a big believer in this, find people doing what it is you wanna do and just make them your mentor Whether, you have to pay them Whether, you just have a quick 15 minute call, maybe once a month. Pick their brain. Who are you Investing with? What, you know, how, what's your experience been? you know, who would you recommend? Testimonials go a long way in this industry and if I can get, you know, five, six testimonials lined up for a particular group and they all happen to be positive and you know, they got the track record and all the rest, I'll probably invest with them. Jesse (17m 12s): Do you make a, any distinction in terms of Investing with an operator that invest in asset specific deals as opposed to creating funds? you know, are you agnostic or do you prefer... /episode/index/show/workingcapital/id/27967536

Is Now the Right Time to Invest in Real Estate? with Neal Bawa | EP160 08/23/2023

Education, Economics and Real Estate with Bryan Caplan | EP159 08/11/2023

Real Estate Round Table with Tyler Cauble | EP158 07/27/2023

Real Estate Round Table with Tyler Cauble | EP158 Transcription: Speaker 2 (0s): Welcome Speaker 3 (2s): To the working capital real estate podcast. My name's Jessica Galley And. on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Speaker 2 (22s): Biznow upcoming Elevate Conference is taking place this August 16th through 18th in Nashville and will convene development and investment analysts, associates, and other rising commercial real estate professionals from across the nation. Elevate will go above and beyond your average event. Attendees will learn critical skills and build career lasting relationships to grow professionally and personally. Plus hear from industry titans, including Willie Walker, Gary Rappaport, and Simon Ziff. Tickets are extremely limited, so don't miss out and apply . Welcome back to the commercial real estate Investor podcast. Really excited to have such an outstanding group of individuals here today, in my opinion, some of the top commercial real estate brokers from across North America to be bringing you all a brand new segment that we're hopefully gonna be doing, you know, once a month, maybe once every couple of months between the four of us where we have a little commercial real estate brokers Roundtable and talk about what is going on in the commercial real estate market. What are we seeing since commercial real estate brokers are really the front line of what is going on in the commercial real estate industry, both on the leasing front and on the investing front. And with that we've got Chad Griffiths, Jesse Fragale, and Adam Williams. And so I'm gonna have them each introduce themselves, talk to you a little bit about the asset classes that they work in and where they are in the world. And Chad, I'm gonna hand it over to you first. Speaker 1 (1m 43s): Yeah, thanks Tyler, and a pleasure to be here. Thanks for the invite and looking forward to doing more of these as well. So yeah, Chad Griffiths industrial real estate broker. Started my career in 2005. Same company actually ever since. And then I started investing in myself in 2014, coal of about 150,000 square feet worth of industrial properties. Brokerage is still my day-to-day business. I follow the industrial market quite closely based out of Western Canada, but I keep pretty much on top of trends all over North America and and the world. So looking forward to talking about anything to do with industrial real estate. Speaker 2 (2m 18s): Love it. Jesse, Speaker 3 (2m 20s): Hey, everybody. My name's Jess Galley, pretty similar Mo just on the office side. I got into the, the business on the investing front in student rentals. Continue to do multifamily to this day, but same, same idea, day to day is still on the brokerage end. Investment sales, predominantly focused on the office market, so investment sales and office leasing. So I do that out of Toronto. So pleasure to be here. Speaker 2 (2m 49s): Adam Speaker 4 (2m 50s): Hey, everybody. Adam Williams coming to you live from Charlotte, North Carolina. I don't know anything about industrial or office leasing, so you don't have to worry about me talking about that. I only do retail hospitality. Been doing it now for honestly too long. I remember being a young pup in the business and those days are gone. Same, same kind of story of these other guys. I do a lot of stuff on my own balance sheet and with, with local entrepreneurs. Everything from, you know, bowling alleys to hotels, restaurants, and, you know, small development projects. But do a, a tremendous amount of kind of institutional level retail landlord and tenant rep in and around the Carolinas. Speaker 2 (3m 32s): Yeah, this is gonna be a, a fun conversation because everybody on this panel is investing as well. So you're, we're we're all bringing that to the table, which I think is a really unique perspective. 'cause not all commercial real estate brokers are investors, right? And I think that we as commercial real estate brokers that work with investor clients kind of bring a, a fair amount of the investment knowledge to the table when we're working on it. So you guys are very well qualified to be talking about this. Jesse, I wanna dive in first with you on the office sector 'cause that is what everybody has been talking about basically since Covid hit, what is going on in the office market and is it true that office is just dead? Speaker 3 (4m 10s): So it's, let's see, respond to this concisely. I I'd like to take a look at office between two different markets. The, the downtown cores of the world and the suburban office market when it comes to downtown centers, whether that's New York, la, you know, Toronto, Vancouver, those buildings. I think there's been a flight to quality. So the office market has been obviously sluggish over the last few years because companies right now are just tr we're trying to decide what are they gonna do, are they going on a hybrid model? Are we gonna be in the office three days a week? Is it five days a week? We're, are we gonna ever gonna be back there? We were just talking on our sales call this morning. And for a lot, we have over 80 offices, I should just say with Avis and Young. So we see a lot of different markets and we're starting to see that return to office. And what I mean by that is a more specific mandate where you don't have companies just saying, okay, you know, we'll say we're in three days a week. We're starting to see more of a push to have it systematized and have people in there. The other thing is, I think after two, three years, especially in Canada, I know you guys weren't shut down as much as we were, but the result was a lot of the team building and being able to build culture in a company had to take a backseat to, for a lot of the, the different kind of arrangements people had in the office. Now all that being said, I think every major market has seen an uptick in the vacancies that they've had for Toronto and Vancouver. Very healthy for other markets, maybe not so much because we had low vacancy for such a long period of time. How I think this shakes out. I I don't th you know, obviously we're all glass half full guys or we wouldn't be brokers. I don't think offices is dead. I think these changes proceeded, these lockdowns and what's kind of happened to the world that people wanted quality, better amenities wasn't a place that you just were gonna be in a cube for 70 hours a week. So I think that change is happening. And the reason I separate the downtown and the suburban markets is there's been a lot of talk in the Canada and the US about repurposing buildings. The the reality is, and we talked about this a little last time, Tyler, is that you can't just take an office building and turn it into a multi-residential building. They're not built the same way. They're not designed the same way. So although there are candidates for buildings to be converted to higher and best use depending on the area and you know what's in demand, I think that we're not gonna see as much of that as people think in downtown course. I think that might be a periphery thing for buildings that where it's feasible. So I'll leave it there. That's, that's kind of my 2 cents right now on, on the office market. Speaker 4 (6m 46s): Jesse, can I ask a quick follow up question or, or just a, something that I've, I've been itching to hear somebody's perspective on. Somebody told me the other day, or asked me the other day, I should say that how I thought the retail apocalypse where, you know, every retail shop was gonna close and, and every you, everything was gonna be on Amazon, there were no survivors, everything was gonna die. Like I feel that same kind of like click beatty fervor around the office market right now, but I don't know anything about office, right? Oh, I know that much about office. So I'd love to hear, you know, how that strikes you. Do you see any similarities, frankly in the retail business? It was like a, you you mentioned flight to quality. It was a, it was a merciful death for a lot of, a lot of brands that were just hanging on by their fingernails for the last 10 years that had been watered down and watered down and bought and sold. So I, I'd love to hear, you know, how that comparison strikes you. Speaker 3 (7m 51s): Yeah, I think it's a good comparison. I've, I've never really thought of it that way, but we've seen with our retail folks that, you know, the ones that have done very well over the last few years have been quality assets, especially in our area grocery store anchored assets where there's this kind of concept of, I think of creative destruction that people just like, they, they don't realize our industry's a cyclical industry and, and every once in a while you need to kind of clean up some of the underperforming assets. And it sounds pretty, pretty brutal. But some of them that were kind of hanging on, you know, maybe should not have, should not have been there. you know, the business cases might not have facilitated, you know, where they were staying in the rent they're at. So to answer your question directly, I do think there's a little bit of that in office. You'd be lying if you'd say that all these off office asset classes are gonna get utilized. There's gonna be something that happens where whether that means these buildings have to now really start investing in their buildings and make sure there's amenitized we space that it's, you know, those old offices, like I said, where you just have Cube Farms or even modern offices that just don't have a lot of amenities. And then I think the other component is there, you know, before, I'm sure this is a lot of American markets, but in Toronto, the trendy areas on kind of the periphery, the west end, maybe north of the city in, you know, college, the, those were kind of these trendy areas, but they weren't as well connected to transit. I think now you're starting to see that these, you know, younger companies that wanted brick and beam space, maybe that's not on the top of their list, maybe transit number one. And then after that, you know, they can start looking at the actual look and feel of building Speaker 2 (9m 33s): Jesse. What, how do you see office evolving over the next 10 years? 'cause if we take what Adam said and kind of go back to what happened to retail really starting probably around 2008, we went from, you know, I mean the first project I ever worked on was built in 2006. I took it in 2013 as the, as a leasing agent. It was a 550,000 square foot power center, right? I mean it was target anchored Kohl's, I mean, you name it, they were all there. And that development doesn't really happen anymore. It's more of this mixed use town center, smaller retail, and those are thriving. How do you see office kind of evolving over the next, you know, decade or so? Speaker 3 (10m 13s): Yeah, well, I mean, the short answer is I don't know. So that, you know, that's the first thing I'll tell clients of mine when they ask like, for that long, that kind of, you know, long time horizon. But, you know, my, my intuition is that we are, we're starting to see a lot of these large developers, Whether, you know, Cadillac, Fairview, Oxford, like these, these Brookfield, these big developers that are putting a lot of money into their amenities to the, and it's not just about having the food court, it's that, you know, if you work for a certain company that has X amount of square footage in one of these towers, you have full exclusive access to a gym on say the 12th, you know, the 11th floor. Something to that effect where they wanna make it as attractive as possible to be in the office and be in kind of that ecosystem. Yes, you're gonna get some people that drop off by the fact that their commute is, you know, further away and they're, you know, and then the dust will settle in that way. But I do think that amenities are, are a huge component that the square footage will balance out in a proper, like what we always say, it's we versus me space. And, and that goes for the common areas and that that goes for the office internally itself. Speaker 2 (11m 21s): Chad, let's get you in on the conversation here. We've got a question from Junie Cortez. I live in a city with an extreme shortage of industrial space. I've heard positives about opportunity, but also negatives about too much developing to fill the void. Is there a such thing as overdevelopment when it comes to industrial? There always seems to be a need for industrial space? Speaker 1 (11m 41s): Yeah, it's a great question and an observation about the state of the market right now. It's interesting because industrial's actually been almost the opposite of what offices going through right now, where offices has some challenges industrial, the challenges is there isn't enough inventory. The co rate of that, and I do see this being a big problem at some point down the road, is that developers do tend to overbuild. It's a long cycle from identifying land to going through the permitting process to actually completing the project. That's a long cycle. And developers often see signals of aggressive rent growth and low vacancy, and they see those signals as a, as a signal to build and look at a market like Dallas, which at one point they had 70, 75 million square feet worth of industrial properties under development at one point in time. It's a staggering amount of industrial property, but that, that's a medium-sized market, that's their entire industrial inventory. And Dallas was building that at one point in time. So I, I think that there is a warning sign that that could be a problem down the road is that we will continue to build too much. The interesting thing is that might be somewhat offset by the fact that interest rates have caused new developments to actually stall out. So it would've been all the development that got underway in 20 20 21, even early 2022, that's underway. And it's very hard to hit the brakes when you're, when you're in motion already. But that new development, the developer that's sitting on a hundred acres that was gonna do an industrial park, they might just say, well, you know what ca cost of capital's too high right now. Let's actually just sit and wait and see what happens next year. So it's interesting, we'll see a lot of new inventory hit the market this year. What's gonna happen next year, because there'll be that lag from developers po hitting the pause button right now until it actually comes to fruition. I suspect that we will probably see an oversupply at some point in the next year or so, followed by potentially an undersupply. And just real quick on some stats as well, the national vacancy rate in the US it's 4.2% for industrial, that's nationwide. You start looking at some of the really hot markets like the port markets, California, New York, New Jersey, even Vancouver. These markets are sub 2% vacancy. In some cases they're sub 1% vacancy where there's no inventory at all. So those markets have a lot of problems and they can't even necessarily add any more inventory because there's land constraints on it. So there's, there's a rebalancing going on at play right now where companies are looking more inland looking to markets where there is cheaper lease rates, more inventory available. But to the, to the question that was brought up, I think it's a fantastic observation is that developers and just the real estate community as a whole, we always do this to ourselves where we always overbuild when the market's really hot. And then it takes like the, you you had mentioned as well is it's a cycle. So it has to work its way through the cycle where you're gonna have years of really high positive absorption followed by years of negative absorption. And that's the cycle that we're all in right now, industrial's at the top. But I I think that there's reasons to believe that at some point down the road that will have to cycle back and and regress to the mean. Speaker 2 (14m 53s): Yeah, I mean it, it, it's been very clear to me for years. I mean, I've been telling clients for probably the past four or five years, if you can build flex industrial space, you know, small office with, with some warehouse on it, it'll be leased up before you deliver it. And, and I just know that anecdotally from the calls that we receive on a daily basis from tenants looking for that kind of space, what data points or market indicators do you all follow to determine whether or not a development like that should go on? Like if you're talking to a client and they call you and say, you know, Hey Adam, I wanna build some retail space. Is this market good? Or Chad Industrial Jesse wanna do an office building? What are you guys looking at to tell them like, hey, the data, not just anecdotally, but like the data says this is actually a good move for you to make, Speaker 1 (15m 41s): Happy to tee that off and then Adam, you can jump in as well. I would look at it on a very micro level. So there's statistics out there, like the vacancy rate for us industrial 4.2%, that's, that's a good sign, but every market is gonna be different and have its own nuances. So I think you really have to go on a case by case basis as well as even just narrowing in on exactly what you're planning. Because industrial, and, and you've mentioned this numerous times as well, Tyler, it's fairly broad. So that can include manufacturing properties, warehouses, distribution centers, all the way down to the flex industrial like little contractor base or even self-storage really. So I, I would say it's, it really becomes an exercise in identifying the signals in your specific market. I I really comparing that proverbial apples to apples in terms of if you're building a 30,000 square foot flex property and they're gonna be 2000 square foot bays, what's the market for 2000 square foot bays? Not what's the vacancy rate across North America? You've really gotta get granular and, and identify exactly what you're building, exactly what you're gonna be competing against. And that just comes down to a a, a financial feasibility model. What's it gonna cost you to build, what are your timelines? What are your projected rents or if you're gonna sell them, what's your sale price? And then working backwards through to determine it. But I, I think that local expertise is imperative when you're, when you're developing anything, it's great to have that global or North America or Canada or US wide perspective, but you really gotta dig in and fully understand your local market and exactly what you're building. Speaker 4 (17m 17s): Yeah, it sounds like, yeah, I don't wanna repeat what you just said. I mean, retail is like that times 10, you know, retail is so specific and so micro. I mean frankly you can, you can take one wrong turn on one street and have one storefront 30 yards from another storefront and the, and the rent is different. So the the big challenge that, that we're running into right now is, is supply good supply. Like there, there's certainly no shortage of, of bad kind of backwater retail, but the, the available retail that is well-built, well positioned with the right demographics is, is very, very hard to find. And frankly, going back to the re retail apocalypse kind of narrative from, what is that now, four years ago, five years ago, nobody, it'd be like building a spec office building in a, in a center city right now, five years ago, like nobody was building new retail. And now that it has come back with a vengeance there, there's almost no supply and there's almost no supply on good urban kind of main street, high street retail. But there's also like, I've got clients like Ace hardware that all they want... /episode/index/show/workingcapital/id/27586395

CRE Investment Outlook with Jim Costello | EP157 07/19/2023

Ayn Rand, Objectivism and the Economy with Yaron Brook |153 07/05/2023

Best and Worst Asset Classes in 2023 with Raymond Wang | EP155 06/29/2023

Building Passive Income with Whitney Elkins-Hutten | EP154 06/22/2023

Record Breaking Real Estate Investment with Raymond Wong | EP94 06/22/2023

Real Estate Tax Tips with Brandon Hall | EP151 06/06/2023

Opportunities in Commercial Real Estate with Michael Bull | EP150 05/13/2023

Jake and Gino: How to Create Passive Income, Build Wealth, and Take Control of Your Destiny | EP147 04/27/2023

Fix and Flips to Syndicating Apartments with Ted Patel | EP147 04/20/2023

How Does the Real Estate Cycle Work with Glenn Mueller | EP144 04/13/2023

How to Scale Your Real Estate Business with Kris Krohn | EP143 04/07/2023

Buy Right, Finance Right, Manage Right with Mike Taravella | EP145 03/31/2023

Over $250M in Real Estate with Open Door Capital’s Jens Neilson | EP141 03/23/2023

Humble Beginnings to Growing a Multifamily Portfolio with Deji Hambolu | EP140 03/16/2023

The Future of Cities with Karen Chapple | EP139 03/07/2023

Simplify Your Financial Plan with with Mark Willis | EP138 02/27/2023

Simplify Your Financial Plan with with Mark Willis | EP138 Mark is a Certified Financial Planner, a three-time #1 Best Selling Author and the owner of Lake Growth Financial Services, a financial firm in Chicago, Illinois. Over the years, he has helped hundreds of his clients take back control of their financial future and build their businesses with proven, tax-efficient financial solutions. He specializes in building custom-tailored financial strategies that are unknown to typical stock jockeys, attorneys, or other financial gurus. As host of the Not Your Average Financial Podcast™, he shares some of his strategies for working with real estate, paying for college without going broke, and creating an income in retirement you will not outlive. In this episode we talked about: Mark’s Background Getting Started as a Financial Planner Approaching Clients Be your Own Bank First Few Questions to ask Real Estate Investors Debt Aspect Mark’s Advice to Beginners in Real Estat Useful links: The book “The Bank On Yourself Revolution: Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future” by Pamela Yellen Transcription: Jesse (0s): Welcome to the Working Capital Real Estate Podcast. My name's Jessica Galley, and on this show we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, you're listening to Working Capital, the Real Estate Podcast. My name's Jesse for Galley, and my guest today is Mark Willis. Mark is a certified financial planner, a three-time best number, one best-selling author, and the owner of Lake Growth Financial Services, a financial firm in Chicago, Illinois, and co-host of the not your average financial podcast. Mark, how you doing today? Mark (42s): Doing great, Jesse. Thanks for having me on. Jesse (44s): Well, a pleasure to have you on. I know that we, we chatted a little bit before, I thought listeners, you know, whether they are investing in real estate, are interested in entrepreneurship and business, that they would get some value about having you on as a guest. And you can talk a little bit about your, your story and, and kind of what you bring to the table in terms of the financial world. But before we do that for listeners, you know, that don't know who Mark Willis is, why don't you give us a quick background of your background for listeners and we can, we can kick it off from there. Mark (1m 18s): Sure, yeah. Well, I've, I've had the great privilege of working with clients all over the country, us, Canada, and around the world. I've been able to serve many business owners, real many real estate investors, even some N F L Super Bowl champions. But Jesse, most people I work with are just interested in having a bit more certainty, you know, assurance and maybe, I guess, you know, the belief that they're gonna actually achieve what they're trying to do. I feel like a lot of people are frustrated with their real estate portfolio, their financial lives, because what they attempt to do is just not working or it's not working efficiently. So a lot of people who come to me say, mark, I feel like I'm just floating down the gutter of life and I, I can't seem to catch, catch on to a a, a log to move upstream financially. I can't swim upstream. So what we get to work with, and I have the, you know, great honor to do this is work with clients that wanna move upstream financially and become, you know, more in control of their financial future. Jesse (2m 18s): That makes sense. And, and I like it. Appreciate that. That kind of, I guess, philosophy or goal for, for what you do, for your, for your background. You mentioned, you know, before that, how you got into this business. We talked a bit about 2008, and if for listeners that don't know, you know, your background originally was not kind of being the self-employed, the financial planner helping people out. So how did, how did you get, get started in that and, and where you are today? Mark (2m 48s): Yeah, well, I, I certainly didn't grow up wanting to be, or even knowing what a financial planner was. So I think the, the first inclination that money was a part of my life was as I graduated college, sadly enough, I just never paid attention to money and found myself in debt up to my eyeballs in the middle of a great worldwide recession, you know, six figures of student loan debt and no plan to pay the thing off, Jesse. It was, it was like a mortgage around my neck. It was like a, a weight pulling me down. And given that I had no plan to pay the thing off, it was just becoming worse and worse. And it was a surprise to me that there was no training, no education on money or money management for all of the education you get in college. It was surprising that there was no real basic budgeting pla class or whatever, at least not where I went to school. So, yeah, it got me really focused really fast when I realized that, oh yeah, these guys want me to pay them back. So that was a surprise. And I got into a couple of businesses, you know, worked my tail off for a couple years in the middle of a recession where no one was hiring, did every job I could find, including some property management positions, which put me under the, under the, under the, in, into the darkest place you could probably imagine, which is under an elevator that's being serviced. And I'm there with a, a shop vac sucking out God knows what to clean this thing out. And I'm, I'm hoping that they don't snap the wire and end me right there, you know, so that was the, that was the service I had to give the debt, slavery I had to give to my slave masters, Nelnet and Sally Mae and all the rest of the banksters that had a, you know, a knife to my throat as I was trying to pay off all this debt. Fast forward a little bit, I was working for a C P A trying to get my bearings on, on income, and I was listening to her. I was mainly doing tax prep and I was listening to her as I was doing some tax prep. I would overhear the calls where she would be discussing retirement plans for her clients. I wasn't doing the investing necessarily at that point, I was just tax prep guy, but she would have those calls and it was the calls that you never want to have as a financial professional where you have to tell the client, I'm sorry, Mr. Client, I know you're 63, I know you're about to retire, but I just lost you half your life savings. Sorry about it. Click, you know, that's a terrible way to run a business. I, I hadn't no desire to have anything to do with it. And I almost left the financial industry until I found some strategies that had nothing to do with Wall Street that helped us meet our goals without taking a bunch of unnecessary risk. And it also happened to help me pay off my debt too. So it was a, it was a light bulb moment. And in that moment my wife had the, the wherewithal to kick me in the pants and say, start a business, don't be some w2. Go out there and start the business. And at the time I needed to borrow her courage, but I did it, man. I did it. And that was 11 years ago, almost 12 years ago. And here we are with, you know, several advisors that I get the privilege of working with and a little over 1200 clients around the country and around the world. So it's been a great honor to get to serve clients and help them meet their goals. Jesse (6m 8s): That's great. And on that point with clients, when it comes down to, you know, you talking about your services for individuals that, you know, for our audience group, real estate investors, people you know, potentially with a portfolio or building their portfolio, how do you approach that type of client differently if, if at all than, you know, your average, your average, say employee of large company? You know, is it, is it a different value add or is it a, a different offer or discussion, you know, with real estate investors? Mark (6m 38s): Well, I'll tell you what, I, you know, I think one of the best parts of being a business owner is you get to pick your clients after a certain point. And, you know, maybe not the very beginning, but at some point you really begin to say, I want this kind of person in my life. And that's a beautiful thing. Cuz if you're a w2, you get basically got one client and that's your boss. But yeah, when you, when you get to work with real estate investors, business owners, they make up the vast majority of our clients. Not everybody, certainly not, but a good chunk of our clients want some agency in their life. I believe that in many ways, part of the reason why people stumble into this insanity known as real estate investing or business ownership. And I say that with all the, the positive regard I can, being both of those things, real estate investor and business owner, the insanity of it all is you take on a lot of risk. I mean a lot of risk, but you get access to the dial on your life. You're not just a thermometer, you're a thermostat. You get to dial up the temperature, dial down the temperature. You, you, you gotta understand, as a financial planner, we all swim in this thing called finance money. Money is the environment where we live most of our lives. It's half of every transaction. It's certainly not the, the most important thing in your life, but, but I do believe money touches the most important things of our life, our legacy, our children, our marriage, our health, our future, you know, these things, our retirement, our, you know, our, our capacity to feel secure. So when we, when we have some manner to engage the environment in which our entire life lives, we feel a sense of security there. And so yeah, when you've got a, a business or you've got a real estate portfolio, then you can manage to manipulate the environment where you're living, you feel at ease. Much like dialing up the thermostat when it's 22 below, like it might be in, in Chicago here today or in Toronto there tomorrow. Jesse (8m 43s): Hmm. Yeah, fair enough. And in terms of the actual, the technical aspect of, you know, a real estate investor comes to you and, you know, as opposed to say somebody that's purely a, a salaried employee, you know, real estate investors take a lot of different forms. Some of them as you know, are, are fully self-employed. They're doing that for, for a living. Other ones are working a job, but as a side hustle or, you know, part of their portfolio is real estate investors. So just from a technical aspect, when you, when those individuals come to you, you know, what are the first few questions you're asking them and what are you trying to, what are you trying to get out of that con initial conversation to be able to say, you know, this is, I, I think the best path for, for you going forward? Mark (9m 25s): Yeah, most financial planners, I would say, direct you toward a set of pre-determined outcomes. It's like those old choose your own adventure books, you know, you felt like you were able to go anywhere you wanted, but really the book was moving you in one direction. And for most financial planners, that's Wall Street, that's the endgame. Let's get you into a my index fund or let's get you into my, my mutual fund or my ETF or my target date fund, or you know, your 401ks, your RSPs, whatever it is. And given all that, it's sort of, it's sort of unfortunate that most real estate investors don't have a pathway with most financial planners, but like it or hate it, I've been now coined the not your average financial planner. And I love it. I personally love it because we look for strategies that don't rely on the whims of Wall Street or the typical financial products and tools. Listen, where is it written that we all have to dump a bunch of money into, you know, a a market casino that has no access and there's no outcome predictability. And we don't know what the taxes are gonna be when we take the money out anyway. So, you know, where is that? Is it written on some law that I didn't read? No. So yeah, when, when I sit down to have one-on-one advisory consultations with anybody, whether real estate investor or not, I do have a, I got about 10, 12 pages of notes we end up taking and, and, and including questions like, well, what does the word retirement even mean to you? What about your spouse? Maybe it's a different thing altogether for him or her. Also, you know, in five years, let's say, let's fast forward five years and we're building this plan together and we're making it work, how will you know it's a success? How will you know we're on the right path? What are the mile markers? What are the distinctive characteristics of things that are tangibly different? Is this depth gone? Is your income doubled? Do you have seven properties or 70, you know, these are the questions you'd want to ask to really get a sense of are we on the right track or not? It makes my job so much fun. I feel like your financial conversations should be some among the best conversations of your life, you know, because it, again, it touches the most important areas of your life money does. So yeah, we dug, we dig into strategies that I think help be like a, a, a hinge, a small little hinge that can swing very big doors in your life if we know the right tools and tactics and strategies to take on. If you don't know those tools and tactics and strategies, I gotta say, man, real estate investing or any kind of financial project is gonna feel like swinging a very dull ax, or even worse, like a butter knife at your tree trying to chop it down. It's just gonna take forever. You'll eventually get there with Wall Street with index funds, but it's so inefficient. You might as well look and see if there's better ways to leverage the finite time and money and energy that we all have in this life to put toward things that are gonna really move the needle. And again, be that leverage point that, that I think many people are looking for. Jesse (12m 30s): Yeah, and I'm curious too, because we not just invest as real estate investors, but even, you know, for example, when we're raising capital from, from inve, from investors for real estate, oftentimes what investors tell me is either, you know, at the, at the best they, you know, they're invested in, you know, whether it's mutual funds or Wall Street to some, some degree stocks and bonds, but you know, they don't really have clarity exactly on the fees like that they're actually getting pay, you know, that they're actually paying on. So for them, one of the value a or one of the value propositions for real estate, it's, it's that tangible aspect that people can kind of understand, even if it's commercial they've all owned or they've all rented or owned a place and they understand that. But I imagine it's somewhat similar when people come to you, if you see the current investments that they have, if they have them. I'm sure you guys fe see some red flags. So are there anything, is there anything on that, in that topic of fees that you don't realize you're actually getting charge, but you are, I assume you have conversations somewhat similar to that? Mark (13m 34s): Oh yeah. Well, I mean, nothing is free except the cheese on the wrong end of a mouse trap, Jesse. So let's be clear about that. Nothing's free, not real estate. Yeah. All right. Not index funds, nothing's free, but it's egregious to me to think that, well, let me just say it this way, nothing's free and it's all, it's all in the, the perceived value that you receive. So if it's perceived as valuable enough, then pay whatever price it is. You know, I'll, I'll, if I had to, I'd chop my arm off to escape a, you know, a, a dangerous situation if I had to. It's quite a price to pay, but I'd do it if it was perceived as valuable enough. The unfortunate truth is, fees are the hidden viper in your portfolio. This is according to the Department of Labor. They say a 1% fee on your 401k, your IRA or Canadian equivalent accounts over a 35 year period. That's like a typical retirement, right? Is gonna eat up a third of your nest egg, 27% of your nest egg just gone to fees. And what is, what is it we're getting for that fee? Are we getting something magical? No, we're getting illiquidity and volatility and in retirement, that is not what we need. Right? When is it that we're mo when are the times we're most likely gonna need cash, probably during a crisis? When is our portfolio gonna be at its lowest value, probably during a crisis? Oh, by the way, when are banks least likely gonna lend us money? Same answer, right? During a crisis? Yeah. So for all the fees, is it worth it? And I would say again, the, the best thing you can do is find the areas in your life, your financial life specifically in every area really. But on this podcast, we're talking finance and money. Find the areas in your financial life that are the leverage points. And, and I'll just go ahead and say it. One of the big aha moments of my young adult life was when I realized that underneath the importance of stocks, bonds, mutual funds underneath the importance of cash, savings, money markets, all that was the fundamental reality of banking. Banking is actually the operating system of the financial world. It's actually as old as human civilization. There's great books out there. There's a good book out there by David David Frager who says Debt. The first 5,000 years is the title of the book, and it's a phenomenal book, but it kind of shakes me every time I think about it to think that this book is talking about a topic of banking debt that's been around since caveman paintings, right? To have to have the four letter word of debt in our human consciousness for that long. Think of how much pain has come from all the debt that's incurred over these many years and think of all the incredible wealth that's been generated if you were the banker. So part of our experience as financial planners, I think has been focused on the tail of the elephant. When I wanna look at the whole thing, all I care all most financial planners care about is that tail of that elephant, Hey, look at this rate of return. I got you last quarter, I just got off the phone with a client. He said, my, my investment guy, cuz he has another guy who does his investments for him. He said, my investment guy, the best he could tell me, mark, he said, my investment guy's best, best feedback or self aggrandizement was that he only lost him 18% last year, whereas the market lost 20. And so the best he could say is, Hey, I only lost you 18%. That's looking at the elephant's tail. I wanna look at the whole elephant. I wanna look at how do we take on the banking function to control not just the rate of return of your savings, but how do we control the environment in which your money lives and dial up, dial down that thermostat so that you can, you know, win by default in your real estate portfolio or wherever you might be focused on. Jesse (17m 44s): Okay. So on that point, I think, you know, there's the, there's the de debate of, you know, whether you're, if you are a bit more of a dove or a hawk, depending on your amount of financial leverage or debt that you take on, you know, most listeners being real estate investors, we, you know, we have a love hate relationship with debt. It's, it's really the DNA of our business leverage. You know, we couldn't do what we do. The successes that we have are clearly compounded by leverage the, you know, the losses that you have are too. But it is something where I think most investors would, investors would say that there's a consumer debt as opposed to... /episode/index/show/workingcapital/id/26059179

Tax Strategies for Real Estate Investors with Amanda Han | EP139 02/21/2023

REITs, Housing Policy and the Economy with Mark Kenney | EP138 02/08/2023

REITs, Housing Policy and the Economy with Mark Kenney | EP138 Mark Kenney is a President and Chief Executive Officer at CAPREIT Mark Kenney joined Canadian Apartment Properties Real Estate Investment Trust (CAPREIT), a TSX listed company, in 1998. In 2019, Mark was appointed President and Chief Executive Officer.    As Canada’s largest publicly traded provider of quality rental housing, CAPREIT currently owns or has interests in approximately 67,000 residential apartment suites, townhomes and manufactured housing community sites well-located across Canada, the Netherlands and Ireland. In 2020, CAPREIT was included in the S&P/TSX 60 Index.    With over 30 years of experience in the multi-family sector and as President and Chief Executive Officer, Mark is actively involved in creating and implementing the strategic vision for the organization through the direction of company policy and oversight of the crucial divisions within CAPREIT, including property management operations, marketing, procurement, development, and acquisitions. A frequent contributor to BNN Bloomberg and other media, Mark is a passionate advocate for the role of Real Estate investor   In this episode we talked about: * Mark’s Background and How he Got into Real Estate * The Comparison of the Commercial Real Estate World of the 80s-90s and nowadays * Difference between Commercial Real Estate and Residential Real Estate * Pricing and Valuations of Industrial Multi-Residential * Supply in Real Estate * Real Estate Deals in Suburban and Rural Areas * Development Costs and Charges * Areas of Investment into Manufacturing Housing * CAPREIT Focus in terms of Real Estate Projects * 2023-2024 Interest Rates Environment * Advice to Newcomers Transcription: Jesse (0s): Welcome to the Working Capital Real Estate Podcast. My name's Jessica Galley, and on this show we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jessica Gallen. You're listening to Working Capital, the Real Estate Podcast. My guest today is Mark Heney, president and Chief Executive Officer at Capri. Mark joined Canadian Apartment Properties real estate investment trust, a TSX listed company in 1998. In 2019, mark was appointed president and chief executive officer as Canada's largest publicly traded provider of quality rental housing. Capri currently owns or has interest in approximately 67,000 residential apartment suites, town homes, and manufactured housing community sites. Well located across Canada, the Netherlands, and Ireland in 2020. Capri was included in the S N P and TSX 60 index. Mark, how you doing today? Mark (1m 3s): Great, Jesse, thanks for having me. Jesse (1m 4s): Yeah, pleasure to have you on. You know, wanted to talk a little bit about, you know, the current environment that we're in right now, you know, your background in the industry and, and Capri in general. But I guess, you know, maybe we could start with you have over 30 years experience in multifamily in that sector, and I was just curious to kind of get a little bit of a background of guests that we have on. It's always interesting to see how they got into the wild West. We called real estate. Mark (1m 32s): Yeah, so I, I don't know, like, because I go back in time here to when I was growing up, I think it was very normal for young people to be interested in cars and real estate. It was, so, it wasn't anything that special about being drawn to real estate. I think like a lot of people I would daydream about real estate and back then it was probably just what it would be like to have a pool and a, and a big yard and, and a bit of a fascination how people got there, which kind of always stuck with me, but I didn't want to be a salesperson in real estate. I was obviously just fascinated. Again, nothing unusual about that. And, and I found my, my way into, into real estate primarily because I probably wasn't the best student in the world and I, I really wanted to do this. So the thing I maybe haven't talked about a lot in the past was, it was an incredible opportunity because nobody, there was no competition. So a lot of my friends coming outta school we're lawyers and accountants and, and, and I, I was not the academic overachiever. I really was always focused on just working. I didn't really understand why people went to school unless you're gonna become a doctor. I thought this isn't really helping me. And, and so I went into a field where there wasn't a lot of competition. I was one of the first people to get involved that, that had a degree and I stood out. And so the, the pool of people even today who you're competing with for a great career in real estate, especially on the property management side, I don't think it's fully understood by a lot of people. Young people wanna go into tech, a lot of people wanna go into crypto or sales or something glitzy. But the cautionary tale is like, you know, who are you gonna be competing with in there and where can you really, you know, stand out. Jesse (3m 37s): Yeah, fair enough. I tried to ask every time I have somebody with your amount of experience in the industry, I find I find the late eighties and early nineties commercial real estate world kind of fascinating. Not just in in North America, but specifically in the, in the kind of Toronto environment. And I find that, you know, younger people in, in the industry, I consider myself included in that. I think it's important for us to understand the history of, of some of the times that we've gone through in real estate, whether that's the early nineties, 2000, 2008 and, and what we're currently doing today. But I'd like to just get your perspective. Obviously you're working in the industry during that time. Do you see any, any applications or do you see anything that you know, was happening back then that are reminiscent of, of what we're going through today? Mark (4m 26s): Well, very different back then. Just to touch on what I said a minute ago, apartments in the eighties were the dirty cousin of all real estate sectors. Like nobody wanted to be involved in apartments. So that again, was a reason to go there. And I, I'd like to say I was a visionary and saw that the truth is, I, I got a raise every six months and that's why I stayed in it and by a raise, I mean, all they had to do was throw 500 bucks a year at me and I was there to stay. Most people my age that had gotten into multifamily and it was starting to happen early nineties, would be lured into commercial immediately. Like if a commercial job was to present itself, you'd leave multifamily, go into commercial, and, and that was the general trend as you aspired to get into commercial in some form, especially office in Toronto at the time. So, so for me, I guess partially because I was, you know, excited to get a raise every once in a while I dragged into the sector longer and the longer I stayed, the more experience I had and the more sought after I became. Jesse (5m 41s): So in terms of the kind of the history that you had with, with Kareed in, in the career in general, like I come from the, the office world and you know, I, I find it still kind of amazing today that, you know, we're very specific about when we're talking about real estate, whether it's rentable, square feet, everything's per square foot, and I talked to our apartment team and you know, we're going by either the door if it's, you know, by the unit or by the bed if it's student housing. But how, how have you seen that evolve over the last, even, even 10 years in terms of how it's, I feel like it's, you guys have now kind of been more formulaic than you may have been in the past, but it's, there still seems to be a difference between the pure commercial stuff and an apartment world. Mark (6m 24s): So apartments, I'll give you an idea. Like in 1996, I worked for a company by, by the name of Real start. And one again, one of my career benefits with Real Start is I was hired as one of Canada's first multi province property managers. I was a district manager with Real start, but I was overseeing property in three different provinces. I, I think I was the only one in the country at the time. Okay. So the reason that's important is that the consolidation hadn't even started then. There was the consolidation of big ownership pools in multifamily has only really happened in the last 15 years if at at most. And that's where all the career opportunities come from. So you've got for the first time a handful of big companies that you can have a, you know, a a traditional career of promotion if you're gonna be an employee, but most of the sector is still private. Most of it still is. And, and it's a great ownership path. It's a great investment path. It's not necessarily a career path. And, and I think that now in multifamily there are institutional owners like Capri and Starlight Hazel View. You've got all these different companies that are large or, and you can have a progressive career from the entry level right to the right to the top kind of thing. But imagine a, a sector that's as old as real estate and multi-family in particular, where that opportunity's a new one. Still new, very, very few people when we're looking to hire, I, I can't find people with 10 years experience in the industry for senior jobs. If they have 10 years of experience, they can pretty much name their own price. Jesse (8m 11s): Yeah. And in terms of the last couple years, it's not, it's no surprise industrial multi-res, there's been some key sectors that have been red hot in terms of the demand, the the actual availability of the space. Why don't you give us a sense in terms of the, the last few years for multi-res, the pricing right now, the valuations that, that we saw. Were we just at a frothy time where the valuations were getting a bit disconnected from, from the actual real environment in terms of the rent? Or do you have, do you take a different view on that? Mark (8m 45s): No, I don't think so. I think my view is the institutions called cap rate or others that talk about cap rates, that's our game. The private market looks at price per door. They look at different whole set of different metrics, how much leverage they can get, is there yield spread? They don't care about yields, they just care about paying off their debt and, and they get security when they look at price per door. So when you look at our sector in general, the older assets, like we will say the, the plus 20 year assets are, are even with low capri today, trading at 30% of replacement costs. In some cases it's basically 30 to 50 across the country. So when 97% of the market is private, like the rates are less than 3% of the market. Just to give you an idea, the apartment reach, now there's other institutional owners, but the REIT sector, all of us combined are less than 3%. Well then we'd be fool hearted to pay attention to just cap rates when the market is valuing apartments differently. So today, when you have the kind of housing crisis you have in Canada, this was, this is not gonna get solved overnight. This is a a 10 year journey and we might have a chance of seeing some balance, but as the, as we continue to up our immigration numbers and don't outpace our development, we end up with a more and more pronounced problem. And, and so the fundamentals for multifamily are off the charts positive. The only, the only headwind we have is the potential government regulation and additional regulation which doesn't build homes that will not attract capital. So we're in very, very interesting times right now. Jesse (10m 31s): So I want to touch on that point. We recently had, Richard a Epstein is a professor of nyu and we were kind of talking about the regulatory environment in the US and Canada, the impact of some of these, the different policies that are being put in place. You were, you were on B N N a little earlier in 2022 discussing this, you know, this regulatory environment. We see this constant headline of affordable housing, the way we get to affordable housing, various pres prescriptive type of policies. But like you said, not necessarily addressing the supply constraints. What is your view on that? Where, where do we get to a place where we actually can make an impact on, on housing? You know, the affordability aspect and just actually, like you said, building Mark (11m 14s): Supply is you have to start with supply. Okay, in Canada, we have an affordability crisis and we have a supply crisis. They're, they're siblings, they're not the same thing, but they're absolutely family members. So when it comes to what needs to be done, well supply has to be addressed. So then you go affordability, well that's more of a government decision to help provide supports. Okay. Whether it be building all the housing requirements of Canada, like CMHC puts it at close to $3 trillion of investment that's required. So the government can choose in a country where our, our debt is now our total lifelong country history debt is at a trillion, are we really gonna go 3 trillion further into the hole for the housing problem or are we gonna turn to the housing private sector to say help? So, I don't know, I've never, there's no example on the, on the history of the planet Earth and no example where the Hubble's telescope is ever seen a planet anywhere where taxes build homes, taxes do not build homes, taxes keep capital aside, uncertainty keeps capital at bay. A clear path of investment will bring capital to work. So I think instead of like pointing fingers at who, who the boogeyman is, I think that as a country, if we do not awaken to, to the reality that the private sector has to be a big part of this, then, then the country just stays in, in the washing machine and the problem gets worse. You just can't continue to bring people into the country without, without a housing solution. And we already don't have one for our own people. So we've gotta get focused on supply and, and I've got a lot of different views on, on why that supply problem exists. Jesse (13m 8s): So I'd like to get into a couple of those, those views in terms of the supply, cuz you know, you hear, you hear a number of different reasons that we believe that the, this is the case. Whether it is the regulatory environment not being able to, to build, not be able to build certain asset classes. What do you see, you know, what's, what's your view on that? If you could name a couple on the supply end, Mark (13m 30s): I'll give you one that nobody's talking about and hopefully this is interesting. Sure. Taxes, whatever, we gotta get through that gate. But then it's like, why don't we have affordability in housing in Canada? Well the number one distinguishing factor between Canada and the US is the cost of land. But why is land so expensive? We have a lot of empty land. We have a lot more empty land than the US has. And, and so why? Well, the answer is in part that in Canada, if you need multifamily, it has to be on municipal services. Okay? If it's on municipal services, then you can put multi-family. Now, if you ever thought of it, when you drive in the countryside, you never see an apartment building. Why? Cuz it's not a municipal services. It's not because nobody wants a a sixplex there. It's cuz it's not a municipal services. Okay? So municipal services drives up the cost of land. Cause municipals are doing nothing. Like they're slow, they're bureaucratic. There's a finite amount of land in our municipalities. Okay? So they have to expand hyper fast so that we can get things. So that's the land price issue. Then you have development fees. So before you even break ground, you in Toronto, you got $250,000 of land cost and $200,000 of, of development fees. Why? Because it has to be on municipal services. Okay. So then you go, well what do you do by that mark? Well, if you look at the us you know, they, what, think of a, a very robustly built market, Dallas, Texas. Okay? In Dallas, Texas, they have what, what are called muni municipal utility districts muds. And in Dallas, Texas, there's 58 of them right now. And what those are is private sector building, municipal service hyper fast. So the private sector can do it more efficiently than municipalities can and they can do it faster and they can attract capital to do it. Municipalities are capital constrained, they're efficiency constrained, they're ability constrained. So number one thing we can do is embrace a different way of getting more land to build more. In Canada, we got lots of land. There's no excuse for this. We've got a planning act that makes us put multifamily on municipal services. This is, nobody's talking about this. This is at the core of the affordability issue. Now interest rate Sure. And supply chain issues, sure. But we, we, we, we can solve those problems. The one problem no one's been able to solve in Canada is land costs. Jesse (16m 16s): So I'm thinking about some of these more, you know, suburban or rural areas where you actually don't have services. What does that structure look like in terms of actually getting that paid for in terms of, you know, is that something that you give credits to landowners that are there to have it built, but somebody's ultimately gotta pay for these services to, to get built? So you mentioned mud, so a private sector solution. How would something like that work in, in kind of our, our environment, our environment, let's say Ontario. Okay. Mark (16m 44s): Have you ever been to a cottage? Sure. Have you ever been to a house in the country? Jesse (16m 49s): Yeah. Mark (16m 50s): Every single one of those properties is on a well and a septic, every single one without exception. Maybe it's a holding take, maybe it's a weeping bed, but they're all on wells. Okay. So it can be done. You look at manufactured home communities, they're all on, on their own water system. They all have their own private waste treatment. Okay. I love to talk about the example, the piece of land in Berry Ontario, a building lot in Berry Ontario cost about six to $700,000. That's on municipal services. That exact same size piece of land five minutes away is about $15,000. You can't convince me that it, we know that it costs about $50,000 to private service a lot. Okay. And we know the province overseas, this, this is why I'm such a loud advocate for manufactured housing as part of the solution. It's not the urban solution, but it's part of the solution. We've told government you can have home ownership in Canada for under $200,000. That's the, the cost of a 1300 square foot manufactured home. Sure it's not the traditional home, but people can get into the home ownership market and they're blocking them out of it right now by not permitting the zoning of these kind of communities. So when you think about it, 30 over 30 million Americans live in a manufactured home. It's been used to treat affordability for decades in Canada. We shut down the sector about 30 years ago and said no more. His multifamily needs to be on municipal services. Jesse (18m 21s): So if there's such, like take that example, if that delta is that large between 600,000 and and 15,000, wouldn't there be, I'm thinking for just from an economic standpoint, once you have developers coming in and literally paying for those municipal services specifically per project, or is that just, isn't Mark (18m 37s): That a good idea? That sounds like a good idea. ... /episode/index/show/workingcapital/id/25872921

How Government Policies Hurt Real Estate with Richard A. Epstein | EP137 02/02/2023

How Government Policies Hurt Real Estate with Richard A. Epstein | EP137 Richard Epstein is our returning guest. Richard is an American legal scholar known for his writings on torts, contracts, property rights, law and economics, classical liberalism, and libertarianism. He is the Laurence A. Tisch Professor of Law and director of the Classical Liberal Institute at New York University, the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution In this episode we talked about: Historical Perspective of Land Use and Regulation Government Real Estate Agencies Inflationary and Interest rates Environment Macroeconomic Outlook Jesse (0s): Welcome to the Working Capital Real Estate Podcast. My name's Jessica Galley, and on this show we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Richard is an American legal scholar known for his writing on torts, contracts, property rights, law and economics, classical liberalism and libertarianism. He is the Lawrence, a Tish professor of law at nyu, and the director of the university's Classical Liberal Institute. Richard, it's great to have you back on. How you doing? Richard (39s): It's always great to be here, Jesse. Jesse (41s): Well, we're gonna have a bit of a, a crash course here in in property rights land use regulation, and kind of talk about how we got to where we, we are right now in, in the US in Canada as it as it relates to property rights. And it'll be topical for anybody interested in real estate, real estate investing development law. And you know, if you're ever interested to see why certain investment firms pick different states or pick different countries, you know, we'll, we'll touch on the intricacies and differences between how some of these laws develop. But Richard, why don't we, why don't we start from the beginning? You talked about a historical perspective when it comes to land use and regulation, so I'll leave it with you here. Richard (1m 29s): Okay, look, well the first thing to note is that when densities and real estate densities are very, very low, there's very little reason to have any kind of land use regulation. Land use regulation is a function of having large numbers of people within relatively close levels. One way to try to regulate this is from the private law of nuisance dealing with offensive smells and so forth. And that certainly is a part of the system. But when you're dealing with modern zoning laws, it turns out it's a relatively unimportant part of the system unless you're dealing with certain kind of very difficult industrial manufacturing areas. But if you're going to the sort of the city life, the, the story really begins in 1916 when in New York City they realize that if you put up certain kinds of large buildings, the equitable building, what it's gonna do is gonna block light in other parts of town. And so the question was, are you willing to suffer that and let people build as they will, or do you think that you could kind of regulate densities and distances? And the initial New York statute was designed to deal with exactly that. And so they put up kinds of restrictions and they were relatively modest, but nonetheless they were there. The one that was put into place in Washington was a high limitation. And in 1909 the Supreme Court said it's okay for you to do that. There's some kind of average reciprocity of advantage in everybody having the same kind of stuff. And so it's also another effort to sort of attack the light interest one way or another. And zoning of that particular sort was a relatively modest affair. I think the entire zoning book was, you know, 20 pages or something of that sort. But the movement got Abe boost from a very strange location in the United States. And that strange location was a Department of Commerce where the Secretary of Commerce was none other than Herbert Hoover, later known for his other kinds of deeds. And what he did is he called together a national conference of local people trying to explain why it was that a general kind of zoning law was something that ought to be put into place throughout the United States. And federal government at that time had no power to regulate zoning within cities today in the United States. And in principle has that power, but it is virtually never exercised. But what Hoover did was to persuade all of these towns and all these governments that they should put together a zoning package which is much more comprehensive than the ones that they had before. The theory behind this stuff was how you organize land uses as opposed to blocking light. And the notion of a zone actually quite literally meant this. We put in this zone, we put manufacturing in that zone, we put commercial in this other zone, we put in apartment houses, this other zone we put in single family homes. And the theory was that if you have each zone with a pure type of, what would happen is you would prevent all sorts of nasty kinds of interactions between people and everybody would be better off. It turns out that this is a colossal blunder in the way in which you organize because what it does is it gets you uniform zones within use. It prevents incompatible uses from taking place, but it also prevents compatible uses from taking place. And so if you wanna get a sense of how, for example, real estate is organized in a more or less voluntary market, take any city, whether it's Toronto or New York and just go vertical. And at the bottom what you do is you see a series of real estate stores, mainly commercial one way or another in New York. And probably in many other places, the escalator in these real estate stores goes down, not up because what you do is you have a lot of space below ground that doesn't change the profile, the building above ground. And so you do that. And then above that what you do is you probably have some degree of office space, which is a different kind of use. And above that you start having hotels in one kind of amenities. And then above that what you do is you probably have some residential units and on the top you have some fancy club where everybody could look out at fine dining or a conference center. So you get four or five different uses stacked with one another. If you change the order, you would realize that this is not a random phenomenon, it's the way of maximizing value. A traditional zoning statute makes that extremely difficult. And so when Jane Jacobs wrote her famous book in 1961, she was always against single use areas because she said, if you're alive during the day, you're gonna be dead at night. Or if you're alive at night, you're gonna be dead during the day. If you have the right kind of mix, you can have a steady flow of people in and out of the city and get greater utilization of your public resources. So the zoning system essentially made this mistake. And the case that demonstrated this was a case called Ewa cited in 1926, which was the same year that Hoover called his particular meeting in Washington. And what was the UK case about? It was about an industrial site between the nickel white railroad and some fancy highway on the south. And what happened was a unified plot, and it was ideal for a major plant of one kind or another, but the city fathers decided that they were gonna change the way that this thing operated. And so what they did is they created zones going from top to bottom in that area and there was a zone that was designed to be manufacturing and then there was a commercial zone and there was a certain kind of residential zone and then a over the apartment house and a play zone. And what happened is you start looking at this stuff, you realize that having divided this thing, the loss and value is necessarily enormous. You had a single owner of this patent and as you know Jesse, one of the fundamental theorem of real estate is if you have a single owner, every time you decide to do something on behalf of one of your potential buyers of renters, you're gonna hurt somebody else. So your constant job is to try to figure out how it is that you maximize the net value of all the uses that you sell, taking into account direct and indirect benefits like views and so forth. And sure enough, if you start looking the way these things go, you never see any of these things where the rental units are buried down below and the parking spaces are above. The whole thing is organized in a way to sort of maximize access on the one hand and views on the other hand. And people really know how to do that and they're experts in excuse. So what you're doing is you're taking away the actual owner who's all the right incentives. He can only maximize his values if he maximizes that of his buyers and renters and and putting in place a government organization. And what it did in zoning, excuse me, what that did in zoning is it knocked out 75 or 85% of the total value by creating artificial barriers, discontinuities of one sort or another. And it goes to the Supreme Court and the question is, is this thing constitution? Well, it was argued that it was a taking of one kind or another cause you saw the huge value. But the Supreme Court in a sublimely stupid opinion by a conservative judge known as Sutherland, a decent man, but a terrible judge on this stuff said, well, you know, you gotta have zoning laws because you have to have traffic regulations of one form or another. So what he was doing was talking about this areas where these units were already divided and you had to coordinate them and saying, that's the rule that we have when we already have a coordinated unit. And so what you do is you know, for certainty that you've got a huge loss in net value. And the net question as a social thinker is, is there gonna be some external benefit that justifies the losses that you're imposing? And then you look around and you say, well, is it gonna be the fact that you're gonna prevent nuisances? Well, you could do that by saying you can't admit slope. And in fact, if it's a large part of land ly, every landowner wants a little bit of setback from the street, right, in order to give themselves a little bit more flexibility. And so they have a garden or they have some kind of a statute in front of the place and so forth. And so there's gonna be zero probability of nuisances against neighbors. But on the other hand, you shut this thing down as a con industrial site, there are gonna be a lot of people who live in the neighborhood who now will not be able to get jobs. So if you're trying to figure out what the net effect of construction is, the standard zoning model is every time you build something here, it's gonna have a negative effect everywhere else. The more accurate situation is there a few uses that you have to ban and you can do that. But most of the interactions that are gonna take place within the nearby neighborhood are gonna be positive. And so you put into place a system which essentially is doomed to fail from the start. And then the question is, what about constitutional attacks on? And what you always have to say about something like the Euclid decision is the moment you sustain the constitutionality of what must be the dumbest plan imaginable for land use planning, you're never gonna be able to attack anything else because every other program's gonna be less stupid than the one that you have here, even though they're plenty dumb. And so essentially in the United States and in Canada, I believe there was no serious challenge to zoning ordinances that took place for the next 50 or 60 years. The system essentially went on autopilot and the positive externalities would be taken into account in some cases politically but never legally. So one of the things you mentioned, you can interrupt me at any time, is how do different towns respond to this stuff? Well, it's a very funny game. I'll tell you just a little anecdote is we wanted to build a house in Michigan at a time when the area was somewhat depressed and there was a zoning ordinance that was administered by the local government on behalf of the state and they were desperate to get our house in there. Why is that? Because in the usual exurban communities, they have two tiers of taxes. They have low taxes for people who live there full-time and high taxes for com, people who live there for the summers or the weekends or whatever. And they were desperate to get those revenues. So our architect goes out and presents his plan and this is what the host of the situation said, this is 35 years ago, but it's the same story. I said, Mr Grun, would you like to go first? You came a long way. Now what's going on is they really wanted that stuff. And there are many towns in the United States where zoning has done in exactly that way. So that what happens is if you have the equid frame of mind in Ohio, it gets taken over in New York, it then spreads to building permits and other situations like that. And so essentially to construct something in New York City is about as difficult as breaking into a bank cuz nobody wants you to come. You go to Texas, it takes, you know, two weeks to get a building permit as opposed to three years to get a building permit, the land use review processes, is your building gonna fall down? Will you let us know? Is your building going to have no access to the street? Will you let us know? So essentially what they worry about is a little bit about massing. They worry a lot about safety construction floors and so forth. And the very important issue of how you coordinate entrances and exit from a large building onto a complicated city set of griefs. And those are all the things that you really have to worry about. But what goes on inside the box is something for which in general it is very unwise zoning board to take hold of. But you take a place like New York, it's not only zoning, it's handicapped regulation. So somebody will tell you how wide the hallways have to be in order to accommodate a wheelchair that you don't need of a bill that's no longer made, which will reduce the value of your house by 20% every time you try to do a renovation. So the thing to understand is every community is not so stupid as to try to take advantage of the full powers of the zoning law, but you can easily find configurations where local politics are such that the dumbest of the dumbest get to the top of the roof. And if you wanna find a place in which that's likely to happen, you go to San Francisco, you go to New York, not so much Chicago, although they have a terrible mayor and so forth, it's essentially major progressive communities tend to be most insistent and what they do is they drive people away with their stupidity. Jesse (13m 46s): So Richard, the, this kind of, it reminds me a bit of this common misconception between freedom and license and the, I guess we could back up and say from, from a standpoint, I don't think I, if you are extremely lez fair in disposition that you think that there's no limits on on, you know, what you can do with your property, but, but there is seems to be a certain balance. So there are certain externalities that are easy to control and, and others that are different. For instance, you know, the law of trespassing, it's very obvious but the, you know, the externality of environmental issues or you know, smell emanating front property. So I, I'm curious to, to know that for instance, I live in downtown Toronto. If I'm walking down the street, as much as I don't like to be the nimbyism not in my backyard type of person, when there's certain condos put up in certain sight lines where there was one sun is there's no longer sun, we, we certainly lose something as a community the way that we go about ameliorating that or or dealing with it is, is not efficient. And it reminds me a bit of a book by Charles Murray, I think it was by the people and it was talking about like what you're talking about a lot of regulations that you know, say you have a commercial building and the steps need to be this many inches and have these, these spindles and and realize it doesn't apply to a certain case. So, so where's the balance when it comes to the ability for you to have efficiencies and be able to have that quick turnaround time like in some of the southern states as opposed to not, not limiting other rights that are external to say your Richard (15m 21s): Property. Now look, as I mentioned to you, light is one of these very difficult issues as is density. And the point about light and views is everybody knows that you attach an enormous positive value to their use. And so for example, if you have in New York an apartment on Central Park West that looks over the park, it's gonna be worth $40 percent more than a unit in the same building and that looks down the street that another street. So these things are extremely valuable and so the question then is how do you manage to preserve them? And it turns out I think the only thing that you can say is that in plan unit developments, these things are gonna be naturally taken to account for the reasons that I mentioned at the outset. The developer who denies somebody of view in order to give somebody else a lot of space, he may lose more money on the view apartment than he will gain on the space apartment. So he'll do something else. When it comes to uncoordinated development, it's an absolutely killer and one of the kinds of regulations that have been sustained and it's one for which I have a little bit of sympathy, I'm not sure exactly how hard a setback regulation. So the same time they put Euclid into place, they said you could require everybody to set back 10 feet from their neighbor, 10 feet from the floor. Now is this a good or a bad idea? Well it really depends. So let me give you the Epstein situation circa 1950. I grew up in a duplex, not a duplex, it's a semi attached house. We had a neighbor on one side with a common party wall and it was open on the other side. And essentially this was a kind of an effort to sort of create that sort of compromise that you want to have, you reduce the density a little bit by having that common wall and so forth but you kept the openness by making sure that every two units instead of every single unit has some setback or partition from the guy behind you. And and I think trying to put zoning ordinances like that into place is not going to give rise to a huge thing. And there's a simple way to try to test this out. The zoning ordinances that I mentioned in equi were ordinances that resulted in a loss of value, easily measurable because of the market value of the land of 80%. Now you put a setback regulation in on a large unit owned by a common developer and you ask yourself how much is gonna be the reduction in value if any from this situation? And remember the people who live in the houses, houses are the people who walk on the public streets and probably it's gonna be the case that the sort of setback regulations you're talking about will have relatively modest effect on property values and positive effects on neighborhood amenities. And so they should be upheld is being some kind of constitutional, the reason why this is so difficult is I suppose you have a part which is 25 feet wide, having a setback on that is gonna be very, very difficult than the width. But if you have one of 40 feet you can start to do it. So the sizes make a difference, the ratios make a difference, which means that it's extremely difficult when you're doing these things that kind of figure out the way in which they go. One of the things... /episode/index/show/workingcapital/id/25808607

From Upstart to $3 Billion in Real Estate with Scott Pickett | EP136 01/27/2023

Cities, Skyscrapers and Development with William Strange | EP135 01/17/2023

Cities, Skyscrapers and Development with William Strange | EP135 William Strange is a Professor of Economic Analysis and Policy at the Rotman School. William is former Editor of the Journal of Urban Economics (with Stuart Rosenthal), and he served in 2011 as President of the American Real Estate and Urban Economics Association. He works in the areas of urban economics and real estate. His research is focused on agglomeration, industry clusters, labor market pooling, skills, private government, real estate development and real estate investment. In this episode we talked about: William’s Background and how he got into Real Estate Rotman School Real Estate Program Paper Analysis of Skyscrapers Macroeconomic Outlook Urban Economics Resources Useful links: Book “Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier” by Edward Glaeser Book “The New Geography Of Jobs” by Enrico Moretti Transcription: Jesse (0s): Welcome to the Working Capital Real Estate Podcast. My name's Jessica Galley, and on this show we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jesse for Galley, and you're listening to Working Capital, the Real Estate Podcast. My guest today is William Strange. Will is a professor of economic analysis and policy at the Rotman School that's at the University of Toronto. He's the former editor of the Journal of Urban Economics, and he served in 2011 as president of the American Real Estate and Urban Economics Association. He works in the area of urban economics and real estate. His research has focused on industry clusters, labor market, pooling skills, private government, real estate development, and real estate investment. Will, thanks for being here. How's it going? William (58s): Thanks a lot for having me, Jesse. It's going great. Jesse (1m 1s): Well, I appreciate you coming on. Like we said before the show, I thought there's a couple different areas of research that I thought we could jump into and, and I think the listeners would get a lot out of. But before we do that, why don't we kind of circle back to you in, in your current role at the University of Toronto and kind of what you're working on today, how did that all come to fruition? How did you get into, into this business of real estate? William (1m 25s): Well, I got into real estate as an urban economist, so when I went to graduate school, my favorite undergraduate econ class was urban. I liked it because there are so many things going on in cities. Cities are just interesting organisms. And so I, I pursued a PhD at Princeton with Ed Mills, who is the father of the feet, modern field of urban economics. That ended up with me at U B C amongst the real estate folks. And I gradually came to understand just how interesting real estate is too, and just how much an urban economist will have to say about real estate, you know, both on the residential and commercial side. I feel incredibly fortunate that I've lucked into a, a career as satisfying as this one has been. Jesse (2m 8s): That's great. And the current role that you have at Rotman, so for people that aren't, aren't familiar, that's the, the business school at the University of Toronto. The, the teaching that you do there, is it predominantly undergrad is, William (2m 21s): It's almost entirely MBA and PhD. I teach some vanilla economics, which I think is important too. Yeah. But, but we also teach a bunch of econ cla a bunch of real estate econ and real estate finance classes. One thing that I would say to your audience is I'm also the director of the Center of Real Estate at Rotman, and we periodically put on public events, we put on one on downtown recovery back in December that was addressing the different pace at which downtowns were repopulating as Covid fingers crossed, recedes. And, and we were scheduled to do a housing market one with City Post in March, and we'll keep doing them as interesting policy issues emerge. We are, we, we welcome people from outside Rotman. Please come everybody. Jesse (3m 12s): Yeah, that's great. The, and we want to jump into one of the papers that you did, you did regarding covid. Before we do that though, I'm curious, you know, people in our industry, when we think of schools that have a real estate program at the MBA or or higher level, you know, whether it's economics or finance or real estate, I think of, you know, Rotman, I think of Osgood. A lot of people have gone to Columbia and New York for their Ms. Red program. Has that, how long has that program been the real estate specific aspect of it? How long has that been something that has been at Rotman? Because I, I feel like you guys were one of the first to actually have the, that specialization. William (3m 48s): It's nice of you to say, but it was, it started building up when I came in 2001 and we've specifically p positioned ourselves to not duplicate other programs. Like I, I, I like the SCHOOK program very much, but there's no reason that we need to do something that's as specialized as their program is, given that they already have such a program that's, that's a good program. So what we have done is to set up a smaller real estate program. We have three electives of the 10 classes and MBA would take with the idea being that people in real estate benefit from taking things outside of real estate, you know, that a good real estate person needs to know about finance, a good real estate person needs to know about strategy and my various colleagues in Rotman can help in those ways very much. Jesse (4m 33s): Yeah, no, that makes sense. So before we, we jumped on here, we, we talked about a paper that kind of pid my interest and it was just being in the commercial real estate world and it was a basically a, a paper analysis of skyscrapers. I thought before we jump into this Covid paper, we could talk a little bit about this, this paper that you did regarding skyscrapers. William (4m 53s): The skyscraper paper is still pretty relevant. I mean, what it's motivated by is that we're living in a new era of skyscrapers that if you look at something online like the skyscraper page, you can see the big buildings that people are planning to build. The Empire State Building was the biggest building in the world for on the order of 40 years before the World Trade Center. It has since been sub topped by Burge Dubai. And there are other buildings that are, are also really large that are either recent or, or that are being planned. The big question is, are these big buildings being built big because it's economical to do so? Or are they being built big for some other reason? You know, possibly ego reasons, possibly other stuff. And so we have analyzed skys, this is in my paper with Bob Helsley from UBC. In this paper we look at skyscrapers as a contest for who is the biggest, this, this is assuming that people want to be bigger than the other person. Let me give you a couple of historical examples of that. I mean, people did look at whether h skyscrapers were economical in the 1930s after the big skyscraper wave of the twenties and thirties. That was mo allowed by things like structural steel and elevators. And we see there a lot of stuff that looks game theoretical. So one story is the story of the lower man of the Manhattan Company building, which is now Trump's lower Manhattan building. And, and, and the incredibly beautiful art deco Chrysler building. And they were each built to be the biggest building in the world at the time. Manhattan Company building finishes first, so it has a ceiling on it, and they are very happy because the ceiling on the sky on the Chrysler Building is, is gonna be lower. So for some reason, the Chrysler building did not build an extra a hundred feet that would've made them bigger than the Manhattan Company building. And, and this has an added issue of personal interest, that the lead people on both of those projects hated each other. They used to be partners. There was a breakup of their partnership and, and not the owners of the buildings, but the architects despised each other. Unbeknownst to the people who built the Manhattan Company Building with the Chrysler Tower, the most famous thing about it, if, if the readers Google it right now, you'll see it is the spire at the top. It was hidden inside the structure, so people didn't know what happened. And so they waited until the Manhattan Company building had reached its ceiling and then they raised like a giant middle finger, the spire of, of the Chrysler building, which made it an extra 50 feet taller than the Manhattan Company building. It's really hard to argue that there is some economic tenants paying rent sort of argument that would make you do something like that. That's one example. Another example is the Empire State Building, which I mean we've all seen King Kong bu movies, so we know how the Empire State Building looks, but, but the, you may not know that the spire on top of the Empire State Building, which made it by a couple hundred feet bigger than the Chrysler Building when it was built, that was originally pretended to be a Zeppelin loading dock. So people would be taking international flights by blimp and, and on top of Manhattan where winds are pretty big, they, they would tie the Zeppelin on and then people would get off on on it. No one ever did that. That was just totally a fiction to allow the building to be as big as it could possibly be. So in, in, in this paper, we look at that as what is called in game theory and all pay auction. That's an auction where you have to pay, even if you don't win in, in this case, you pay to build the building even if you don't win the race of having the very biggest building subsequent to our paper, which was theoretical. Others have looked in various ways for empirical evidence in the data, and there seems to be a lot of it around the moral of the story being some of these big buildings look like they should be built based on economics, or at least you can make a justification of building such a big building on economic grounds. But there's a lot of evidence that people wanna build a little bit bigger than the other guy, even if it's not economical because of the prestige that seems to go with being the biggest building in a market or in the world or of a particular type. If you look online, you'll see all kinds of lists of, you know, biggest office building, biggest residential building, biggest building in Canada, biggest building in Toronto. It seems to be something that people do care about and not simply just the economics of, of building real estate space for tenants to use. Jesse (9m 29s): Yeah, that's a fascinating story. I'm almost embarrassed to say I I had never heard of that. So they continued to build with regard to the Manhattan Chrysler, they continued to build hiding the spire within, within the William (9m 41s): Envelope, within the structure because the seal structure, you know, you can have it own. And then they literally leveled it up. There's a, I forget who wrote it, but there was a book, there's a book on this whole episode, which I think is a fascinating story. Yeah. Jesse (9m 51s): Oh, that's great. Yeah, that it's, it's interesting too, I'm reading a book right now that New Kings of New York by The Real Deal, and it talks about a lot about kind of the Trump era of New York when it was the, the basically push to build more and more price per square foot condos, high-end condos. And it was really almost a race of who could build the best, the the tallest. And it became a lot of, seemed to be a lot about ego rather than economics. William (10m 16s): Yeah, I mean, I think ego matters in real estate. Look, I mean, I I'm just a professor, I just write papers. Somebody who actually builds tall buildings can, you know, look at this thing that they've built and I understand why people's personalities are invested in it and why, you know, they wanna build buildings that are deemed to be significant. I mean, for a long time the, the CN Tower was the biggest structure in the world, and people make a distinction between occupied buildings and unoccupied structures. And so, you know, clearly we in Toronto are, are not immune to building buildings for ego-based reasons. Jesse (10m 51s): And it was there a distinction in your research between commercial skyscrapers as opposed to residential towers? Or, or was it, William (10m 59s): I mean, the early ones were, were all commercial and, and well, I mean the Eiffel Tower shows people how structural steel lets you build stuff that's big and then the Woolworth building becomes the biggest building in the world. And then as supplanted, as I said a little while ago, briefly by the Manhattan Company building the, whatever the Trump building is in lower Manhattan and, and Chrysler, they were commercial. But now, now we see people building big residential buildings. I mean, it, it can be problematic. The, the, the former Sears Tower, and I'm having a brain cramp now about its current name, Willis Tower. I believe it, it was renamed a while ago. It had a problem after its initial construction because it was big enough that the building swayed in the wind and, and this made people feel very uncomfortable. And so there was a period of time and it, it could continue. I'm not sure whether it is or the tallest, the, the, the highest suites in that building were used for storage because people didn't wanna be up there because it wiggled around too much. Yeah. And, and, and just made them uncomfortable for residential. I mean, I don't know what your experience is, but I have a friend who was on the 40th floor of a Toronto building and which, you know, he thought was beautiful, gave him a view of the lake and so on and so forth. But during covid when you don't wanna be in the elevator with a lot of people or worse still, if the elevator is slower is not running, you know, 40 stories is a long ways to walk. Jesse (12m 24s): Yeah, absolutely. Well the one with the Willis Towers kind of, that'd be Chicago too, so I I'm sure it, it, it'd get pretty windy up there. I think for us, if, if I'm not mistaken today, our first Canadian place, at least in the Toronto area. William (12m 38s): Yeah. Ever since it's been built, that's been the biggest building in Canada and it's, it's of course commercial. Yeah. There are some things that I believe people are considering that might be bigger but haven't been built yet. Jesse (12m 48s): So you, you mentioned something that you ask your class at Rotman question that I, right before we got on this call, I would, I would've failed and can pose the question to, to listeners that you normally ask your class at Rotman. William (13m 2s): Well the, I mean, I I've said that this is an era of skyscraper construction and I've talked about the earlier one. And the question is what is it that it took for us to have skyscrapers? And it turns out there are two things that it took. It took structural steel and it took elevators. And before I ask the question, I can give you the elevator story because that is also one that's worth hearing. Sure. Elevators are old. They're like, they're like, Archimedes figured out how you could use pulleys to lift things. The problem with a, a classical elevator is if the cable was cut, the elevator would fall and whatever was on it, including humans would be destroyed. And, and, and thus elevators were not used, you know, for large distances for human beings because it was just considered to be too dangerous. The name that most people will associate with elevators is Otis. And, and Otis went to the New York World's Fair in, I believe 1856, give or take two years. And he demonstrated his safety elevator. And the way he did it was he was pulled up in the elevator with a very sharp sword in his hand to about 40 feet with an audience watching him. And then he cut the cable above the, the rope that was on the elevator above himself and the audience went, Ooh, because the, they, they were sure that he was now going to fall to his death. But the Otis elevator's innovation was, it didn't fall, it was a safety elevator and it had automatic brakes that would arrest it. Before that you wouldn't see apartment buildings that were any bigger than six stories. Cuz you know, six stories is a lot to walk up. You wouldn't wanna walk up 10. But now once you have elevators, vertical distance is not a barrier anymore. And that really changes the ability, the demand for big buildings on the supply side. This is my question, what was the biggest building in the world in 1850 around when the elevator was developed and before skyscrapers were, were started to be built? So I'll leave leave you a minute to think about it. Look it up on Wikipedia or, or whatever the answer is that the biggest building in the world was the great pyramid from something like 1400 bc. Why is that worth mentioning? Because it's a masonry building and, and the key feature of masonry buildings is that the supporting walls on the lower floors have to get bigger and bigger as the building gets taller in or in order to bear the weight to say, to say nothing of earthquakes and other problems with masonry buildings, structural steel changes that structural steel lets you go up. I mean it's, it's incredibly robust. We don't always use structural steel. Now the World Trade Center did not to, to its peril. It used much lighter framing. And that was one of the things that meant that the intense heat that the airplanes produced when they hit the building were able to bring it down. That's a worthwhile story to to point out because the Empire State Building was also hit by an airplane during World War ii, which people might not know about because the Empire State Building is still there. Yeah. It was foggy and a, a World War II bomber crashed into it, but because it was structural steel, it basically bounced off. I mean, it was, was not good for the airplane and not good for the pilots, but it, it survived. But we've learned cheaper ways to build buildings subsequent to that without structural steel. And that seems to be one of the factors that's responsible for the skyscraper wave that we have seen in, in recent years with Birds Dubai. Now the tallest building in the world for a while, Taipei 1 0 1 was, was the biggest building in the world. You have very tall buildings being built in, in many Chinese cities, especially Shanghai. People are building big buildings, you know, and, and part of it is the strategic thing that we talked about a minute ago in the case of Taiwan. I mean, if you read about that building, it's clear that this was a matter of great national pride. And so the Chinese were building it to make Taipei obvious as an important business city and to make, to make Taiwan an an important place. The same sort of thing in places like Birds Dubai, I mean, what will be the financial center in the Middle East, it's, it's not obvious what it would be having big buildings, you know, they're hoping that if they build it, people will come. Jesse (17m 10s): Hmm. Yeah. That's fascinating. Well it was good to, good to jump on that cuz that paper I saw that the title and I was like, well it's got economics, it's got skyscrapers. So just being from the commercial real estate side of things, I thought it'd be something listeners get some value out of. Well, I William (17m 24s): Mean, so for, for your readers who are in the... /episode/index/show/workingcapital/id/25637070

Building & Nurturing Investor Relationships with August Biniaz | EP134 01/05/2023

Building & Nurturing Investor Relationships with August Biniaz | EP134 August Biniaz is the Co-founder and COO of CPI Capital. CPI Capital is a Real Estate Private Equity firm with its mandate to acquire Multifamily and BTR-SFR assets while partnering with passive investors as Limited Partners. August was instrumental in the closing of over $208 million of multifamily assets since inception. August educates real estate investors through Webinars, YouTube shows, Weekly Newsletter and one-on-one coaching. He is the host of Real Estate Investing Demystified PodCast - https://podcasts.apple.com/ca/podcast/real-estate-investing-demystified/id1650186768 In this episode we talked about: August’s Background and how he Found his Niche in Private Equity Nuances and Differences between Investing in the US and Investing in Canada Single-Family Rental Deals Syndication August’s Geography of Deals Syndication Structure Limited Partnership Syndication VS Joint Venture Difference between Funds and Syndication State of the Economy Overview Advice to Newcomers Resources and Lesson Learned Useful links: Books: “Best Ever Apartment Syndication Book” by Joe Fairless “Raising Capital for Real Estate: How to Attract Investors, Establish Credibility, and Fund Deals” by Hunter Thompson Transcriptions: Jesse (0s): Welcome to the Working Capital Real Estate Podcast. My name's Jessica Galley, and on this show we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jessica Galley, and you're listening to Working Capital, the Real Estate Podcast. Our guest today is August Biaz. August is the co-founder and c o of c p i, capital c p i. Capital is a real estate private equity firm with its mandate to acquire multi-family and B T R S F R assets, and we'll get into what that is shortly while partnering with passive investors as limited partners. August has been instrumental in the closing of over 208 million of multi-family assets since its inception. August educates real estate investors through webinars, YouTube shows, weekly newsletter, and one-on-one coaching. He is the host of real estate investing demystified podcasts. August. How you doing? August (1m 1s): Great, man. We're doing much better now that I'm here with you, brother. Jesse (1m 4s): Beautiful. Well, I'm glad that we finally were able to do this. There's a little back and forth I was traveling, but you look great. You always look sharp for those that are listening full suit and tie, so I'm excited to to chat today. August (1m 17s): Absolutely. You gotta stay in character, right? When you're in private equity, you just gotta be in character all times. Yeah, Jesse (1m 23s): The August avatar, So August, you know, for those that don't know, we, we did have a conversation, I think it was the beginning of 20, or the end of 2021. Time flies. I can't believe we're gonna be in 2023 very soon here. But we chatted a little bit of, a little bit about multi-family investing, the economy, and you know, I tell guests if I haven't talked to them in over a year that, you know, nothing really of, of substances happened since we last talked, so I'm sure that, I'm sure we'll have nothing to talk about today. But yeah, I mean, for those that don't know you August, why don't you give a little bit of a background about, of how you got into real estate in general, and then maybe how you kind of found your niche in, in private equity. August (2m 7s): Absolutely, yes. I've, I've spent the majority of my professional career in real estate. Started out as a real estate agent 17 years ago, and I wasn't the best at being a real estate agent, but I was great at finding deals and, and putting deals together. I I started doing small fix and flips, started my own general contracting company, and then I started building single family homes more on the luxury side, both spec and custom, always wanted to scale a deal. Came across my desk, which was a five single family home land assembly that the, that we could, we were, we were able to rezone and build townhomes. We were able to build Tony Townhomes. I syndicated that deal before I even knew what this concept of syndication was, was basically I found a deal. I I, I went to some investors and brought on some JV investors and basically purchased that property. My experience was ma mostly in single family. So I brought on the experts, I brought on AR architect, I brought on a gc, and we, we started processing, we started building that project. And I fell in love with this model, with this concept of finding the deal, finding the investors, bringing all the experts on, and then, you know, being compensated relative to the performance of the project, the performance of the asset. And I wanted to learn more about the space, how real estate private equity worked, how the world of syndication worked. And most of the content was coming from the us. You know, syndication wasn't very common and still, it still isn't very common here in Canada, but in the US it seemed to be very common. A lot of podcasts, YouTubes a lot of books, and I'm happy to go over that in a moment. And I realized about us multi-family, particularly the value add business model, and fell in love with that model. Wanted to initially duplicate that model here in, in Canada to be able to buy apartment communities. There was some hurdles and pain points I faced early on the rent to value ratios. You always hear a complaint in Vancouver or in Toronto that rents are very high, but rents relative to the value of the properties are actually very low. The rent to value ratios, you know, in the US are much higher. In some cases they have a 1% rule where one month's, one as properties, one month rent equals to 1% of the asset value. And here in Vancouver, if you do the same ratio, you're at 20 basis points. So the rent to value ratios weren't there. And, and also in the US they were, you know, a lot of groups, private equity firms were investing in the Sunbelt because the apartment buildings were garden style and two story, three story. We didn't really have that here in, in, in Canada and really we're not really a, a, a renter's nation like, like the US are. So that was the really the impetus for me to look at the us. And then when I looked at the landscape across Canada, I didn't re, you know, there were very foreign and few groups that were actually investing in US real estate that were syndicating deals here. So the competition wasn't there. And when I compared that to being a builder here in Vancouver, or being a real estate agent in, in our province, there's over 23,000 real estate agents, and that's a bit of a historic number over 8,500 licensed builders. And when I looked at our space of what syndicating US multifamily deals, there were less than a handful of teams doing it. That was really a start to co-found c p capital with partners with our mandate to purchase US multifamily. Jesse (5m 34s): Yeah, and I think listeners will know, like we, we try to do on this podcast is I, I try to talk both to US and Canadian investors. You know, being a Canadian myself, I, I experienced the same pain points that you did in terms of the education. I started investing in 2000, 2008, and we've, we've gone light years ahead of where we were even back then in terms of the resources, whether, you know, you're on a bigger pockets forum or you're just on YouTube, but 100%, you know, a lot of talk about the irs, a lot of talk about LLCs and you know, for the Canadians listening, you know, all those pieces have little bits of nuance and it's almost more dangerous when you do have people talking about real estate and you're getting informed, but dangerous in the sense that everything is so close that you kind of get fooled to a certain extent. Or you can, you can think you're doing something correctly and, and in fact you're doing something that is, you know, abiding by u US law, for example, and, and not Canadian. So, yeah. Can you talk a little bit about that process of, you know, education and some of the differences and nuances between investing in the states as opposed to investing in Canada? August (6m 47s): Absolutely. And you said it perfectly. I mean, it's, it sounds very similarly, sounds the same. Some of the words are really interchangeable, but they're not. So for example, a term offering memorandum. Offering memorandum is usually a package that a real estate agent in the US puts together and gives to buyers when they wanna buy commercial real estate. And offering memorandum in Canada is an exemption you could use through securities commissions to raise capital. So they sound the same, they look somewhat similar, but they're totally different. And then you talk about, you know, LLCs, limited liability corporations or companies in the US and LLCs are very fashionable. It, they're a hybrid entity. We don't have LLCs in Canada. We either got corporations or we got limited partnerships. We don't have this hybrid that they do in the us which is very fashionable to use when you're structuring deals. But if LLCs are used in the US to purchase and structure, you know, the, the acquisition of a project, that entity, that structure is not tax efficient for Canadian LP investors. Which, which is a case where they get double tax, they pay their taxes on the US side, but when those funds are repatriated, they have to pay their taxes here in Canada as well. And in most cases, they're taxed close to 70% of their profits goes to taxes on both sides. So yeah. Now as far as a syndicator, as far as a fund manager, as far as someone raising capital, and now you have to abide by, you know, the regulatory framework on both side of the border. You have in the US the S E C in Canada, you have securities commissions in every province you have certain rules and regulations that are national instruments where it's across the board, but every province has their own rules and regulations. For example, in in Ontario you have sophisticated investors, you have non-accredited, sophisticated and accredited. In BC you only got accredited and non-accredited. So there's nuances there. You know, when we first started our company, our company was Canadian passive investing because we wanted to cater to Canadian investors and bring us investments for Canadian investors. As soon early on we noticed that a lot of American investors were reaching out to us as well. That's what was, without doing any marketing in the us. So we were like, you know what, know what, let's make the company brand a name, you know, to be able to, you know, service both Canadian, US investors and we change the name to CPI Capital, but now we have to abide by laws on both side of the border. So if you're syndicating a deal and raising capital from Canadian investors and US investors, this structure has to be tax efficient. The structure has to be compliant. The, the exemptions we're using to raise capital has to abide by regulations on both side of the border. So, yeah. Jesse (9m 25s): Yeah, and I, I think on that piece too, a lot of what is involved in the marketing of, of these deals is very specific on what you can and can't do. And some of the nuances between the states and Canada are important. You know, the, the nuances in general are important, but you gotta be very careful that you're, you're on side of, of, you know, of the law and of the rules. Yes. August (9m 48s): I'll touch on that briefly quickly here on as far as the, the, the marketing side. So it, you know, with the securities commission, they're not their educating, there is a lot of content there. Most people that work for security commissioners are actually lawyers. When you look at the names of people that working, they're mostly lawyers. So they're there to sue to basically for bad actors and stop fraudsters. And that's understandable. But also they're, they're, they're not there educating you, so you have to get that education through, you know, speaking with, with attorneys and, and, and, and accountants and legal counsels and what have you. So for example, as far as advertising in the US is very pretty black and white, not as black and white here in Canada. So in the US if you're using the Regulation D offerings and you're, you're raising capital, so you can most probably either using a 5 0 6 c C for Charlie or 5 0 6 B for Bravo, if you use a private 5 0 6 , you can't advertise the moment that you advertise the deal outside of your own network, you're triggering having to now switch to 5 0 6 , which is only accredited investors. And 5 0 6 you're allowed to have non-accredited investors. I invest with you up to 35 non-accredited investors. But here in Canada is, is a bit more vague. So it, it doesn't go by any kind of trigger that is at the moment that you advertise, it goes by the exemption that you're using to raise capital. So if you're using the offering memorandum exemption, for example, or the accredited investor exemption, you can advertise as much as you want. You can put it on Facebook, wherever you want, obviously, depends what you're saying. If you're, you gotta make sure that you know, the promises you're making or any claims of guarantees are not there, so on and so forth. So again, that is another situation, whereas far as fund managers or anyone's looking to start a fund or syndicate a deal, they have to be very careful and follow their guidelines by their Canadian and and US councils. Jesse (11m 34s): Yeah. And for, for the Canadian side, the, like you said, it's a little bit more vague. And for those, I mean, if anybody's having trouble sleeping and wants to, wants to take a look at this stuff, if you Google National instruments in Canada, that's kind of our version of these exemptions. So I think it's National exemption 1 0 5, 45 1 0 5 45 1 0 5, 1 0 6. August (11m 56s): Yep. Jesse (11m 57s): Yeah. You'll see exactly. Friends, family, and you'll see kind of an outline of, you know, what, what that means, those definitions. And you know, in, in, you see, well, part of the reason in the states you see that you get put on an email list and there's conversations that happen is because there has to be a substantive relationship for, for you to kind of get into, I believe it's the 5 0 6 world, right? August (12m 19s): B, b B for Bravo, Jesse (12m 20s): B Bravo, yes. But yeah, I mean all those, all these pieces are important when you're, when you're doing these deals, but you know, that's why you hired the lawyers and you, and you make sure that you're, you're abiding by those terms. But I would always caution us, you know, Americans being careful when stuff is coming out of Canada in terms of educational content and then vice versa, Canadians being careful of what they're hearing in the states. And always make sure you talk with your accountants and, and obviously your lawyers when drafting these type of documents. Now, in terms of, you know, the actual fund stuff, when you get to acquiring real estate, we talked about this new asset class and it's built, built to rent single family rentals and it's, you know, we talked before, it's a newcomer asset class that you, you guys really like. So maybe first you could describe what it is to listeners and we can chat a bit about, you know, why it's an appealing asset class. August (13m 10s): Absolutely, yes. Yeah. So B T R S F R built to rent single family rental is a newcomer asset class at a commercial real estate umbrella. It's, it's an asset class that really started in post gfc when the foreclosure on homes it was, was, was, you know, tremendous amount of homes were being foreclosed and Wall Street got involved and they came on purchasing single family homes and swats of single family homes. And they, they started purchasing these single family homes in the, in, you know, buying these things, pennies on the dollars in the hopes of selling them when the market turn turned around. But while they were holding the asset, they started renting them out. So they realized that this, the asset class be built to rent single family rental homes in a portfolio or in the community. They actually behave just like multi-family by the way they're managed and, and and rented. And actually they, the, the type of tenant demographic and the stickiness of the tenants is actually better than multi-family. So they actually started to be more involved in this asset class. And by, you know, 2015 when the market had completely turned around, they, they couldn't purchase these homes pennies on the dollar no longer. So they started actually partnering with developers, and this is Blackstone and other kkr, other large private equity firms, they started actually partnering with developers and building purpose-built rental communities. These are single family homes built, you know, approximately 1500 square feet, you know, 3, 2, 3 bedroom, two car garage in a community of single family homes, purpose-built rental. So the plan is to rent it. And yeah, it was the start of this new asset class and now you have groups like us that are syndicating these deals. There's a sweet spot for us, the non-institutional groups, which is kind of the 60 to hundred single family homes in a community. And, and yeah, it's, it's, it's a tremendous asset class. I really believe in it, especially post covid. A lot of people rather live in a single family home, have their own privacy, not have somebody living next to them, above them have ha have their own, you know, two car garage independence. And also they're, but even though they're living in a single family home, they're not living in a community when they're, when they're one of the only renters, everybody else in the community is also renters. So they get, you know, they're part of the same similar demographic and you know, they don't have to live in a neighborhood where, you know, they're, they're, they're, they're kind of the, oh, this person rents or what have you. So they're with others who rent. So yeah, it's a very interesting asset class and we're looking at it very closely. And yes. Jesse (15m 46s): So with the, with the bill to rent, when you're saying that you're syndicating for these deals, what, in terms of the scope, are you syndicating the actual construction of them? Are you purchasing existing and you're being part of the equity, equity and debt at that point? How, how does that structure look? August (16m 4s): Great question Christian. There's really three main ways to get involved into B T R sfr as the syndication group. You can either purchase a piece of land, partner with a developer or hire a developer to build these single family homes. You syndicate the project in different tranches, the first tranches to fund the capital needed for entitlement and rezoning and putting, putting the project together. And then the next tranche is to fund the construction. And then at stabilization, you're refinancing and paying back your investors. However, you, you, you structure it. So it's getting involved early on. And the other way is to buy and already build project and you're taking lease up risk, basically bringing it, you know, from zero vacancy to full occupancy. And then there is, the other way is to, to, to buy an already stabilized BTR community and then going in there if, if it's a few years old, you can utilize the value add model. If, if a developer had just finished building it and just occupied it with tenants that they could just to be able to bring the occupancy up to 90% so... /episode/index/show/workingcapital/id/25513890

Recessions, Investing and Mental Health with Joel Friedland | EP133 12/27/2022

Real Estate, Inflation and Government Policy with Economist Brian Beaulieu | EP132 12/09/2022

Real Estate, Inflation and Government Policy with Economist Brian Beaulieu | EP132 Brian Beaulieu is the CEO and Chief Economist of ITR Economics and the Returning Guest from the Episode 67 In this episode we talked about: Fiscal Policy Response View on Interest Rates Increase 2023 Real Estate Trends Rental Prices Macroeconomic Perspective Useful links: - episode 67 Transcription: Jesse (0s): Welcome to the Working Capital Real Estate Podcast. My name's Jessica Galley, and on this show we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jess for Galley, and you're listening to Working Capital, the Real Estate Podcast. I have a returning guest, Brian Bolio. Brian is the c e o and chief economist of it, t r Economics. He's also a returning guest from episode number 67. If you want to go check that out. Brian, how you doing today? Brian (39s): I'm doing well, Jess. How are you Jesse (40s): Doing? I'm doing great. Always good when I get to talk to a, get a talk real estate with an economist. So nothing's happened since we last spoke episode 67, so I'm thinking about a year and a probably about over, just over a year ago. Brian (54s): Yeah, nothing's happened since then. You're absolutely right. Oh man. Yeah, long it's been, it's been, I don't know, life still isn't back to normal since the pandemic. We're going through all these covid echoes, this is what I call them. I mean, the, the inflation is a covid echo because it stems from the government's and federal reserve's response to the pandemic. And now we have higher interest rates as an echo because that's stemming from the inflation that stemmed from the pandemic. And those two factors are having other echoes, including through the real estate market. I mean, we're gonna, we're still years away from being back into normal economics in, in my opinion, and that includes the current yield curve and the extreme extremeness of the yield curve, which can lay directly at the feet of the Federal Reserve. And that isn't going to do any of us any good either. So we're still living with the economic after effects of covid, even though we're running around without masks anymore. We we're bearing the scarves, the economic scarves. Jesse (1m 58s): And how, if you were to grade the, if the fiscal policy, let's, let's focus on the US for now. How would you grade that? Fiscal re policy response and continued response to the economic environment that we're currently in? Brian (2m 13s): I graded as C is fairly average, and that with each successive economic crisis, the fiscal policy response has grown disproportionately large at the point now where when we see a fly on the windshield, we don't even think about it. We just grab a sledgehammer to kill the thing. You know, there's no measured response anymore, it seems, and you know, it's, and it just occurred to me, it seems to be in direct response to the divisiveness of the two political extremes. They seem to wanna do outdo each other in terms of, you know, bringing in favor and votes and getting reelected at ever extreme levels. It's very disturbing. Jesse (3m 0s): So do you see on the monetary side, so we're, you know, since we last spoke, even we've, we've gone up on interest rates a number of times continued, you know, if anybody had construction loans or anybody was doing any variable type of debt, they definitely felt it over the last year. Did you, you know, playing Monday morning quarterback, your view of the interest rate increases, did they overdo it? Was it just enough? Not enough. Brian (3m 25s): Oh, they get an F The Federal reserve gets an F They were too slow to start to push those interest rates up, and now they're going way too high. They've created this inverse yield curve, you know, it's, it's Federal Reserve 1 0 1. The Federal Reserve is supposed to be looking into long gone, taking some clues from that. And, and Chairman Powell in this Federal Reserve, they seem to be off the reservation. I don't know if I can even say that anymore. You probably have to edit that up. They seem to be no longer playing by the playbook that we all have known through prior cycles. And they've, they're by now, they should have been saying not we're gonna increase rates by a smaller amount. They should have said, we're stopping because Disinflation is here, and let's see how far down it's going to come without us ruining the economy. And they should have come to their realization three or four months ago. And they, and they failed to. And hence we're in this inverse yield curve situation, which is not pleasant. I just went through and looked at for all of our December client accounts, the, the data will be touching their company data. 43% of our clients in December will be able to tell 'em that they are not interest rate sensitive. The inverse yield curve is not gonna be adversely impacting them, but for all the others, they're clearly at risk because of the interest rate trends that have been forced upon us. Really get, getting back to your, to your really, your concern. It, it is, you know, the unaffordability of the single-family houses now, it's not the fact that housing prices went up so much during covid because the market's already correcting for that, that, you know, we're seeing those bar markets and key measurable areas coming down. It's what I call the Peloton effect. You know, everybody going up, everybody's in quotes, I got a Peloton because you were stuck at home. Demand was screwy relative to supply, prices went up. Now the Pelotons sitting in the closet after being used for all the six or eight weeks, something like that, prices in those key metro areas are coming down, but the rates aren't going to come down enough to offset the damage that has been done. And the builders at the same time, at least the ones that I've been talking to, are saying, look, I don't, I don't need to be pulling all these permits. I'm not gonna hold the land. I'm not gonna gonna pay those co carrying costs. I, I'm, my backlog's good for 23. So, you know, I'll think about pulling those permits further on down the line. When I'm, when I'm back out there, I'm constantly telling people when they, not strangers, but when they ask me, this isn't 2006, 7, 8, 9 again though, because the homeowners out there actually qualified for their mortgages and this go round, homeowner vacancy rates are, are very, very low. And the consumer is in really good shape financially speaking, despite what the headlines may be saying, when you look at loan delinquencies, whether it's auto or housing, you look at on the corporate side of the street, businesses are still in reasonably good financial shape. Very, very different scenario than what we saw in 2006, 2007 in particular. So we're not, the paradigm I think that we should be looking at is more like 2000, 2001 or 19 90, 91. And Jess, I, I mean you may have read about the early 1990s, but Jesse (7m 8s): Survived till 95. Brian (7m 12s): Well, Jesse (7m 13s): Y I mean that, so that, that's a great point. So interest rates have gone kind of crazy compared to the last 10 years. Inflation is where it's at. But you know, for those that do remember oh eight, and you know, prior to my time 1991, you're saying that the paradigm we should be looking through is the early nineties or the.com era. What, why is that? Why, why is that paradigm make more sense than say oh eight? Brian (7m 39s): At least for the real estate market? It makes more sense because of the inventory levels, buyer qualifications. I even remember in, in 1987, we had another, another housing crisis. And through that period, and again, it was people who were way over extended and you could see it in their balance sheets. And we're not seeing that in consumer's balance sheets today, real incomes are going up that by real, I mean after adjusting for inflation, which is incredibly important because that means our incomes are still rising. It will match these market levels eventually, it's just take some time to readjust the market. But what I've been doing is, and it's for housing for our clients, for just about anything that I can trend, I actually look to see the deviation upside deviation from the long term trend. And that helps me identify the Peloton effect and housing clearly experienced the Peloton effect. So we have to go through this, I think it's going to be two to three more quarters of lackluster single family market activity before it starts to turn around. And we start that recovery process. Then we run the risk of that getting short circuited that recovery process, getting short circuited in 2024 because of the inverse yield curve. So it, it's the intermediate outlook with, and we, for me that includes 2024, doesn't look all that great for single family housing units. Now, multi-family to me looks fantastic because you're looking at affordability problem for single family homes, and we're still looking at low vacancy levels for those multi-family homes. And the affordability quotient is gonna work there where it doesn't work on the single family home. So they're both residential market, right. But one's gonna be much more resilient to these economic circumstances than the other is. And since the last time we talked, Jess, the I've, I did this analysis and it was fascinating to me. Single family new homes, those prices experienced quite a bit of beta on the way up and on the way down. Whereas the multi-family is very resistant to decline in price. The, those prices went down in 2008, the great recession of that through that period. But in other recessions, they just flattened out. They don't really go down and they become a much better store of value. If you want, you know, you'll strike it rich if you strike the single family market correctly. But if you wanna play the long game, then you've better off in the multi-family market. And I correlated multi-family home pricing to existing to stock market. It's oblivious to the stock market. I correlated it to the general business cycle. G or US industrial production has not correlated to that either. In other words, it's a wonderfully safe place to be for the next 10 years with all this craziness going on around us. Jesse (10m 59s): So Brian, you know that I'm a student of economics, but I only play a smart guy on TV here. So if you could educate us on you, we see, we see good job numbers, I see all the anti data, we look at, we see businesses hiring. We see that there isn't a credit crisis like there was a oh eight, but we still look around and there's this, there's this talk of recession in the next year, the next two years. What is the driver for the layperson of, of that outlook of that outlook into, into the next year or two? Brian (11m 33s): Well, the first driver is that's what the headlines are screaming at us day after day after day. So it becomes part of our emotional makeup when you hear that sort of thing. And it, because some sectors, like we've seen the housing market pricing come down, we, we know household furniture is doing poorly. We know that home exercise equipment's doing poorly. All those peloton factors, it's not hard to spot them. 30% of the customers, the, our client data that I looked at for December had some peloton effects. So they're feeling this air underneath them after they're running so hard in 21 and 22. So that impacts the thinking also. But it, you have to separate the 30% from the other 70% that aren't feeling that. And that's what keeps it from being the great recession redux. Hmm. Jesse (12m 32s): So if, if from the practical standpoint for investors or even homeowners that are getting into real estate or recently purchased real estate where interest rates are where they are, what, what is the conventional wisdom's suggestion or, or advice in terms of longer term fixed rates versus shorter term, you know, refinance in a couple years? Is, are you seeing, are you seeing a trend in one way or the other Brian (12m 58s): When it comes to those long term rates? My preference would, and what I would personally do is go fixed either for seven or 10 years, get a fixed rate. They may come down some, and I know the, the street is loading in some assumptions about interest rate decline. I wouldn't bet on that we're not gonna see an inflation correct as much as we have in the past, and therefore we're not likely to see the interest rates back down as much as we have in the past. And while waiting home home prices two, three years from now could very well be up considerably from where they are today. So you'll pay about the same rate mortgage for a higher priced home. So if you like it both the trigger now, Jesse (13m 44s): So we're also seeing rental prices in most of the major, major markets that we're in go up quite substantially. And you know, the idea of, of real estate investing for us has always been this idea where you can pass on some of that inflation to your customers or renters. Do, do you see a correlation between the, the valuation of where homes are now start starting to get priced in, I guess quotations properly and the, the rate that we're able to increase rents? Because what I've noticed is that the, especially multi-family, most of the, the people in our market here in Toronto, and I was just in New York this week, you know, they are very, very sensitive to dropping any valuation because they've seen their prices, you know, at a certain high. So I, I feel like there's a bit of a lag there, but on at the same time we're seeing intra, we're seeing rental increases that we've, we haven't been able to get in years over the last year or two. So what do you make of that, the interplay there between valuation and the recent ability to increase rent quite substantially? Brian (14m 53s): Well, you gonna help me out here a little bit? The valuation of which asset? Single family or multi-family? Jesse (14m 59s): Yeah, so in this case I'm thinking more on the commercial end, but we can choose multi-family as, as that commercial asset. Brian (15m 6s): Okay. Because co commercial to me is a very broad bucket. Jesse (15m 11s): Yeah, yeah. I mean the commercial multi-family as in five units are greater. So apartment buildings, Brian (15m 17s): Yeah, it becomes a positive feedback loop in that the external single family competition is difficult to afford, which means you can raise rates and because you can raise rates and because of the historical tendency for those valuations to be sticky in that particular market becomes even more valuable. But there is that lag obviously between the cause and the effect. But I think that's a trend that we are going to see go on in a positive way from an investment standpoint in a positive way through the rest of this decade and maybe a couple years into the 2030s. So this is just the beginning of that ride from our perspective. Jesse (16m 7s): So in the business cycle, where do you see us in, you know, are we, are we headed towards the trough? Are we, are we in it? Yeah, Brian (16m 18s): We're not in it yet. Not from a macroeconomic perspective. You know, you're in Toronto, so the circumstances are somewhat different because the US dollar is so strong right now that it is distorting the economics between north and south of that border. Jesse (16m 42s): Yeah, I did, I did a crazy thing last year. I bought, I bought my first US property pre-construction, so I got hit with the interest rate increases and I got hit with the dollar. I was like, what could happen in a year? Turns out a lot. Brian (17m 1s): Yeah. Sometimes you just get lucky, sometimes you guess just get unlucky. That's the way it works. Jesse (17m 7s): Yeah, yeah. It's, it's, there was a Danny Kahneman and Traversy where it's, it's that loss aversion, right? I'll remember about this one, but you know, 10 years ago when I hit it out of the park, I won't remember that. So you have to think, it kind of evens out in the end, you know, we're in it for the long haul in real estate. Brian (17m 24s): Oh yeah. You absolutely have to be. Which state did you buy in, in the Jesse (17m 29s): States? So I bought in Orlando a townhouse. Brian (17m 32s): Oh Jesse (17m 33s): Yeah. But what I still amazing, or what was amazing to me was that the, the actual yield, you know, was a 9% yield and like cap rates in Toronto at the time, even now they're starting to come up. But three 4% was like your typical cap rate in Toronto. So even with the interest rate increases as a foreign national, the lowest I was gonna be able to get was in the low fours. It turned out to be somewhere in the sevens. I didn't even wanna, I don't even wanna think about it now, but the, you know, the, the good headline or the, you know, the thing that you know, was the silver lining I guess I should say was the fact that it still was gonna coverage in cash flow, which most of our major markets and in us major markets, finding cash flow is, is not the easiest thing to do. And some of the, you know, Brian (18m 23s): Oh yeah, absolutely. You know, and thanks for telling me the specific market. I mean, you're not gonna go wrong in that market. You played the long game. I know you do. And you're gonna be smiling at and patting yourself on the back down the road. So, Jesse (18m 39s): So Brian, for listeners that, I don't know if they've, if they haven't listened to the previous episode, they, you know, your background as an economist, what does this look like from kind of an economics 1 0 1 standpoint of how we go into the next phase of the business cycle and then what are the clues or indicators that show that we're coming out of a, out of a cycle and maybe even using a historical perspective to kind of outline it? Brian (19m 6s): Well, the big glaring clue right now is that we've had an inverse yield curve in the states sustained for two consecutive months. And that's statistically significant. And that means we are definitely heading toward turbulent waters compared to what we've been going through over the last couple of years with more downside pressures and more weaknesses. Fortunately though, as I mentioned before, the consumer is not in bad shape and as you mentioned, the job situation is still 10.6 million unfilled jobs in the United States. So those argue, well for this not turning into a, a significant or appreciably bad difficult downturn, but we're going be peeling that downside pressure into deep into 2024. How are we gonna know when we're coming out on the other side of it, our leading indicators will begin to go up and they are not close to doing that right now. We'll also know, because I, I expect the stock market is gonna be leading the way out of this also. I'm not at all confidence. The market isn't gonna show us some more downside before it finally reaches Its slow. We'll know that we're, we're near and low because it's been at least three quarters since the Federal Reserve has stopped raising interest rates. That'll be a good sign. That's a rear view leading indicator, if you will. But we'll pick that up through corporate bond prices. When the bond prices start moving in the right direction, that'll be a good sign that we're coming out of the hole. There's some things though that can, that can well can hurt more than they can help. China's still a mess. China's going backwards. Their current political regime is taking them back into the eighties in... /episode/index/show/workingcapital/id/25281945

How to Get the Deal Done with Brian Scanlon | EP131 12/02/2022

How to Get the Deal Done with Brian Scanlon | EP131 Brian is Managing Partner at DealGen Partners, a deal origination company that currently manages $2.7 billion in Buy Side Mandates. Since 2016, DealGen Partners has generated over $900M in deal value. Through the combination of their outreach strategy and network of partners In this episode we talked about: * Brian’s Background and Journey in Real Estate * Value of Metrics * His View on Strategic Investors * The Macroeconomic Real Estate Environment * Trends in Real Estate * Geographic Preferences * 2023-2024 Opportunities * Brian’s Advice to Individuals who are Entering the Real Estate space Useful links: https://dealgenpartners.com Transcription: Jesse(0s): Welcome to the Working Capital Real Estate Podcast. My name's Jessica Gall, and on this show we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Hey everybody, my name's Jess Fraga, and you're listening to Working Capital, the Real Estate Podcast. My guest today is Brian Scanlan. Brian is a managing partner at Deal Gen Partners, a deal origination company that currently manages 2.7 billion in buy side mandates. Since 2016, deal Gen partners has generated over 900 million in deal value through a combination of their outreach strategy and network of partners. Brian, how's it going? Brian (46s): Good, man. Thanks for having me on. I appreciate it. Jesse(48s): Yeah, thanks for coming on. I think it'll be, yeah, it'll, it'll be a interesting conversation. Today we're gonna talk a little bit about kind of your background, private equity deals in general. So I think we'll, we'll have a lot to get going. First question from you, where are you joining us from? Brian (1m 4s): Yeah, so I'm in Boston, Massachusetts. Our, our office is right outside of Boston in Wellesley, mass. My partner and I both went to Babson College in Wellesley, and we were looking for office space. We decided it would be kind of nice to not have to commute into the city every day, but stayed close to, to the alma mater. So we're in a nice old town. Jesse(1m 24s): Beautiful. So, yeah, I thought, you know, like, like we have other guests on the show that, you know, we have things that are kind of real estate adjacent or investments from, you know, asset classes that are not necessarily focused specifically on real estate. I thought we'd have a conversation a little bit about kind of your background and deal gen and, you know, basically what you do for your clients and you know, what the company does, you know, why don't, why don't we kick it off from, from that almer mater. Did you get into this right after right after school? Brian (1m 55s): Yeah. Yeah, kind. So, I, I sold a, a marketing company right after college, and the guys who helped me sell it were a small two-man shop outta New Jersey. And I, I joined up with them during my, you know, non-compete to go start another marketing company. And, and they said, Hey, why don't you come with us? And our specialty was lead generation at that time from the marketing company. So said, why don't you help us drum up some new business? You can learn this investment banking world and see if it's something you wanna stick in. Cause I kind of always like that space. So we, I did that, jumped in, we were doing kind of low to mid-market sell side m and a advisory. So companies that were anywhere from five to 75 million that were looking to exit, we would come on, act as their banker, help them through a, through a transaction to find, you know, an acquire injection to capital partner, whatever it might be. And I realized every, you know, every deal we represented when we talked to a private equity fund or a strategic acquirer, they would say, okay, you know, thanks for telling me about that one. What else do you have? And they really wanted more and more and more deal flow. So we stepped back and said, maybe there's a way way we can combine this marketing expertise and the investment banking expertise and service those private equity companies by providing them deal flow and lead generation for businesses to acquire. And we started off really doing a hybrid of working with PE funds and working with any type of company on their lead gen, really just to keep the lights on and get the business rolling. And then slowly morphed away from working with, you know, just sales organization, software companies or coaching companies or whoever it was. We, we worked with everybody to really focusing in this private equity world. And that sense has morphed into this becoming, you know, strictly private equity, strategic acquired deal generation. So we spend our days farming deal opportunities and acquisition opportunities for our clients, vetting them, delivering to them, helping, you know, manage that deal flow process, ultimately handing it off to them and letting them go close the deal. So, you know, we're essentially real estate agents for businesses, for lack of a better description. Jesse(3m 58s): So in terms of the, the sandbox that you play in, you know, in terms of, I don't know the, which metric would be most appropriate for companies, is, is it the value of the companies in terms of size? Like where, where do you guys play? Brian (4m 11s): Yeah, pretty much. That's where it starts, right? So we, we tend to focus on a few verticals. B2B software, it's a big, big, big, you know, vertical for us. About 90% of our deal flow is in that space. We also work adjacent to that in tech enabled services. So, you know, software and consulting component or software and service component. And then we have a another bucket of kind of everything else, industrials, manufacturing, real estate opportunities, whatever it might be that could just be a good fit for one of our funds. And we've done a pretty good job at building a buyer network across the whole value chain of a business, right? So we have guys that look for the one to 3 million software companies. We have guys that look for the 300 to 500 million software companies and real estate investment we're working on right now at Boston, you know, is a upwards of a billion dollar project in, in a, you know, major, major undertaking in the Boston area. So it kind of runs the gamut, but that's strategic, right? We wanted to fill the gaps in our business model with buyers for every deal that we uncover. And of course, you know, some deals are not gonna transact and we don't close everything I wish we did. We've, we've in a really good spot. But, you know, we, we've kind of plugged those holes and said, all right, we're missing a group that looks for flat or declining companies. We went out and got that guy, we're missing the group that's looking for the mega deals. 500 million plus. We went out and got that group and now we have eyeballs for everything we uncover. Jesse(5m 37s): So in real estate, a lot of what you see is kind of a gradual movement from, say you're finding your first deal, say you're syndicating it on an asset per asset basis, then you know, you get enough volume where you're creating a fund cuz you now have capital coming in and you're getting a portfolio of, of properties. Is is it kind of the, the same, the same process with with your business? Cuz I imagine that, you know, you're gonna need the actual capital on a consistent basis to have actual funds without that cash just kind of sitting around. Brian (6m 9s): Yeah, so we, we are not a fund ourselves, we are hired by the funds. So for example, if there was a real estate developer in Boston who said, Hey, I have, you know, $2 billion to spend, can you guys go out and find me the opportunities to spend that on? That's where we sit. So rather than, you know, going and finding the money ourselves, we already found the money. Our job is to find where to spend that money. And, and it, it's different, you know, we, some of our PE funds are just conglomerating software companies and, and buying them up in the hundreds of acquisitions and some of them are looking for one or two plays that they can hold for five to seven years grow and then exit some of the, you know, the real estate play we're looking at now is, it was an opportunity that came to us and said, Hey, we're looking to kind of recapitalize that cap stack. Do you know anybody that might be able to come in with, you know, 150, 250 million? Yeah, we do, we have a fund that looks at that. So, you know, we made that introduction and now they're at that point of, are we gonna do this deal, you know, together on a, on a 220 million capital injection? Jesse(7m 15s): So for those that kind of aren't in your world and private equity, when you say strategic advisor, strategic investor, what, how do you, how do you look at that? Brian (7m 25s): Sure, so a strategic is a private equity fund is more acquiring companies in a certain vertical, whereas a strategic would acquire a company that is, you know, a bolt-on to what they're already doing. For example, a car dealership franchise saying, Hey, this guy across the street is for sale, we don't have a Nissan dealership, maybe we should buy that one. And it's more of a strategic acquisition for an existing business versus private equity that's putting together a portfolio of various investments to operate as, you know, a holding company. So we have some strategics in the software space that are looking specifically for bolt-ons to their current investments that can supplement what they're already doing. Maybe it's a service that you know, hey, our software does this, that software does that. If we had that, we could cross sell it to our current customer base. So we're gonna go out and make that strategic acquisition. Jesse(8m 19s): So in terms of kind of where we are right now in the economy, you know, it's been last two years been kind of a rollercoaster, interest rates inflation. How does that impact what you guys do? If, if it does, are you insulated in in any way from that or is it kind of, you know, exposed, like, you know, other businesses would be exposed to some of the macro economic circumstances? Brian (8m 42s): Yeah, we're definitely exposed and we're exposed in the sense that the valuations are lower than they used to be, right? So that company that was getting 10 times their bottom line for evaluation is getting six or seven and it's really affecting the borderline companies more than the really good ones. The really good transactions are still happening. Those, you know, first round draft picks are always gonna be first round draft picks, but the borderline 10th round guy probably isn't gonna get drafted this year. They're gonna have to wait that one out. So, you know, we're, we're, we still have a very active pool of acquirers. The problem right now is are their offers matching up to what the sellers wanna wanna take? Yeah. You know, and I'm sure in the real estate world right now with interest rates, if you're not coming to the table with a hundred percent cash, you're probably at a disadvantage as a buyer, Jesse(9m 34s): Right? Absolutely. We're, we're constantly talking about the bid ask. You know, we've had a environment where valuations were so high for such a long time that this idea of cutting your price from the seller standpoint is just, it's unfathomable. But the reality too is that we're not seeing as much on the demand side. So something has to give. The nice thing is the cash flows for the most part are up because, you know, we're able to increase the rent so that inflationary, you know, call it a hedge, but that inflationary aspect of it, you know, we, we see a little bit of benefit from in terms of deal volume. So you mentioned first round draft picks are always gonna be there, but in terms of the volume, have you seen the volume of transactions go down? Or is it more so just kind of the, the multiples are, are aren't what they were a year or two ago? Brian (10m 25s): It's more the multiples, the, the, the volume of companies looking for some kind of transaction, whether it's a capital raise or an exit completely, or just a, you know, hey, we wanna sell minority interest. In my business, that has not slowed down. That's actually increased. We work with the world's largest and most active acquirer of flat or declining software. So they're, they look for the broken and battered companies that they're burning money, they can't get another raise round and they're just looking to exit. And their deal flow has tripled since really July. But the guys that are looking for the a hundred percent year over year growth companies that are gonna be the next Facebook, those have slowed down a little bit, you know, but the volume is there. We, we, we have not slowed down in our deal origination on a monthly basis at all this year, and we haven't slowed down on how many deals are closing. Jesse(11m 20s): Yeah. And do you see the, do you see any trends in terms of the, the type of, the type of businesses that, that are showing strength over, you know, over the last year? Because for, you know, in our world, one thing I was talking about with the podcast we did before, this was the, with an economist and we're we're saying like, unlike oh 8, 0 9, the yes, interest rates are up, yes, inflation is up, but we're still seeing a lot of health in the, in the employment rate, we're still seeing a lot of growth in these companies. So are there, you know, are there top picks in terms of sector that you're seeing? Brian (11m 54s): Healthcare on the technology side is, is really, you know, really taking off right now. Some stuff with the government, you know, software that, that provides to, or software providers to government entities is another place that our, our clients are really kind of hot and heavy on. And the other is like learning management systems, online learning. I don't know if that's because people are, you know, investing in themselves and learning more or if it's just that's the way things are being taught now. But we have multiple clients who knocked on the door and said, Hey, we want to add this to our, our criteria for searches in the learning management world. So, you know, those are, those are there, but at the end of the day, the real, the real, you know, commonality between all of them is recurring revenue. Everybody wants that recurring aspect. If you're a project based entity right now, it's gonna be really hard to transact at a number that, you know, gets you excited, you can sell for sure. But that high multiple, the frivolous money getting thrown around is just not there anymore. Jesse(13m 0s): The times were good for, for the last 10 years. Brian (13m 3s): Yeah. Jesse(13m 4s): Lot, lot of funny money. So in terms, you mentioned you're in, you're in Boston now and that real estate deal was also in Boston. Do you guys focus on a certain area geographically or are you, you know, are you agnostic to, to that side of the investment? Brian (13m 19s): Yeah, we're agnostic. Our, our clients are all US based businesses, but a few of them invest all over the world and you know, they're opportunistic with that. So we really have no geographic boundaries on, you know, what we do or what we find. You know, our, our last transaction that closed was a company in Texas buying a company in California. They didn't meet, they did the whole thing virtually. It was a software acquisition. They never sat in the same room. So it was kind of, you know, interesting from that standpoint. But no, we have no boundaries really, which is good and bad for us because, you know, we tend to run into the ability to chase shining objects with some of our deals because we have a lot of upside. But the more focus we stay in the verticals we're good at, you know, the better off it is. So we're really more vertical focused than geographically focused. But at the end of the day, almost a hundred percent of our deals are done in the US and Canada. Jesse(14m 13s): So in terms of the kind of your role, like I know with on the real estate side, when we start raising capital or start connecting principles, there's always that risk of being dealer broker. Like how do you, how do you guys position that in terms of, you know, what deal gen is as an entity? Brian (14m 31s): Yeah, so we are not investment bankers and we don't have to be for what we do, right? So we, we are not conducting the transaction. We are paid from the buy side, not the sellers. So we're not paid outta the proceeds of the deal. We're paid from our client paying us, you know, a fee and it's essentially a referral fee. So we are there to originate the opportunity, introduce that opportunity, and then everything from diligence to close is done by the buyer. Yes, we're very hands on and liaising the deal to get to that letter of intent stage. But after that it's a hundred percent on our buyer. So we are really, you know, essentially we're a marketing company, you know, we're, we're just finding opportunity and handing it over and we're getting, we do get paid on a percentage of the deal, which is, you know, a great model for us. But we're not licensed to, you know, transact public companies or anything like that. Cause we don't have to. That's not, that's not where we exist in the deal flow. Jesse(15m 29s): So is it similar to us on the brokerage end? Like on the real estate side? Like once you, once that deal transact, transacts, then you know you're paid your fee. Is that kind of, or is it, is it just the introduction to loi? Brian (15m 42s): No, so we, we get paid based on a, we get a yearly, you know, kind of commitment fee is what we call it from our clients. They pay us to say, yes, you're gonna go out and work for us and do this, which is, it's small. The reason we do that is we need skin in the game from our, our buyers. And we used to do it without that, just on a referral fee only, just based on what the deal closed and what we found was there wasn't enough attention to the deals we were sending over. So even something as small as, you know, 10, $15,000 for the year for us to go out and work on this thing all day, every day, at least when we send those deals over, they're evaluating them a little differently. We don't wanna be treated like everybody else. We wanna be treated differently. We want preferential treatment for our deals. So we have that, you know, commitment fee plus a percentage of deal value and it's small. It's a referral fee percentage, it's not a investment banker, five, 7% of deal value. Jesse(16m 35s): So we always ask guests, you know, for a little bit of a crystal ball where, you know, regardless of the industry you're in, where you see the opportunities in the short to midterm, you know, the next couple years, you know, where, what are you guys seeing from just a, a trends perspective or any areas or businesses that you're seeing that we're gonna see opportunities in? Brian (16m 55s): Yeah, so we're, we're seeing a big opportunity in, you know, like I said, we play in the software space, right? So there's these software companies that are doing, call it two to 4 million a year in annual recurring revenue. And they're just a little too small for the big PE funds to really sink their teeth into, and they're a little too big for the individual investor to come in and strike a check, right? But if you put four or five of these things together in five to seven years growing that entity, you're gonna have a hell of a, of an exit. And we actually happen to have a fund that we work with... /episode/index/show/workingcapital/id/25199604

Finding Your Niche in Real Estate with Jeff Flemington | EP130 11/24/2022

Working Capital The Real Estate Podcast

TOPICS