The Fourplex Product Niche with Real Estate Guys Co-Host, Russell GrayAug 29, 2020
"For anyone watching this, the first year that you own and acquire a property—that's the thinnest cashflow. Because you're buying in whatever the market is, especially in a hot market, and bidders bid it up and it gets a little thin.
But with cheap financing locked in for the long-term, (and if you catch a market that's on the rise) I think you can make the argument for pretty much every one of the markets you're in. [FIG markets] have growth potential in different ways and for different reasons, but it's there.
And then you apply those deductions, that bonus, and that stuff goes away in 2022, I believe. So we have a window of opportunity for people who are in acquisition mode, to kind of dump dollars, which I think was not a bad thing to do right now. Get into real estate, income-producing real estate, and grab those tax deductions to make that first year of ownership easier.
Then when you get a new-build, you really don't have to worry that much about deferred maintenance or hidden things. I mean, it's pretty much what you see is what you get. And then it's a lot easier to rent because if you're a tenant out there, would you rather rent something old, something refurbished, or something brand new?
Well, obviously, you know, refurbished is better than old, but brand new is the best of all. And so I think that we're hot on build-to-rent right now in affordable and landlord-friendly states, cheap financing and taking advantage of that cost segregation...."
The Real Estate Guys™ Radio Show is a real estate investing talk program for investors and has been broadcasting weekly on conventional radio since 1997. The podcast version of the show is one of the most downloaded investing podcasts on iTunes.
Fun and informative, this real estate investing talk show is hosted by professional investor Robert Helms and financial strategist Russell Gray. The show delivers no-hype real estate investing education and expert perspectives in a fast-paced, entertaining style.
Transcription of The Fourplex Niche, a Conversation with the Real Estate Guys
Hi, this is Russell Gray co-host to the Real Estate Guys radio show here for another edition of Boots on the Ground! And today we're not talking about a geographic market necessarily, we're talking about a product niche: fourplexes.
Fourplexes are like the highest level of multifamily you can go before you have to switch over and start dealing with commercial loans and really get into what's called apartment lending.
So to help us understand this niche is the multimarket man himself. Steve Olson from the Fourplex Investment Group. How are you doing, Steve?
Pretty good. How are you holding up?
Good. I'm excited to hear from you. You know, one of the reasons I love doing these updates with you is you have a bigger picture. I mean, even though you're very narrow in your niche (new-build fourplexes) you're actually in four different markets. Right? Which four markets are you in?
We operate in Salt Lake City, Houston, Phoenix, and Boise metro areas.
Okay, so that gives you a little bit of diversification but you found a successful model building these fourplexes specifically new-build for investors. And then you put them in markets you think have good underpinning.
So out of those four markets, are there any that you are particularly fond of as we sit here in August of 2020 in the midst of the COVID-19 crisis?
Yeah, I'm pretty fond of Utah right now. It's been doing pretty well through the COVID crisis and so has Boise. You know, we like them all but I was actually in Boise this morning, caught a flight back to Salt Lake City where home base is.
You don't like Phoenix when it's 120?
Well, we invited you up here to wants to speak in January and you almost didn't do it. You were scared of the snow. So a lot of fans. Yeah, that your hundred and 20 the feeling's mutual. But I actually do have a couple of personal properties under construction and reserved in our Phoenix market. So Money Talks. I obviously love that market too, because I'm investing there. Right.
But what was really interesting I was I went out to dinner and downtown Boise last night. What pandemic? I'd be that place was crazy. It was a Tuesday night. They've got these two streets that you were a lot of the restaurants are they were packed. You know, people walk around with masks and everything. But I'm seeing these Restaurant Servers, these restaurants up and running. Right, ringing the register.
I like seeing it. I don't know what it means health-wise, we'll see. But people were done with, you know, holding back they are out and the market was really really humming. So it was interesting. To see, well that, you know,
I mean, obviously anecdotal, but I'm seeing the right thing I went to dinner here in Arizona the other night, it was the same thing people had masks on, but the place was bustling. And that was really it's good to see. So, you know, it's hard to suppress the human race. And when it comes to something as foundational as eating, and sleeping, and socializing, people are going to find the right way to do it.
Yeah. And so you know, from our standpoint, when Robert and I talk about strategy, you know, where How do you invest in this type of thing. We just got done doing our Crisis Investing Series, which is, you know, rolling out on YouTube, and we've been getting a lot of views.
You really have to focus on things that are essential, real, and essential. Obviously, real estate fits, but not all real estate is booming right now. But we think that residential real estate is particularly strong because people may not go to stores anymore.
They may not work in offices anymore, but they're probably going to sleep in the house somewhere on the apartment. You know, small multi-unit single-family somehow someway people are gonna have a roof over their head. That's pretty important. So I think that you know, you can bet that no matter what happens in life, people are going to find a way to do that. I think agriculture is another one that we've been focused on markets that are energy supported, energy driven.
I know you're in Houston and you can say, Well, yeah, but oils had a tough while it's not gonna have it tough forever. That's a timeout another thing you can't keep down forever. And of course, Salt Lake is a really interesting market, you know, because I've been there and you know, it's, it's, you've got the lake, you've got the mountain, it reminds me a lot of kind of a Hillier high altitude Silicon Valley, in terms of the inability to really expand a lot of supply in the core and you've got a really strong base of education and infrastructure that attracts population and retains population, and it's a hard-working demographic that that is productive and that that drives demand for housing and prices.
I mean, that's what I see. I don't know, you tell me. I mean, you know more about the market?
Well, I asked our property management team this morning in preparation for this call that you and I were going to do. What has happened since the moratorium or off and now you could argue there still is a moratorium. Trump does this executive order of no more evictions. What does that mean? on the local level? we've had 20 delinquencies where people have moved out because of COVID across the entire portfolio, that's thousands of doors.
And interestingly enough, what we've seen on the ground in these markets so far, you post that eviction notice, which nobody likes to do, but if somebody went dark on us back in April, and is not talking to us, what choice do you have, right? So you post that three days pay or quit notice. Most of those 20 people left on their own free will they said on out. Now the few that didn't leave where you actually have to proceed to get the sheriff involved?
The judges seem to be just kind of punting that for 30 days. Right? no matter what's going on, they say you gotta give this person 30 days, extenuating circumstances. That's still light years faster than an eviction in California. Right. Which I wonder
if you can be unfamiliar with that.
Yeah, yeah. So it, you know that but it's a very, very small portion of the portfolio that's, that's going through that where the judge has put a freeze on it. So we've seen that almost across every market that we're in, but it's a pretty small sample size. Most people have either moved on but we've actually seen a lot of renewals.
We're leasing new projects. Right now. Right. Many listeners, the real estate guys invest in those projects, those are going a little slower than they normally would, because of higher renewals people less likely to move this you know, with what's going on. Right? Right. Not a lot. I mean, we're getting anywhere from three to 1015 leads a week and each project that we're bringing online so people are out there signing leases, it's happening.
And on the construction site, I mean, are you having any issues with supplies or labor or financing? Are you still able to just crank out your buildings?
Um, well crank out, you know, constructions, a messy business. There's always something going on. We're doing okay with labor. You know, construction is an industry that's been hiring. Right. We've seen jobs being shed and another construction has been expanding. And boy, do we need it? Right.
So we've been able to keep the labor relatively consistent and operate through this. I'll tell you cabinet hardware is a bit of a pain, you know, getting all that to come in on time. orbit around China, I'm guessing.
Yeah, they're they've got a whole bunch of boats parked off la right now and they've almost unloaded all the containers. And it's good. I don't know if you've seen this. There's been plenty of news coverage, but lumbers up double Yeah lumbers crazy high. So we've been taking four Plex reservations from our investors, they've been locking prices. As we start to release new projects, those are going to go up with lumbers double.
You know what? Yeah, you know, that's such a great point, Steve, because I think a lot of people don't understand in an environment. You know, I think a lot of investors understand when you go through like an event like 2008, you have distress, and you have existing inventory selling below replacement cost.
That's an opportunity to buy if you can buy properties below what it's going to cost to build them later when the demand is there, then that's a deal. Well, this is a very similar circumstance, but for a different reason. Instead, today you're locking in the purchase of your materials and now yet you're in a situation where you know the price is going up because these supply chains have been disrupted. And in order, as long as you've got continuous demand in the marketplace, then the bid will continue to be there for the inventory existing and new And you've got a competitive advantage because you've locked in your material costs.
And then the other thing is, I mean, of course, who knows what's going to happen in the future financing. But right now residential one to four financings is like borderline free. And that is something I just think people should be filling up the shopping cart on because you have an opportunity to lock in 30 years fixed financing on residential one to four at extremely favorable rates, which at some point down the road may end up being a big competitive advantage because that's a big component of cost to in real estate is the financing.
So what do you guys see it on the financing side for your takeout buyers? When you sell something to somebody, what kind of loans are they getting? Are you getting hung up or the lending restrictions getting harder? Are you getting conditioned to death? Or is the money still kind of flowing?
It's flowing pretty well and it has flow flowed throughout the COVID crisis. You know you mentioned takeout financing. We've got two loans that happen in our deals because we're known for that pre-construction, right? If investors willing to take on a construction loan and go through, we give them a better price because they took that risk, right?
Well, those construction loan rates are prime plus one. Yeah, those coming right around five. Still, they've stayed tracked. right with that. Then the reifies are, wow, they're better. You know, most people are coming in under four. Yeah, on a fourplex on a 30-year fixed.
I mean, any cheaper than that, and they're paying you to take the money. And so that that's been really good. We continue to project on our proformas for the quarter to try to bake some uncertainty into the cake. Knowing that somebody is refinancing in a year. You've got to have that in there. But yeah, people are most are coming in under four right now. If you want to pay a point you're going to be even lower. So that's been very good. We haven't received much kickback our investors typically are 700 plus five goes with Good assets and the lenders like they want those deals. So we haven't seen a lot of overlays or weird conditions or anything like that.
Nice. Well, we've been putting a lot of emphasis on the build to rent because there's, you know, a little bit of an inventory issue out there. And so it's tough if you're out there trying to buy existing stock, but if you're in a market that can absorb some of this, and of course, a lot of these markets right now have because they're affordable because they make sense because they have a good quality of life because they have decent employment.
You know, you're finding people that had been trapped in these high priced markets. We just got done talking to some folks in Florida. And they're in migration is huge, because people are abandoning Chicago and New York and Boston and Baltimore, they're leaving those towns. And the reason they are is that they've just discovered they can work remotely, so they can go move to a low tax, high quality of life, low-cost state, maybe even allow their employer to give them a little bit of a haircut on the salary and you yet they're caught their standard of living actually goes up.
And of course, when they come I mean, they may not necessarily be living in a four Plex like yours but what they do bring is they bring their income and their expenses. And so when they're out there in the marketplace doing business locally, they create those tertiary jobs and end up being the tenants that live in a place like yours or even the salary jobs.
Yeah, I told you last night we had dinner in downtown Boise talk in real estate. And this couple in the booth next to us was kind of eavesdropping on the conversation and they introduce themselves, sure enough, guess what? in town from Mission Viejo, California, trying to find a place to live. Can't find one, but still, the pricing is way better.
They're ready to get out. It's and that was just last night. And we see that happening in all of these states that we operate in, in the Intermountain West in Texas. NET in-migration, in addition to high natural childbirth as well. You Yeah, well, especially Salt Lake City.
Nobody makes more babies than Utah!
Yeah. Well, I mean, the markets that you're in that makes sense, because, you know, I mean, I think I'm very high on the Phoenix market just because I think that the proximity to California and what's going on in California, for a lot of people, especially Southern California, which is the bulk of the population base in California, it's a natural move, they're still close enough to their friends and family and even the beaches that they love.
I mean, it's not super convenient, but you're not, you know, you're not a plane flight away, you can still make that drive if you choose to. And, and you just get so much more for your money and you still get the warm weather and you have all of the big amenities.
You got the sports teams, and the restaurants and the shopping and the freeways and the medical education, I mean, everything you'd want to have, but the heat isn't everybody's cup of tea. And so that's where these other markets, you know, like salt lake Boise, I mean, I know because when I was looking to Exit California I visited all those markets, they were all on my list. And, you know, I ended up in Phoenix because I like the sun.
But when I went through that experience, I realized what was happening. And so it made me very bullish on the Phoenix market. You know, of course, the challenges are the rents have been going up and the inventory is very low. So that's, again, goes back to this notion, at least from the investor point of view, the fact that you're building the inventory, you don't have to wait for it to come free. And for an investor who really wants to load up or a syndicator.
You know, obviously we have our syndication program, right, we have people that aren't just going to buy like one property, they're going to build a portfolio for their investors, they might be 10 or 20 properties and they might mix them up and all for your markets and to be able to come to a guy likes you and get market diversification, brand new product and bulk being able to buy it in bulk.
That makes life a lot easier for a syndicator so We should probably have a conversation about that offline because I think there's an opportunity there to present that to some of the folks in our club. But at any rate, okay, well, it sounds like the financing is there, a little bit of trouble with the labor and the materials, but you're able to lock in the materials. So that's good. any issues with land acquisition or being able to continue to kind of keep the pipeline going? How's that look?
Land is expensive, it's tough to get your hands on it. Right? you know, the news is out. So we're, we are innovating different product types, you know, can we get the density we need to be profitable, but still pass on a good return to the end investor? So we've started doing you know, we do a lot of townhouse-style four Plex, we can do some more stack flats. We look at expanding, are there different parts of the market that makes sense where maybe there's, there's a good land that you can buy but you're also not stretching?
You know, we've looked at some land in Ogden, Utah that's on the north side of the Salt Lake Metro. That is We hadn't previously done but rents have come up and up there that the cap rate is attractive. Now we've got a good project we're looking at there. We really work down to 303 and the 10 there on the west side of Phoenix, you know, there's just tons of those logistical jobs there with the 10. Feeding LA, big country.
Yeah, yeah. And so there's a good need for housing out there because it's, you know, for the working person, it's too expensive in central Phoenix or Scottsdale or Mesa. Right. But that west side and surprise good year, some of those cities, that's where they need to be and they're right near those jobs. Yeah, that just so keeps knocking into Phoenix.
Steve, are you looking at other markets? Or are you just expanding your footprint in the four core markets you're in?
Well, we're looking at others. It's gonna be a few years though, right? Because Phoenix is newer for us. We've got to get that tuned in. But we've been looking at markets in the western United States, Colorado is one of them. Maybe some of the other major Texas metros would prefer to be on our shortlist.
Yeah. Okay, well, that sounds good.
So you have a report that you've done for us, it's in our special reports library, but anybody watching it, it delivers an update, really and all of the market you're in, you can send an email to [email protected] and then you'll get an update on all four of those markets.
And Steve, you update that for us from time to time. So it's relatively current, of course, we do these Boots on the Ground once a month, so that people who really want to follow these markets and track on what you're doing and how the rapidly changing environment is affecting your model, good or bad, creating opportunities and challenges.
And of course, the flip side of every challenge and opportunity. So true. No, it really just depends on how you choose to frame it. But, you know, we're obviously always looking for opportunity. I mean, I like you to see a lot of positive things happening right now.
For real estate for leveraged real estate for residential real estate and in particular affordable residential real estate in the right markets. And I think you guys, you just hit it center mass. So excited to stay in touch with you and have you keep bringing us these updates and maybe one of these days, actually get out there and put my mask on and come see you.
Yeah, I'd love to do that. But maybe look me up the next time you're here in the Phoenix area, and we'll catch up.
That sounds good to me. I'll look you up and we'll stay in touch.
Okay, any closing thoughts for the folks before we wrap this month up?
Yeah, if you're a real estate professional, you need to get into new construction and do a cost segregation study with the bonus depreciation. A lot of clients do that on this new build for plexes. I just did one myself, it made my bank account very happy.
Yeah, you know, I thought we were winding up but let me just hit on that real quick because that's huge.
You know, the first year for anybody watching this; the first year that you own and acquire a property--that's the thinnest cashflow. Because you're buying it in whatever the market is, especially in a hot market, and bidders bid it up and it gets a little thin. But with cheap financing locked in for the long-term, and if you catch a market that's on the rise, and I think you can make the argument for pretty much every one of the markets you're in has growth potential, you know, in different ways and for different reasons, but it's there. And then you apply those deductions, that bonus, and that stuff goes away in 2022, I believe. So we have a window of opportunity for people who are in acquisition mode, to kind of dump dollars, which I think was not a bad thing to do right now. Get into real estate, income-producing real estate, and grab those tax deductions to make that first year of ownership easier. And when you get a new-build, you really don't have to worry that much about deferred maintenance or hidden things. I mean, it's pretty much what you see is what you get. And then and then it's a lot easier to rent because if you're a tenant out there, would you rather rent something old, something refurbished, or something brand new? Well, obviously, you know, refurbished is better than old, but brand new is the best of all. And so I think that we're hot on build-to-rent right now in affordable and landlord-friendly states, cheap financing and taking advantage of that cost segregation.
So good point. All right, sir. Well, I appreciate your time today. And if anything breaks between now and the next one, give me a shout and we'll do something off rhythm But otherwise, we'll just look forward to catching up with you. And again, anybody watching this once that report, it's in the show notes below but [email protected].
Thanks a lot, Steve.
Good to see you again. Russ. You take care.