WIN190. Positive Leverage Explained: Why Smart Investors Are Buying Multifamily Now with Reed Goossens

AJ: Welcome to the Westside Investors Network (WIN) your community of investing knowledge for growth. This is the real estate professionals investing podcast for real estate professionals by real estate professionals. This show is focused on the next step in your career, investing. Thank you for listening. And please, if you like our content, rate us on your podcast provider.

Just a quick disclaimer. The views and opinions expressed in this podcast are for educational purposes only and should not be construed as an offer to buy or sell any shares or securities to make or consider any investments or take any other action. Alright. Today, we've got Reed Goossens with us. Reed, thanks so much for coming on the show.

Before we get started, do you wanna just tell us a little bit about yourself and maybe how you got into real estate?

Reed: Sure. Yeah. Thanks for having me back, guys. Weird accent, originally from Australia. Moved out here chasing a girl.

Moved here in 2012. My background's in structural engineering. I moved to New York City without a job. My door knocked until I got a job. Then quickly realized how, know, how does The US is made up of essentially like the states like individual countries, you know, compared to say versus Australia, like the secondary markets and tertiary markets and you can buy a property for $30,000.

Like, you wouldn't get that in Australia. So, you know, mind blown when I first got here and you fast forward to where we are today. I've founded two different syndication companies. We've done nearly $1,000,000,000 in acquisitions across the last twelve years. We've cycled seven deals.

We have 31 transactions to date. And, you know, we we do asset management in house, construction management in house. We're across seven different MSAs at this point. And and you're looking to continue to grow into the future.

Chris: That's quite a track record. Yeah, we are excited to have you on. So I think that we were going to jump into kind of talking about the current market and maybe, you know, a look at how you would view an opportunity, you know, when it feels a little bit uncertain. But, you know, I would say, you know, we're about four years into a recession. And, you know, the last recession, I think, was four or five years.

So

Reed: Yep. No, I completely and I think we have to so let's break it into its pieces maybe about what we're doing. So when I first got started back in twenty twelve ish, you know, we were buying with fundamentals, agency debt, positive leverage day one. And, you know, what has happened since then and we're probably all, let's call it the quiet thing out loud. Like, we are beneficiaries of the Jobs Act changing in 2012, right, where retail investing became a lot easier to access into private markets, private deals, and we've all benefited from that.

I have you guys have and it's been a good thing. Right? But there's also been a lot of capital into the space and that changed the way people it became a crowded very crowded. And we peaked in '20, you know, 2022. Right.

When interest rates started to go to the moon. But today we're we're fundamentally going not fundamentally going back to those fundamentals, positive leverage day one.

Chris: You said it twice. I'm I'm sure that there's plenty of people don't understand what positive leverage

Reed: is. Let's let's let's break it down. So the the delta between or the difference between the going in cap rate and what you lock interest rates at. So say you're buying at a six cap and you're getting interest rates at a five cap. That's positive leverage.

A couple of years back, you know, when rents were going skyrocketing, you may have gone negative leverage where you're, you know, you're going cap rates of five, but your interest rates at six and you're hoping you're betting on the come that you're going to renovate those units and pop your head above water. Right? And that's where some people got into a lot of trouble and there's blood in the streets today, which we'll come back to and talk about in a minute. But, yeah, back to the fundamentals of like what what is what is multifamily investing? And we've seen in the last four years, depending on what markets you're invested in, there's been a massive reset.

We'll probably see the last four the four years we just come through. We'll probably coin as the the historical reset of our generation and now is a really good time to be buying. However, there's a lot of capital still sitting on on the sidelines and attracting capital in today's market is is is is very difficult. But it is a good time to be buying, and I know you guys are active in the Northeast and you you're seeing discounts. Northwest.

Northwest. Also, North Northwest Northwest.

Chris: And and Different Portland, you know, you guys.

Reed: But but but you you you're you're you're seeing the opportunity like we're seeing. And I think that's the beauty of real estate is that it's not like the stock market that's jumping every thirty seconds. Right? You can kind of see when you hit the bottom or when you start to get to peaks. And we'll look back at decisions made 2021, 2022 and say, oh, we should have had my time over again.

I wish I'd do it differently. Right? Like people would look at today and say in three or four years time, I wish I bought in 2026 or 2025. Right? So, you know, I think we're at the I think we've already hit the bottom.

I think we're sort of bouncing on the bottom. There's maybe some movement upwards, but the the next yeah. I I think buying right now is a is a fantastic opportunity.

AJ: Well, I'll jump in here. One of the reasons I think buying right now is a fantastic opportunity is we may have talked about this slightly earlier is that we've had the most deliverables, you know, in the last few years, but I mean, currently the starts are abysmal. I mean, here in Portland, Oregon, like they they have offered, 5,000 units like no SDC fees to try and get developers to start and they're they're still struggling to get through that and I'm my understanding is that's kind of proliferated throughout The US and Portland's significantly harder to get a start and I think kind of like California is harder to get a start whereas, you know, maybe some of the Sunbelts Sunbelt states are not quite as hard. But my understanding is there's just not a lot of planned new units.

Reed: Look. Real estate is local for a reason and understanding the the pipeline in a in a local town is was key. Right? And I think a lot of people maybe overlooked that in the hysteria of that run up to sort of 2022. And I think a and I think a lot of people today are really looking at it.

Right? And not just what are the next three years look like or what are next five years look like. And and you can't, you know, with development, you know, you can have deals sitting on the shelf for a period of time and you can't really always accurately predict when the next wave is coming. Right. But, you know, the cost of construction is still going up.

You guys are in a a high barrier to entry market, which makes existing assets probably more valuable and and a lesson that people can learn when you say, oh, I'm just going go invest in red states. And you're like, well, look, there's good things about investing in red states, but there's also good things about investing in blue states and having high barriers to entry, which means, you know, it it it inherently makes the existing value of assets higher. Right. Because you can't just come along and build slap up anything, you know, like in Houston where they're just, you know, acres of land and you can just put up anything wherever you want. So there is a, you know, and I did development in Los Angeles for many, many years and in New York.

So I sort of understand that value that can be created by buying existing because it's cheaper than the replacement cost in, say, a Portland or in LA. So and I know groups who are barbelled, right? They've got some stuff in red states and some stuff in blue states. I just I was I was speaking with Tryon Tryon Properties yesterday, a group out of Los Angeles, and they're actively buying in the Bay Area right there because of the thesis of that things are coming back. And and, you know, and so, you know, I know I know they own in all and they own in Portland as well.

So they're also in in in red states.

Chris: And in Miami.

Reed: And by the way, right, in Miami. So what I'm trying to get is that wherever the, you know, people just, oh, just only invest in red states. Well, that's you sort of throwing the baby out with the bathwater and you gotta understand what makes real estate is local and back to your point about the development coming to new pipeline. You have to really look at that as it's, as you're buying new deals. Yeah.

Chris: Certainly the deliveries are one element. Like, if looking back at the precursors to the, you know, huge price drop from 2021 and 2022, I've looked back a little bit at it and also, you know, a run up of massive development and as well in combination with interest rates dropping. That, like for the last two cycles, has proven to be a absolute thrust in pricing. Like 'four, 'five, 'six, that was also a massive run up of development. And interest rates dropped, like they went from six to 4% over that period of time, and everything went crazy.

And then, you know, what also lending, all the unscrupulous lending practices leading up to the Great Recession caused

Reed: the huge bubble in

Chris: the housing market there. At least this time around, there was no huge bubble, which was nice.

Reed: Well, huge bubble in certain like it feels recessionary in the multifamily space right now. Probably feels recessionary in the office space right now if you're a large owner of office space. So, you know, particularly secondary and tertiary markets where COVID has now forced us all to work differently. I completely agree. And and I think that's lessons learned.

Right? Like talking to someone the other day, like interest rates dropped to nearly zero. Where are they gonna go? They're like, you're at historically low interest rates. Like, of course, things are gonna be out of whack.

It's not gonna stay there. And so I think coming back to some normality where we're sort of floating around that high threes, low fours is probably where where where we're gonna stay for a little bit of time. I don't think we're going back down to those days. Maybe we get there in five, six, seven years time. But but but if you do if you do, you know what you're gonna do?

Sell your bloody asses because it's gonna be it's gonna be a frothy market. We've already been through a cycle. So, you know, like it's you got to take lessons learned from, you know, times when you skin your knees and and and, you know, we're we're going, you know, from all of us, we're we're probably going through our first real major downturn and we're all surviving and, you know, we'll get through to the next one.

Chris: So I guess I'm interested in how how are you trying to get deals done with, you know, the credit being so tight? Like, it's it's so difficult to get a loan. And on top of that, you know, the terms are, you know, significantly worse than they were five years ago.

Reed: Well, good thing on the deals that we've been doing is that Freddie and Fannie are still lending and we have done probably six deals, seven deals in the last sort of two years, two and a half years. And we've kind of straddled the good the pros and the cons of both institutional world and the retail world. And so case in point, we've just closed on a deal in Fayette Ville, North Carolina, but we still got about $3,000,000 left to raise. But because we're partnered up with a programmatic institutional partner, Monday Properties out in New York City, we're able to bridge that gap between us and then we can backfill with with retail equity. So we also did another deal in Fayetteville where we had a huge institutional partner come in, float the entire equity and we just backfilled 50% of their their money over a period of six months.

So there's we've, you know, again, not not not one side of the fence is the best for raising capital right now. There's a lot of institutional groups that are on the sidelines. They look at that treasury and say, I'm not I'm not gonna, you know, really get it back in the pool until it gets closer to four. And then on the retail side, you've got a lot of guys getting hurt and and, you know, with with deals being handed back to the bank. So trying to straddle the two of them.

But but the commonality is that it takes longer to raise money these days and we've had to try and figure out a way to do it. And part of that is, you know, with RSN, we we were trying to push higher into the institutional world doing thirty, forty, 50,000,000 deals. That realization is maybe that we can't do that for the next twelve to eighteen months. Right. We just got to go back to our sort of sub $25,000,000 deals, do three or four of them a year.

We can raise our own money internally. There's still debt there. And so there are things changing in real time. But but back to sort of how we're getting it done, it's like we've tried to we found a partner that we really love to work with. They've also interested in sort of the retail side of of the of the spectrum.

We've got, you know, investor relations guys and, you know, funnels build out and all that good stuff online to drive traffic and raise money. But it's still the the the the sort of the cycle to to get an investor in and, you know, educate us educate them about us, get them to invest in a deal is taking a lot longer. And each deal that we've done in the last sort of two years, there's been some element of post closing raise, that just goes back to the, you know, to to sort of the environment we're in. But on the lending side, I haven't seen as because we've only done agency debt. I was like, we've done one bridge debt on a distressed deal in Dallas.

But, yeah, it it is tough to raise equity right now, particularly when, you know, the average investor's stock portfolio has probably gone up 20% in the last three years. So, you know

AJ: Yeah. 20% per year.

Reed: Yeah. Right. Right. Right.

Chris: Yeah. I mean, you you kind of nailed it. So, I guess, what about finding deals?

Reed: Yeah. So finding deals I think this sort of sentiment of like, oh, the extend and pretend. Right? So you gotta you gotta you gotta understand a little bit around the context of where we are from a lending perspective. So so prices have dropped, rents have you know, interest rates go up, prices drop, rents have declined.

Right? Expense is also go up. So margins are thinner.

AJ: Banks know Huge NOI compression there. Right?

Reed: Huge NOI compression. Huge NOI. And banks know and have learnt from 08/2009 and was mandated from both current administration and former administration to not whack lenders. Right. Work with them.

And so there's this been extended pretend and it's been going on for a period of time now. That has caused two things. One, it's good for not a run of the markets. We get that positive. But the second thing is that it's probably extending some of the pain that probably needs to happen.

Right? To sort of have that real hard reset. And then you you couple in all the other things that are going on in the world today. So, you know, the the the there is this this element of, oh, I think there's gonna be a lot of distress and this distress is coming. Distress is coming.

Distress is coming. And it is there, but it's not that every deal that you pick up that is quote unquote distress is a deal. Right? Because there are there's a lot of deals we look at that are even lower than the bank balance. And so banks are either saying we're gonna get rid of it or we're gonna try and hold on to it and, you know, and and and and work it out ourselves.

And and that's I don't know when that if it all comes at once or it's just still sort of a bit of a slow trickle. We look at deals all the time where you gotta you gotta really look at is it a distressed deal or is it a stress operator? And and you don't wanna be picking up both. Right? You wanna really be picking up the distress operators where they we picked up a deal in Atlanta where the the the person had a some other deals not going so great, and so we, you know, he didn't have a lot lot of time to to focus on the current deal, but the current deal is completely fine.

We just put new debt on it. It it's been it's been a really good little deal for us. So it just really depends on you do you you gotta look at more deals, but there's not as many deals out there to look at. So it's sort of a it's it's it's a chicken and egg scenario And, you know, it goes back to, you know, this sort of expectation that every single deal is gonna be distressed and every single deal is the bank's gonna wanna, you know, write down and cut cut down their note in half. It just that that isn't that doesn't seem to be playing out as much as what maybe the the wider market expected.

AJ: And I mean, correct me if I'm wrong, but I feel like we've seen kind of like some attrition of operators in the market and there's my, I don't know for sure, but my assumption is that there's probably a good amount of operators that like have to be doing deals in order to kind of stay in business.

Chris: Mhmm.

Reed: Is that

AJ: kind of your same kind of like outlook on some of the stuff?

Reed: Yeah. Look, 100%. Like, don't you can't be throwing stones at glass houses. Right? Like, when it when times are good, when you're doing buying deals, you're selling deals, it papers over the over the cracks that we are in a business that is fundamentally based on transaction volume.

And and if you don't have transaction volume, you the beast can slow down. Right? Particularly if you have a pref that you sit behind as a GP and you really just want you know, you're you're living off asset management fees, which doesn't really pay anything. So and then your your hope is that you buy deals, you plant the seed in the ground, they come to harvest, you sell them, but nothing's been selling in the last two or three years. So there is a, you know, realization, I think, in the syndication world of the flawed business model in which you exist around and thus why people are going out and maybe having bolt on or supplemental things in terms of debt funds to create passive reoccurring, you know, revenue to keep the lights on when when when deal volume is down.

So, you know, it's not a it's not a quote unquote like taboo subject. It's just more of a realization, particularly coming out of such a frothy period, you know, coming leading up to 2022. In my opinion.

AJ: When I think what you said is like, when times are good, times are good. Right. And the asset management fees are not enough to really, like, kinda keep the lights on essentially. But I mean, like, do would you see, like, this period in time as, like, identifying that, like, this particular business is, you know, potentially flawed and, like, maybe needs to change too? Or is that Sure.

Reed: Yeah. No. I I I I I completely I'll completely say it out loud. Yeah. Like, I run a syndication business and, you know, the I've got and this this might sound bad, but, like, you know, people come up to me and say, oh, I wanna start a syndication business like, great.

We you know, you're gonna have to get to $300,000,000 AUM before you can have enough recurring revenue just with asset management fees to support a team of five or six. I run one right now. I know what it costs. Right? Now Right.

You can have construction management fees on top of that and that's where people go and do and and absorb the property management, you know, so they can, you know, generate fees that way to to keep the deals going. But when deals aren't selling and you are sitting behind a pref to your investors, that's where I talk to a lot of people and maybe, you know, one of our masterminds that we were at, like some of the groups we know don't actually have a pref and that can be counterintuitive to an investor to think, well, the GP is eating at the same time. Well, when you're sitting behind a pref, you're probably more incentivized to sell it a lot sooner rather than just sort of sit on it because you're also for every dollar that comes in the door, you're you're sharing maybe eighty, twenty or ninety, ten split. And that's a more sustainable model. So maybe you see a future where the pref goes away.

But when it when investors are addicted to the pref, it sort of put yourself in a rock and a hard place. So I I do know investors who who don't have never had pref. And I said, I did my time over again, I probably never have a pref. Might be slapped on the wrist by saying that. But it is a you have to say you have to understand when you go through a slow cycle like we're going through, what, you know, to make sure that, you know, everyone's eating at the table at the same time.

Chris: So I guess back to buying deals. Question, I feel like is that that is a classic syndication question like, but to pivot just slightly. So we're talking about buying deals. So I guess one of the things that I'm finding difficult is trying to underwrite rents and rent growth. And essentially, you know, the difficulty in placing a value on an asset when rents haven't been growing, they've actually been going down.

Reed: Yep.

Chris: And then as well, the future is very uncertain about rent growth.

Reed: Correct. Yeah. Look. Yeah. So so my opinion on that is is doubling down in your markets that you're already in where you have existing data.

Now for the new folks coming in, that's a little bit more difficult. But for seasoned operators, like, I know we look at data all the time in our markets and we we can sort of tell where test where levels are at on a studio or one bedroom and we just kind of know. And I can tell you on Class C plus B minus assets, we are at probably twenty nineteen pricing in terms of rents. Right. I don't know if you same thing where you guys are at, but we're seeing sort of a studio go for anywhere between on the low end, $8.50 on the high end, $1,100 across the seven different MSAs.

One bedrooms are between 1,000 on the low end and $12.50 on the high end or maybe 1,300. And two bedrooms are somewhere between $12.50 and $1,500, and then three is sort of above that. That's the range. Right? And I think you've got to understand affordability.

Right. And what people can afford to pay and, you know, expecting that you're going to get, I don't know, 300 or pop on a studio in Phoenix on a Class C plus is a little bit, you know, that's you can't be underwriting to that because it's just not true anymore. And when you're being in the market for so long, you can understand what the measure is of the appetite of that of that renter. And I know we're looking at deals in Phoenix right now that have come back to us and we look back at old underwriting where we underwrote it for like two or three years ago and the rents are just not there. Right?

And so you have to then go back to what I was saying earlier about that positive leverage. So we got that positive leverage day one, although nothing to the rents and even they go down a little bit, I've got a cushion there because I do know I do believe back to your point on the construction that there will be a time where rents do start to move in the positive direction. And that's why buying today, how do you underwrite to that? Well, yeah, you can't underwrite to aggressive rent pops pops, you know, probably doing a zero to 1% rent growth at max in the next twelve months, maybe growing to 2% the year after that, maybe stabilizing at 3% rent growth thereafter. Having a lot of understanding of your concessions in the market, really understanding a rent roll and seeing where the last thirty, sixty, ninety days are in terms of your lease trade outs.

Is that is that lease trade out growing or is it is it contracting, meaning that, you know, new leases are less than the existing leases? Understanding all of that goes into how to underwrite deals. But then there's also the the thing of looking at just pure bases. Right. Like I'm seeing some deals where it's very attractive bases, like, you know, sort of, you know, not not you chuck the rent roll out, but like, I can buy something at a 140 k a door where the same thing traded at 230 k a door in the peak.

You're like, I'll apply that all day long knowing that it's just a good buy over the next five years. It's not a it's not a it's not a fundamentals of an of an underwriting thing. It's just more of the time in the market and and underwriting so many deals that when you can see a good basis deal, you're like, I mean, I can pick that up. Like, I bet you I came to Portland. I'd like, I don't know what a good basis deal is, but if someone presented you, I don't know, whatever, a 100 and I don't know what would be good basis.

What would be good basis in Portland if someone said, don't even worry about the rents. Like, if you if I if you got this deal at x, what would that

Chris: It's just it just depends on the asset. I mean, we're

Reed: Call it call it a class c.

Chris: Deal at a 100 or, you know, last year. Okay. Yeah. That was, know, a phenomenal basis.

AJ: Right. All all two bedrooms and a 140 door, you know, that's that's good. Like and that's in the it's in like the heart of Portland and Inner Southeast like that's beautiful. Beautiful. Yeah.

I mean, especially when our median median house price is like $5.50 k. So

Reed: Right. Right. So, you know, again, this does come a time where your numbers won't lie, but there's also do it. Think for the for the folks who are newer on listening to this podcast is like you have to kinda do the reps and a lot of them in a market to really understand and look at historical data to really understand what you're buying today. Yep.

And, you know, regardless of the rents from a basis play.

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AJ: One of the one of the I mean, this is kind of like a really new newer real estate rule, but we look at the 1% rule. Do you guys Mhmm.

Reed: Do you

AJ: guys take that into account? I mean

Reed: No. Not not on not not not not really. Not on when we're buying hundred, two hundred, 300 unit properties. No. We don't we don't look at the 1% rule as much as maybe you may do that in a smaller property.

I'm not saying that that's not they just we just we've got a we there's too many moving pieces on a on a larger property. But 1% rule totally works on a smaller property if that's you know, if you can if you can make it work. So is that still working for you guys in Portland?

Chris: Around it. Right. Yeah. Yeah. I mean, I I really like that rule, and, I mean, we used to never be able to find it in Portland.

Reed: Mhmm.

Chris: And so now now it it exists, and so it it that's kind of like a combination of the basis play. And it's like, okay, well, even with rents going down, know, the basis has dropped so much, like at some point we're going to get back to the peak values, you know, maybe not next year, maybe not in the next five years, but eventually we will get back to it and it will be a good deal.

Reed: And I think the big thing that people are, it's resetting expectations of we had a bit of frothiness and, you know, we we we are guilty of it. Where we're sort of flipping these big deals in three years time. Like historically, real estate is a medium to long term investment and should be treated as such. Right? So putting long put putting medium to long term debt on it, you know, putting three year debt on it, stupid.

No. Good. Look what happened. Right? So re changing the mindset that maybe I'm gonna hold this thing for ten years.

This is a fine investment for ten years. And, you know, getting away from this sort of like, I'm gonna I need to show a five year pro form a and if I can get out in three years, fantastic. I think that's that's changed a lot as well in terms of the, you know, educating the investor on what to expect when you come into a real estate deal.

Chris: Certainly makes it harder to raise capital.

Reed: It does. You know, a 100% does. But I think that's where it goes back to our job as sponsors to to to show the data, show, you know, the historical trends and say, this is why we think this is a better play today. And then really, you know, sell it on a longer term or, you know, longer term hold.

AJ: And we've we've done some heavy heavier value adds where we put some bridge debt on and then, you know, then a five year loan on top. So like total of like six, seven years and explain that to investors. But we still model everything on just like that five year just because it seems like the investor market is just so used to seeing and looking at like what is it in five years? And it's like trying to get it to compare apples to apples. And then, you know, as we start talking more about the specifics of the deal, it's like, okay, so you got to understand like there's probably going to be an extra eighteen months, two years, like, you know, in this and, you know, sometimes it drives people away too.

It's like, well, does.

Reed: So you're saying there's

AJ: not an opportunity to sell it in three years?

Reed: Well, I I I've got a deal with a former business partner where we stupidly you know, the second deal I ever did back in '20 was it 2020 it must be in 2025 or 2026. We put ten year debt on a five year business plan. Like, it that was dumb, but we got to ride out, you know, the waves and it was end up it ends up being fine. You know, we're like, it's just looking back at times and going just sort of shaking your head and think what was I what was I what was I doing? You know?

AJ: Well, I mean, I think if we all had a crystal ball, I mean, we'd put the exact amount right

Reed: We'd all have

AJ: right right time on everything. Ten years.

Reed: We might not be doing this podcast. You know?

Chris: So, Rita, I've got another question. So like, are you seeing anywhere or any market or do you have any, I guess, hunches on where you think is going to recover first in terms of just like migration and in terms of affordability and and possibly where you're seeing capital deployed if it's being deployed.

Reed: Yeah. Look, there's affordability is still a big thing. You know, it depends on what state you're in. Like, you know, ask a Texan, ask a Floridian, ask someone from North Carolina. They're all gonna say, our state's the number one.

I mean, there's a 150 people moving here today and blah blah blah blah blah blah blah. Like, it's just the same same like, you know and it goes back to the the the real estate is local. So, you know, really getting understanding what that construction pipeline looks like in in sort of a four, you know, two, three, five mile radius of an asset. Understanding the macro growth is pretty easy data you can get to. And then if you can get at a really true positive leverage day one because there are things trading at true six caps, seven caps in secondary markets that may not trade there in the future.

So, you know, one particular market no. I don't have one particular market that I'm like hot and heavy on. I'm still across all my fundamental markets that I've always transacted in. It's just that I can I look at these things? I've got so much data to look at to say to make a better investment decision today than I did maybe five years ago based on just being in the market for that period of time.

So, you know, again, I I think sticking to the fundamentals of underwriting, sticking to the fact that, you know, rents will will will go up and have always historically gone up, you know, in lockstep with inflation. And looking at the construction pipeline of what's coming down in terms of new starts and, you know, again, thinking about it more from a medium to long term perspective, if if the deal ticks all those boxes and you can protect yourself against the downside, like fixing interest rates or or do, you know, you know, run the writing to today's rents. If anything goes above and beyond that, you you you're gonna do just fine.

Chris: And and so when you say, like, you wanna understand the construction pipeline, like, you know, like in terms of the construction pipeline, some, you know, development and construction that can attract population growth and, you know, infrastructure upgrades. So, I mean, honestly, you know, since there's, you know, we've gone through this dearth of new starts and development, like a place, you know, a metro getting more development than, say, another metro might mean that it may recover sooner.

Reed: Sure. Sure. But take take the Bay Area, for example, as like it's it's sort of was a doom and doom and gloom of of COVID, and it's now rebounding. Look at New York City, same sort of thing. So it just you know, if you're gonna stick to, say, the Dallas' of the world or the Austin like, Austin's a great example of, like, oversupply.

Infrastructure has not kept up. I was I I am heavily invested in Austin. I still believe in it from fundamentally from a long term perspective, but it's had some growing challenges. Right? You take you compare it to, say, something like Phoenix where there's probably two darling children of the the the the pandemic era and growth and all the head the headline of all the stats and blah blah blah.

But Phoenix was able to absorb its construction a little better because of the infrastructure it already had. Right. Austin has had a bit of a growing pain problem, right, with its infrastructure. And so back to your point of like, you know, kind of no one can say, oh, I looked at that and that's what I made my decision on. But you've got to understand those things that the growing pains of these cities, you know, and how they're going to keep up with that construction to your point.

So I'm not sure if that answers your question, but it's like something that I've observed invested in both of those cities. Right. Take Dallas, for example, another major metro that is taking us a long time to break into that market because it was such a knife fight for so long. It wasn't till this sort of reset that we got our first asset in Dallas. So, you know, that that's got our foot in the market.

Now we we understand more the fundamentals of the market. More opportunities are going to come our way. So, yeah, in general, it's it's it's it's more about sticking around the hoop, getting the rebound, but also understanding maybe going a little bit deeper in terms of that construction. And and and what does that mean if more people move to that city? Can that city handle?

Like, I I had a I had a former employee who used to live in Austin. And I'm not I'm not again, I'm not saying this is the norm. Right? Like but he was just, you know, complaining about trying to get to see a doctor. Right?

You know, again, basic infrastructure stuff because there's just so many people moving to the city. And so there's gonna be a choke point and, you know, that that has both positive and negative. And and and I I've got I've got deals in Austin right now that are just haven't got through their supply yet. But when they do, it's gonna continue to it's gonna continue to be a fantastic city because it's gonna continue to grow. So, you know, investing in the fundamentals and investing in growth, I think, is is always gonna be a good sound investment advice over the long term.

Chris: Okay. And then so what initially attracted you to Austin? And then, I guess, when you're looking at a market, I mean, you you've already touched on a few things, but I I I would just be interested to hear your perspective.

Reed: Historically, like I started in San Antonio. Now I wouldn't touch San Antonio with a 10 foot pole. Right? Like so because of the supply and existing supply that's in San Antonio and just because I've been in that market for so long, like, I went to Austin. I went to San Antonio because of the the the the the cap rate versus where I used to live in where I live in Los Angeles.

I was I was just a cheaper just cheaper. But there is now knowing what I know, there's just a lot of existing deals there. And and the renter mindset in that market is sort of like stuck at a certain you can't like break certain barriers when you go from one bedrooms to two bedrooms. It's very difficult. And then, you know, then we moved up the I 35 into Austin to be because Austin had that more of a bohemian feel and it had a bit more of a coastal feel in the terms of there was a barrier to entry for new construction.

Right. And and you could see sort of a moat being built for that new construction, even though it's it's it's it's a red state. And and that was sort of an investment thesis that we believed in. Lo and behold, lot of a lot of a lot of suppliers hit that market and it's it's choked a little bit. Doesn't mean it's not gonna absorb it eventually.

But but by and large, the reasons we went into our into other markets was more for that affordability. We just we just bought a deal in Fayetteville, North Carolina. As I mentioned before, it's a it's the biggest US military base in the country. It's only about 400, 500,000 people. It's gonna have a different exit cap rate versus a Phoenix, which has 4,000,000 people.

Right? So you've really got to understand when I when I go and buy a deal in Fayetteville, I'm going and gonna be I I need to be seeing things north of a six cap and I need to be exiting at north of a six cap because it's not just that that market is not just gonna go from 300,000 people to a million people in five years. It's gonna slowly, slowly increase. But if I'm buying and say Phoenix, I might have to, you know, look at a five cap and, you know, maybe expand it to a five and a half cap because that's just what you know, it it it's gonna continue to grow. It's gonna continue continue to attract institutional capital.

So it it it really does depend on the market and and and and what you deem is good value, you know, moving forward.

AJ: You said you you wouldn't touch San Antonio with, a 10 foot pole. And and was is it just because the the typical renter there, you know, you can't really push the limit on it? Or is there more kind of like around the around the marketability of the city that is

Reed: No. Yeah. I think a couple of things. And again, I'm not I'm not saying I'm an expert in San Antonio. I love the market.

I've I've I've sold for month.

AJ: Ten years from now, it might be completely different. Right?

Reed: Correct. But it's, you know, there's a couple of things in San Antonio and it is the fourth sibling in the line. You know what I mean? Like it's it's the fourth sibling. It's not it's not part of the top three.

Right? It's not Houston, it's not Dallas, it's not Austin. And it knows its place in that in that line. Right? So, you know, you you look at there are people investing in San Antonio.

And and and really what I mean by investing in San Antonio is in San Antonio is investing in itself. Right? It's not a sexy city, you know, by any stretch of the means. But there's also a lot of existing assets there. Meaning that, you know, you you drove down Fredericksburg.

I think it's Fredericks Avenue or Fredericksburg Lane. There is just wall to wall seventies, eighties vintage stuff. There's just a lot of stuff there. And so when you're going in buying existing assets, you really gotta be careful about where you buy. They talk about, you know, at least in my opinion, the martini glass.

Right? Where your Downtown San Antonio at the peak or the the the bottom of the martini glass and then you sort of got the I 35 up one way and you got whatever that Western Highway. You want us to be sort of be in that northern area. And but but you gotta be really careful about what what you do get into down there because there's a lot of rough stuff like there is in every market. And then there's gonna be add on top of the sort of the the why people move to San Antonio is because it is it is a lot more affordable than most of the other major metros in in Texas.

So there's naturally, like, I first started buying down there ten years ago, a thousand dollar rent check was sort of like mentally the limit of like a class c plus b minus, you know, eighties vintage asset for for a two bedroom. And that's obviously increased. But there's just still that natural book at things that people will pay for. And so when you start adding in trash valets and cable contracts and all this sort of stuff, the renters just say, no, I'm not gonna do it. So you you they're they're very price sensitive on in a market like that for for for sort of workforce housing.

So being being aware of that is is is is really important. You you couple that with say another market we're in in Greenville, South Carolina. I love that market. Reminds me Greenville, Spartanburg. Reminds me a little bit of San Antonio, Austin on just a smaller scale.

Again, we've got we've got workforce housing in that market as well. We got a tax abatements deal where we keep our AMI rents below a certain AMI. Yes. You know, rents are still price conscious, but it's not as price conscious as as say San Antonio. Same with same with Austin.

Right? You know, again, you just you you you you start to identify these trends where people can afford to to pay for certain things where other markets they want. Another good or great example is like people will pay in Phoenix for in unit washer dryers. Like they will like I have seen people cut the bathroom vanity in half and shove a stackable washer dryer. Looks the most disgusting looking thing next to a tiny little shower.

And people pay for it because they just don't want to walk out in the heat. Where in San Antonio, you know, making sure you plumbed your fridge to have an ice maker in the freezer is key because people love their ice in their yeti cups in San Antonio. So like these little things that you pick up as being a sponsor, you know. And but but on the on the other side, like, it took a long time. Like, I used to we were very not I was early on, but like, we used to start providing back in the day, you know, the washer dries didn't come with the units and now it's sort of become very commonplace.

But back in the day, it was very much like, no, I don't wanna pay for a washer dryer. I'm gonna go I'm gonna go I've got my own one from from, you know, my my previous residence. So, again, renter trends, renter expectations, and and and the sort of different things that certain people will pay for, you need to be aware of when you're when you're going to certain markets.

AJ: Yeah. We're definitely seeing that trend in Portland too where, you know, we would have units with just hookups and there's virtually like, the the type of renter that would bring their own washer and dryer is diminishing for sure.

Reed: Right. That's right. That's right.

AJ: And we we do find that, you know, having a washer dryer in unit is certainly a a huge perk in in in the unit.

Reed: But it but it took it, you know, it it took ten years to get to that point. Right?

Chris: So

AJ: Oh yeah. Or even more. I mean, well, you know, the the summer here, this particular summer in Portland is seeming to be more warm, more warmer than like maybe typical and we're getting a lot of questions about AC and we're not required to have AC in this market now. So very low

Reed: at the moment.

AJ: Yeah, I know. But there's like virtually no units have AC unless it's like a pretty interesting. Yeah.

Reed: Interesting. Gotcha. Yeah. So they that's a you go to Phoenix and there's there's boiler chillers up the wazoo. Right?

And you've gotta keep we've we've been slapped over the wrist sometimes where city city inspectors come along and the chiller isn't chilling air, but you can prove, you know, to the unit because it travels through the duct and it, you know, loses its coolness. And by the time it gets to the unit, it's 78 degrees blowing hot air at you. But at the at the chiller, it's, you know, it's at the it's at the right temperature. So it's interesting. That's again, back to the per I wouldn't have known that entering of entering the Portland market.

And, you know, again, things you learn by just being an operator for for a period of time.

AJ: And so you said you recently got into Dallas. Like, what was it the job growth or just that other people were in there? Like, what drew you to getting into Yeah. Like what that as the one of the

Reed: top three. But it's it's

AJ: super adjacent to Austin. It's like, what, three hours away, two and a half hours away or something?

Reed: Yeah. Like, yeah, Dallas has been the probably the one of the biggest growth cities in in the country in the probably last fifteen, twenty years. And so being part of that was always exciting. And, you know, if you're gonna be in Central Texas and, you know, do you wanna go and pay a 100 k a door in Dallas or a 120 k a door in Dallas for existing eighties vintage product? Or do you wanna go pay, you know, a 100 k a door in San Antonio?

And it was just like, I'd rather go pay it in Dallas. Right? I'd rather I'm betting on Dallas than I am on the San Antonio growth. So, you know, it is a bet on growth. It is a bet on the people continuing to move there, and that's what we're gonna have an upswing in the next sort of five to ten years.

And, again, I'm not this is not a Papua New Guinea. This is just you ask me why. And it just you sort of you you you you go to trying to skate to where the puck is, you know, consistently gonna be. And that's what our bet our thesis is that it's gonna be is is gonna gonna be Dallas.

Chris: You gotta hang around the rim, and then you gotta skate to where the puck is going to.

Reed: Yes. That's right. Yeah. That's right.

Chris: You know, what other sports analogies can we throw in there?

Reed: Down the fairway, you know, what's that's another one? Chipping onto the green. I don't know. What I I don't even play golf, so it's it's it's so yeah.

AJ: Maybe kind of a follow-up question to this. Like, did you did you go spend time in Dallas yourself to, like, really learn the market, or are you relying on partners? Or I mean, I've spent very, I've spent like a couple days in Dallas, but I mean, had not certainly not enough that I would be like, oh, like this. I mean, I I've, I've heard a lot from, you know, economists and I see the trends in migration reports and, you know, a lot of the data along with it. But I guess I'm just kinda curious your experience or

Reed: Yeah. Look, I think one thing I've found in general is that I'm not this is a this is a blanket statement, but like when you're shopping in, you know, in these markets for workforce housing, you you know what you're touring. Like, I've toured hundreds of properties across multiple different markets over the last sort of ten ten to twelve years. And the the basic sort of stuff. Okay.

What's your average household income within a mile? Okay. Check the box. Is it above your above or below your threshold? When you go to that market, you're gonna see the same box retailers that are gonna be in those types of suburbs.

Right? And you're gonna see the same things. And it doesn't differ too much between Phoenix or San Antonio or in Austin. And so using that global data that's available helps, you know, you do a desktop underwrite. And then you go to a deals, then you start to put the pieces together and see where the people are going.

But there's a lot of sort of being I've been sort of saying things in in in code here, like, if you underwrite a 100 deals in a in a market, you may never have stepped foot in that market. You're gonna have a goddamn better understanding of that market by literally just underwriting a 100 deals. And that's that's how I started doing in San Antonio from LA. That's how I started doing it and started moving across the country. You know, when we first entered into Greenville, South Carolina, I was underwriting deals for a good twelve to eighteen months before I got my first deal under contract.

Right? It was just it's the repetitions and yet going to site is really good and and getting boots on the ground 100%. I completely agree with that. But you can do you can get like 90% of the way by just doing sheer volume. Like, if I was into the Portland market, my number one first thing would I I get my analyst to do would I literally underwrite everything that hits the market in Portland for the next six months or next three months.

And they really start to build a library of knowledge about that thing. You know, start going there and meeting with brokers, shaking hands, kissing babies, touring deals, and you can start to see the trends. And and and over time, you you can you can sort of make a good investment thesis based on, you know, just a sheer volume of underwriting deals.

AJ: Yeah. I like that advice. We, we started underwriting Jacksonville and Mhmm. Have just kept track of, like, everything that comes on the market. Every like, we shook hands with a bunch of the brokers and have gotten that the deals coming in, but, I mean, nothing's nothing's penciled yet, but you're giving us hope that something in the near future might.

But I think we're, we're getting towards the end here. So let's hop on to our last four questions and I will start us off is what's one piece of advice you would give your 25 year old self?

Reed: You know, it's a it's a marathon, not a sprint. And I've been that type of guy to think that it's that it's it's always a sprint. Right? But, yeah, it's a marathon, not a sprint. So take your time.

Chris: I like that.

AJ: Make make investment decisions for the long run. Right?

Reed: Right. That's right.

Chris: That's right. Or

Reed: Or work on the process and don't worry about the results. All

Chris: right, next question is what was your first entrepreneurial endeavor?

Reed: I remember selling, yeah, just bags of dirt and lollies and stuff on the side of the road when I was a I was a young kid trying to, you know, get get, I guess, some dollars for I remember my mom handing out 50¢ coins to the neighbors, so to make me feel good that there was someone who was buying something from my crappy little stand.

AJ: That's awesome. So they don't sell lemonade in Australia,

Reed: Oh, yeah. I did didn't it was like looking back, like, there's a there's a very clear picture of me selling sandwich bags full of crappy dirt for some reason why I think people would want like like like, just know I like, why why why was I doing that? You know? It's golden. Yes.

There is golden in Australia.

Chris: Yes. It's a dale span.

Reed: It's a lot lot of rocks from from the from that topsoil. So

AJ: Alright. Next question. How has your formal and informal training shaped your journey?

Reed: Formal civil engineer by try by trade, problem solving mathematical brain, always have been systems process orientated, informal, doing do it just do it. Like, I didn't get an MBA. Like, I remember doing my first deal, 192 units as a lead sponsor. And I was like, that's that's essentially an MBA. Like, trying to raise money, put the deal under contract, get a financing, all that stuff.

Like so, yeah, they're just just going out into the world and and doing it, informal training is is so so so valuable.

Chris: Yeah. Okay. Our final question. What was your biggest mistake and what did you learn?

Reed: Oh, mate. There's been so many. One of the one that's come up more recently, short term debt, we've spoken about it, nausea. I I am guilty of having a few of those. But probably looking at a rent roll at in 2022 when stimulus money was in circulation and thinking that was the new norm.

That was probably a very big mistake looking back at that. Now, did I know at the time? No. Did any of us know that? Probably not.

But needing to understand that that, you know, give it with one hand, take it with the other, it will dry up. And that was I still remember to this day sitting on an asset management calling, rents dropping $300 over overnight. I was like, what the f is actually going on? And then you dig deeper and was like, yes, Timmy's money turned off. And you're like, oh, wow.

That's gonna completely ruin my rent roll, you know. So and then making investment in making five year investment decision on that was was was a massive mistake.

AJ: Well, Reed, it's been a pleasure chatting with you, and thanks for coming on the show and sharing your experience and and your knowledge. If our guests want to get ahold of you or learn more about you, what's a good method or mode for them to get in contact?

Reed: Easiest way, hit me up at reed@rsnpropertygroup.com. Or if you ever come in through Los Angeles and you wanna meet up for a coffee or a beer and shoot the breeze, let me know as well.

Chris: Awesome. Alright.

AJ: Very much appreciate it. Thank you for listening to this episode of the Real Estate Professionals Investing Podcast on WIN, your community of investing knowledge for growth. We hope that this episode has increased your knowledge and added value to your path to freedom. If you would, please take a second to rate us so that we can get more great investors to interview. If you or someone that you know wants to be on, please visit westsideinvestors.com and fill out our form to be on the show.

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