Navigating the Debt Markets to Find Opportunities in Multifamily – feat. Jorge Abreu | Aspen Funds
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Navigating the Debt Markets to Find Opportunities in Multifamily – feat. Jorge Abreu

For decades, multifamily properties have been a popular investment choice for both small and large investors. Recently, we’ve been talking about several trends happening in the sector and how interest rates & the debt markets are causing disruption. However, if you know where to look, there are still incredible opportunities in multifamily. In this episode, co-hosts Bob Fraser and Ben Fraser interviewed Jorge Abreu, CEO of Elevate Commercial Investment Group, a multifamily operator with over 6,000 units, and shared personal experiences with multifamily investing, how his investment approach has evolved, and where he is discovering opportunities.

Connect with Jorge on Linkedin: https://www.linkedin.com/in/jorgelabreu/
Learn more about Elevate: https://www.linkedin.com/company/elevate-cig/ 

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Navigating the Debt Markets to Find Opportunities in Multifamily feat. Jorge Abreu

Ben Fraser

Hello, Future Billionaires! Welcome back to another episode of the podcast. Uh, this is another great one for you. We keep just coming out with some great episodes. I gotta say, I, I just enjoy all these recently, they’re kind of really specific about the market right now. So we brought on Jorge Abreu who is CEO of Elevate Capital.

They’re a very big multi-family operator. He’s been in this space for 16 years. He’s seen cycles in and out, and it says it was a great just, you know, kind of heart to heart conversation.

Bob Fraser

So this guy, not just an operator, but he’s actively acquiring these properties.

So, you know, he’s seen all the changes in pricing and has really got some warnings about debt and how debt is changing and what’s going on in the market. Differences between how everything’s happening in Class A versus class C and the differences, So wealth of market information here.

Ben Fraser

Yeah, it was really a, a deep dive in some things we’ve talked about at a high level, but hearing it from someone with boots on the ground experience with a huge portfolio, he’s seen what’s happening real time was really, really valuable.

Bob Fraser

And from a guy who’s been through 2008, So we love it. Definitely.

Yeah, he is. So we ask him, Is this the same? So I’ll let you let you listen.

Ben Fraser

Yes. And at the very end, he also shares a very unique strategy that you’re kind of excited about and teed him up, on, uh, on finding very unique value add in multifamily that a lot of people maybe have not heard of. So stay tuned for that.

And as always, we appreciate you listeners. If you’re enjoying the show, you know, please share with with someone that you think would get any value out. You know, rate this and review this podcast if you would. It really helps us get the word out and share with more people. If you haven’t yet, check out the website, TheBillionairePodcast.com, for all the information you need to join the Investor Club, get notified of new deals, and, uh, do the reviews or anything there.

Thanks so much for listening. Enjoy.

Bob Fraser

Let’s hear from Jorge!

This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you’ll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, Uncover strategies of the ultra wealthy, discuss economics and interview successful investors.

Ben Fraser

Welcome back to the Invest Like a Billionaire podcast. I am your co-host Ben Fraser, joined by fellow co-host Bob Fraser, and today we’re joined by a good friend of ours, Jorge Abreu, who is the CEO of Elevate Commercial Investment Group. If you haven’t seen Elevate or heard of them, then you must have been hiding under a rock, cause these guys have been very active in the multifamily space. Um, we, uh, we love Jorge and his, his team, and super excited to have you on the podcast and talk about multifamily. This is, uh, you know, on a lot of investors’ minds of multifamily has been great for the past decade plus,

Bob Fraser

but everything’s changing, right? And so gonna continue to be or not, you know, what’s, what’s going on?

So Jorge is a wealth of, of information and knowledge, so can’t wait for.

Ben Fraser

Yeah. So Jorge, do you, us a little background on you, those that may not know you, you have over 6,000 units in your portfolio currently, um, been in real estate over 15 years, exclusively multi-family or one trick pony, but pretty good at that trick.

So give us a little more background on you.

Jorge Abreu

Absolutely. Uh, well first of all, thanks for having me on here. You know, we’ve known each other for a while and we’ve talked quite a bit about real estate in the past couple years, so yeah, nice to get on. Um, as far as myself, so I’ll take you back to, I guess when I started in real estate, so that was about 16 years ago now, Decided to jump in and, and do real estate full time.

Um, at that time I was working for UPS and the engineering department, so I’ve got a electrical engineering degree. In getting that degree, I knew I didn’t want to be an engineer, but I went ahead and finished it off.

Bob Fraser

It’s still a great experience, right? Yeah. You learn it helps you,

Jorge Abreu

but For sure, for sure.

Um, so started doing single family actually is, is what I started with 16 years ago and, um, really like the fix and flips. Part of it, um, started a construction company to scale that side. Uh, we were doing maybe at the max about 50 fix and flips per year and then some other wholesale deals. And then I’ve been through a cycle.

So, you know, what’s happening now is, uh, wasn’t the same thing that happened in oh eight for sure. You know, fundamentals are different. Everything’s, everything’s different. But, um, During that down cycle, we did, uh, buy and hold a lot. So, you know, things were really cheap and, and the fix and flip wasn’t really there, but we were, was a fix fixing not a flip

Right, Right. Uh, so bought some small mot, bought a bunch of single family stuff and then, uh, I honestly didn’t like the management part of it, so I didn’t like to have to go and collect rents and. Hear all these stories and all that stuff. Um, we didn’t quite have enough where at least I didn’t think it made sense financially to, to bring in a third party management company.

So pretty much what happened is when the market heated back up, I, I sold everything, um, and went back to fix and flips, and then finally got introduced to multifamily syndications. And man, I. Did not look back like it was instant scale, you know, one deal buying a hundred plus units. Uh, a lot less transactions than what I was dealing with on the single family side.

And, uh, we’ve been pretty busy past few years, uh, acquired around, you know, over 7,000 units, exited another 1500 or so. So, um, still pretty active right now, you know, um, maneuvering through. The market and pretty much the, the debt has become really difficult.

Ben Fraser

Talk about that a little bit. So you had kind of a stated goal, you wanna hit 10,000 units, you know, on your quest to continue scaling, but it’s, it’s really kind of put a pause on that, right?

Because as a lot of people are seeing all these deals aren’t penciling, and it seems there’s a pretty big gap between, you know, the bid ask of, of these, these, uh, uh, apartments going right now in the market. So it’s, it’s difficult to make deals happen and it’s difficult with the changing debt markets, so, What are you kind of seeing and what’s kind of caused the, the slowdown from your perspective on, on acquiring?

Jorge Abreu

Yeah, so I mean, going back the last couple years, um, I wanna say, I don’t know the exact statistic, but I mean, From what I saw, maybe 90, 95% of the loans that were getting done were bridge loans because the rates were so low.

Bob Fraser

Um, and just because we wanna bring all of our listeners in, what’s, what’s bridge loans?

And it just, just walk us through that. Yeah. So

Jorge Abreu

a, a bridge loan is, is kind of what it states, right? It’s supposed to be a bridge between a temporary loan and a, and a permanent loan. Um, you’re supposed to. Take the time it takes to stabilize that deal and then go and, and get a, a permanent loan on there, a more of a agency type loan.

Um, they used to be maybe around two years were the terms, but then when the market kept heating up, I mean, I know all the ones we got on were five year. Pretty much

Bob Fraser

turned so, so typical bridge loan people, people know about debts like a bank debt or whatever, so, So what are the characteristics of bridge loans, let’s say, when you were doing this, you know, 2, 3, 4 years ago and what are the characteristics now?

Jorge Abreu

Yeah, the biggest difference is, is your bridge is gonna be adjustable rates and, and your permanent is gonna be a fixed rate. Um, If the adjustable rate didn’t seem like a problem when the rates were so low. Right. Right.

Ben Fraser

They had been low for so long.

Jorge Abreu

Right. Um,

Bob Fraser

and then you also have, and, and Bridge Bridge is private and private investors, they’re not, they’re not banks usually.

They’re just, they’re just, you know, hedge funds or, or, uh, private equity companies. Right. Rates are a little higher usually, would you say, or?

Jorge Abreu

Uh, they usually, but it, it started trending the opposite. The opposite

Bob Fraser

way. Okay. Yeah. And sometimes they’ll give you more on higher LTV means they’ll loan more on the, against the value of the property, is that right?

Exactly.

Jorge Abreu

Definitely. They’re gonna give you off of the loan to cost versus where most agencies are just gonna go off loan to value. Gotcha. So big, big difference on leverage for sure.

Bob Fraser

And so what’s happened? Rates have gone up and are you seeing the bridge lenders getting more conservative now? They’re, they’re not as willing to go as deep into the Oh, absolutely.

Jorge Abreu

I mean, there’s, there’s some that have shut the doors. You know, some, some of the smaller guys, they just, uh, their lines are getting called and, and they can’t do.

Bob Fraser

So they’re shut, they’re shutting down, they’re getting more conservative. Are you seeing the loan to cost ratios going down more conservatively?

Absolutely. Wow. So, so, so literally debt is just, Debt market is completely changed. And that is because that was what, So you said 90% of the deal is getting done out there. We’re using Bridge, yeah.

Jorge Abreu

Yeah. So you had a lot of, So I wanna say 2018, maybe even going into 2019. Um, you did have a lot of agency getting done, a lot of agency debt, but what happened, and a lot of people saw this issue is where they got stuck because they had a, a large prepayment penalty and, um, they couldn’t seize the opportunity of the market spiking up and, and they couldn’t sell their properties.

Um, . So then that’s when everybody started going towards Bridge and the loan with the rates being under what agency was offering. Um, yeah, I mean, I wanna say, like I said, I don’t know if 90% is exact, but it sure felt like that’s what everybody was, uh, using for acquisitions.

Ben Fraser

Yeah. And from a pure financial standpoint, if you can get higher leverage and lower rate, that’s gonna allow you to be more aggressive as a buyer because mm-hmm.

less equity down, your, your debt yield is lower. So you can afford a lower cap rate,

Bob Fraser

offer higher yields, higher returns to your investors if everything goes well.

Ben Fraser

Right? Right. But now that it’s, it’s changing, you know, it’s coming less, more conservative. It’s rate’s going up. The, the, it’s making a lot harder to pencil these deals.

Right.

Bob Fraser

So you can’t borrow as much against the, the, the value of the property and the rates are higher. All of a sudden deals aren’t penciling anymore at the, at the same level. So, but you. Um, so, so we’re seeing it’s a lot harder get deals done. What are you seeing around the pricing? Yeah,

Jorge Abreu

so I was about to say that.

So there always seems to be like a delay right? From your sellers and, um, we were dealing with that for, for a bit. I, I think the settlers are, are starting to catch up and realize that. If they wanna sell right now, they’re, they’re gonna have to take less. Um, you know, that’s the only thing that’s gonna, I don’t wanna say it’s the only thing, it’s one of the things that can fix acquiring a property with these rates right now.

Um, the other one is getting a little creative with your capital stack as, as well, and, and filling some of that gap with, um, maybe private equity or, uh, preferred equity.

Ben Fraser

Yeah. Interesting. So, I mean, you’re saying there’s kind of a gap, so the, the sellers had in mind, Hey, this is what I’ll be able to, you know, sell it for now.

Price adjustment. You know, I mean, it seems like too, a lot of sellers may just hold on and wait, right? So if they’re not in, you know, dire straits, they, they may just, well, now that the right time to exit. So it’s, it’s taking a lot of product off the market as well. If they don’t wanna sell for lower than they’re expect.

For sure.

Bob Fraser

So are you seeing fewer bidders? You know, I know for a while there it was like bidding war is like a feeding frenzy, you

Jorge Abreu

know? Yeah, yeah. I mean, we’re seeing a lot less, you know, we’re. We’re negotiating, believe it or not, you know? Wow.

Bob Fraser

or anybody that’s not familiar. It was, it was insane. I mean, we’re getting outbid by a million bucks or 3 billion bucks at a time on these things and with bids that, that were.

Already pretty aggressive. You know, when you’re looking, trying to get returns and you’re looking, it just, there’s not that much meat on the bone. And then we’d get beat out by, by 3 million bucks. We’re go, What is going on? You know? And, uh, I, I think, I think a lot of people got the multi-family bug from an, you know, a syndicate point of view.

They’ve sent, attended a seminar about being a multi-family syndicate or something, raised up, raised some capital. Now you got the money, you gotta go spend it, you know? And but those days are that, that capital’s evaporating and those deals are, you know, you know, running out. And so now maybe it’s getting a little more realistic.

Jorge Abreu

Yeah. I think, uh, you know, same thing I saw back in the other, uh, 2008, 2009, um, the buyer pool begins to, to shrink. Um, You’ve gotta, you’ve gotta be able to raise more equity now, right? Since you’re getting lower leverage. Um, also your lenders are becoming a lot pickier on who they’re gonna lend to. Mm-hmm.

Um, so yeah, I mean, now, you know, we’re, there’s some deals we’re looking at where we’re the only one looking at it, or there’s only a couple other people looking at it, you know, and it’s like, okay. You know, your whisper is this, you know, we’re gonna offer millions under, and we’re, we’re waiting, sitting, and waiting on some of this stuff.

So, so

Bob Fraser

take us back, think back to 2008. What’s different with what’s going on now than what you saw happening that,

Jorge Abreu

um, I mean, you have inflation, right? Back then, the inflation wasn’t anywhere near what it is now. Um, I feel like you still have really good fundamentals and the economy is, for the most part, other than what the Fed is pushing , you know, they’re, they’re, they’re kind of wanting the economy to do bad.

Right.

Bob Fraser

But it isn’t Yeah. Not yet, at

Jorge Abreu

least. Yeah. You know? Correct. Correct. The economy’s still fighting them off. Um, so it’s, it’s, it’s definitely different. Uh, honestly, if it was not for the rates, I mean, It would still be a really hot market. So, yeah.

Bob Fraser

Yeah. I mean, 2008 was fundamentally, it was a real estate and a banking collapse.

Yeah. And this is not that, Right? This is not, you know, this is, you know, I, I actually, I, I, I got one on you. I actually was the, I went through the.com crash, you know, and that was different and real estate crisis softened, but it wasn’t a real estate and banking crisis. It was really a stock market crisis, you know, and, and, you know, so, Everything’s interlinked at some point.

But, but, you know, 2008 was fundamentally was real estate speculation and, and shotty underwriting that, that drove these values to excess. And, you know, with speculation, you know, this, and this simply isn’t, it doesn’t have any of those characteristics. And, and as you point out, inflation is a massive tailwind for real estate.

Right? If you want, you want to, you wanna really get a free ride, you know, and you know, coast. You know, erect your sail into the inflation tailwind, and that’s what that, what real estate is doing. So you know, there’s gonna be long term, there’s just gonna be plenty of demand for this. My view, at least inflation is, is not going away anytime soon.

Yeah.

Ben Fraser

Te talk a little bit about Jorge. I mean, we’re talking about the kind of debt markets, the capital, you know, structuring of these deals. But you know, on the other side of this equation, multi-family to your point, is very attractive. Fundamentals. We’re seeing housing affordability just plummet right now.

Those interest rates are going up and home prices haven’t taken a huge hit yet. Maybe they’ll, they’ll plateau or even decline, but as pricing, um, I think. Year over year difference. Um, and affordability was 40% less. Right?

Bob Fraser

So, so all of a sudden these, the homes are now outta range. What do people wanna live?

The people have to live, What are they gonna do? They gotta rent. Right? Are are you seeing strength in, in, in the rental side of the business? Oh yeah.

Jorge Abreu

It’s, it’s, it’s nothing like I’ve seen before. I mean, the, the increase on, on rents and, um, you’ve got a lot of. People coming towards renting for, So I’ll give you an example.

I, I just saw this this morning. Somebody bought a house for $400,000 roughly last year, same time. And they bought it today, the same price, just with the increase in rates to be paying an extra around $750 a month, A month in, Yep. Mm-hmm. . So, you know, even. If the prices drop, your rates are still.

Ben Fraser

Prohibitive to and comparing to leasing. Yeah. So, so it just

Bob Fraser

creates demand for multifamily and one or the others going up, right? If there’s, as long as there’s demand increasing, which we’re seeing, you know, that there’s still a shorting, still a pretty huge housing shortage pretty much anywhere in America.

Um, so, so here, so we’re seeing the debt stack has two, has significantly changed and, uh, And so, you know, but one of the things that we’ve seen, and one of the things, you know, we’re gonna be talking about, you know, uh, in a future deal we got, we have, we found a little unicorn here, you know, with a consumable debt, right?

And, uh, it’s a Fannie Mae loan at 3.49%. So that, I mean, that completely changes the equation, right? All of a sudden it’s consumable. Nine years consumable debt at 3.49%. It’s like, okay, , you know? Yeah.

Jorge Abreu

I mean, it, it’s crazy, right? Last year, somebody would’ve told me, This property has consumable debt. I would’ve been like, No, thank you.

Who cares, , I would move on, move on to the next. Now I hear consumable and I’m there, you know, I’m all over

Bob Fraser

it. , so, So there’s, there’s still good deals out there, in fact, you know, and what you’re saying, there’s softness in the market, so there’s, there’s good deals yet to be had and, and including unicorns like this.

Jorge Abreu

Yeah. We’re submitting offers weekly. I mean, that’s awesome. Um, You know, there’s certain, we’ve definitely changed our criteria. Um, I do think, What’s

Bob Fraser

your criteria? How’s it changed? Yeah. So we were

Jorge Abreu

very value-add driven. Right. And, and we’ve got the in-house construction and, um, we’re not scared of, of heavy lips.

Bob Fraser

I don’t want heavy value add. We’re you gotta do a lot of work Yeah. In the property. Gotcha. Yeah. It’s a real fixer upper. Yeah.

Jorge Abreu

Uhhuh. So I’m not saying we’re, we’re not doing those anymore. Period. Um, Just if we’re doing that, it’s because we’re getting it at a really, really low basis. Right? Um, where we’re seeing more, or at least easier to add value is more of the a class, especially straight from the developer.

We’ve done several now, um, where they’re more concerned about occupancy and not really pushing the rent. So we can easily come in, do a couple tweaks, and just, um, kind of take it to the next level. Uh, we’re looking at, you know, that’s a lot of what we’re looking right

Ben Fraser

now. Uh, so when you’re looking at that, the kind of, you know, it’s, it’s always all the sponsors flash their big IRRs, Here’s what we’re gonna get on this deal, Right?

But it’s so important to look at what’s the risk adjusted return, right? And through Covid, you know, these heavy value add deals. Have suffered a little bit, not only from just difficulty in getting supplies and the supply chain has disrupted that flow. Labor’s been very difficult to get. Um, and so you have all these timing issues and you end up taking a lot more risk in construction and, and repositioning assets.

Um, if you’re going from a C it would be or a B to a minus or something, and you’re trying to get these higher returns. But you know, in these kind of more class A deals, it’s more of just a operational tweak. You’re not taking. Undue risk from construction, from supply chain, from the labor markets, from having to prove out of brand new business planets, you know, let’s, let’s add a little bit of extra revenue by adding parking or add some other amenities like dog parks.

Let’s do things that are a lot lower, you know, sweat off your brow, but can have pretty similar, um, uh, amplifiers to the bottom. Yeah,

Jorge Abreu

we, we pay a lot of attention to what the average household income is in the, in the areas as well. Um, and for the most part, you know, these are higher class, um, residents as far as their salaries and, and what they’re making.

And whether we’re in a recession, we’re heading towards a recession, whatever you want to call it. Um, I feel like. They’re gonna struggle less versus somebody in a c class. Um, and, and we’ve seen some of that in some of the c class stuff already. So

Bob Fraser

you, you’re seeing literally so more trouble on with, uh, renters paying, uh, Correct.

Yeah. Correct. Interesting. And it makes sense because it’s, if, especially in inflation, it’s the lower income people that are the most hurt by it. Right. If, if a guy, if it’s painful to fill your tank, then. You’re gonna, you gotta make, I gotta drive to work or I gotta pay my rent, Which am I gonna do while driving to work is probably, if you, if it really is that bad, you have to make that choice, you know, then Yeah.

You know, you know, we’re seeing, So tell us if you’re seeing the same thing. We’re seeing a different difference in demand and pricing for Class A versus class C properties. And we’re seeing, so the cap rates have, have moved quite a bit for. Four class Cs are you see seeing the same, same thing where there it’s much softer?

Jorge Abreu

Absolutely. I mean, it had the margin between a class and, and C class had gotten compressed so much. Um, that that’s one of the reasons that we’re kind of, you know, staying away from the, the C class right now. Um, I just feel like pricing wise, it’s gonna take the biggest hit for sure. Um, so if you’re buying at the height, Of the price on on a C class, and you think you’re gonna add all this value, but if you can’t, for whatever reason, I mean, I don’t wanna

Bob Fraser

be an OR

Ben Fraser

or you already say you do add the value, but because you bought it at the top of the market.

Yep. You go to sell it. The market’s not gonna price in that much premium anymore. So you actually achieve your business plan, but now you can’t sell up what you thought you could because cap rates have gone back more to the me.

Bob Fraser

Okay, so before we lose everybody, you know, multifamily 1 0 1. All right. So A, a, B and C class.

The difference is primarily age, right? So, so the, so the C class or, or like vintage. You know, seventies or eighties typically. Right. Uh, you know, and so typically they need more updating, more modernization. That kinda, So that’s, that’s the main difference. Right. And is, is age and C class. And historically, C class sold at a higher cap rate, meaning they were less expensive relative to their net operating income.

Right. That was historically. And then what happened during the Covid era, all of a sudden the C class caught up, or they’re, they priced high, It’s. Not far under the A class. It’s like, that’s what you’re pointing

Jorge Abreu

out. We’re looking for that value add, right? So everybody was going towards

Bob Fraser

their, everybody was bidding these things up and now it’s coming back more to, okay, they’re reflecting the price that they really should be.

And what we’ve seen in a. You know, during this run up we saw a bunch of, I think, smaller syndicators with, with value add stars in their eyes would go buy this C class and think I’m gonna fix it up. And they budgeted their, you know, they went in and budgeted their, their, you know, rehab unit rehabs, but then they blew out their rehab budgets, right?

Because whoever. You know, experience, you can’t hire the workers. All of a sudden the workers are wanting 50% more and lumber went up three, seven x and it’s like your budgets get blown. Well, meanwhile, they’ve raised a fixed amount, they’ve raised a fixed amount of capital, they’re outta money. And so what are your choice?

Well, let me sell it back to the market as a, a second version of a value add to somebody else. Right? More value to be added. Uh, so, so we’re seeing a lot of deals blow up, right? Just this calculus. And so prices are really coming back to normal.

Jorge Abreu

Well, I think it also takes a lot of work to operate these, especially the C class with the delinquencies.

And just like you mentioned, there’s, there’s, they’re older, right? So there’s things hidden and there’s issues that are gonna pop up. You’re gonna have issues with the boilers, with the chillers, with the roof, with, you know, cast iron, uh, sewer pipes and, and whatnot. Um, A lot of mediocre or even bad operators have been saved with the market and now that’s not there anymore.

Right? , you’ve really gotta be able to be efficient and, and, um, operate the property better.

Ben Fraser

So, so as you kind of shifted from, you know, more heavy value add to more lighter value add class A properties, what, what are other factors you have to look at in underwriting that are maybe different from a Class C?

What makes a really good. Class A, right? Because you know, these generally go for a higher premium, but if you know you’re in high growth market or you’re next to, you know, great job growth or, you know, give us some examples of how, how do you, how do you look at it differently and what are the factors that you’ve mentioned, media income.

So how does that kind of play into, you have some kind of bright line metrics you look at when you’re looking, um, in these markets for these deals?

Jorge Abreu

Yeah. I mean, the, the first thing we look at is, The rents and then other income as well. You know, how, how much can we really push on the rents and. Are there other income that we can make by, you know, bundling the internet and adding in the internet or, um, just adding an amenity fee?

Uh, we do that by looking at the, the comparables in the area and see what other apartments are charging. And we look at the, like I mentioned, the average household income. You know, how much can our residents really afford, Um, before it’s just we’re asking for too much. Right. Right. Um, So really pushing the income is, is the number one thing.

And, and seeing how far we can push it. And then, um, the expenses, you know, what, what efficiencies can we add and where can we cut out some expenses if, if, if we can. Um, we have been able to find that most developers are not great operators. They, they want to build these and they want to get out of them.

They don’t wanna hold them long term. Um, So usually we can find a lot of. Savings on the expenses and a lot of items that we can add for, for more income

Bob Fraser

buying direct from developer. Yeah. Yeah,

Ben Fraser

it’s interesting. I mean, it, it’s, it’s interesting to look at the math too on generally these class A properties have a much higher unit count and.

If you’re going and, you know, to report, one of the deals that we really looked at a while ago and ended up investing in, uh, with you guys was a class A deal, and one of the value add plans was bundling internet and having that as a, as a part of, you know, the package and I forget the specific number, so correct me if I’m way off base here, but you know, maybe something like 50 to a hundred bucks, somewhere in that range.

But you add that across, you know, 300 units per month, it’s real

Bob Fraser

money. I mean it’s real NOI boost, you know,

Ben Fraser

and divide that by your cap rate. That Class A is generally gonna trade at, that’s millions of dollars of value from. One little thing that’s, it’s not gonna be a budget breaker. Right. For, for

Bob Fraser

these.

Well, and you’re, you’re actually, they’re already paying internet. You’re just changing who they’re paying it to.

Jorge Abreu

Right? It’s not even, not the same, uh, apartment you’re talking about. We just started implementing is, uh, we added a smart thermostat, a smart lock, and some USB plugs. Now we’re charging 50 to $75 extra for those units,

And

Ben Fraser

you know, that’s, And how, how much is that, that cost just rough numbers to put those things in. I mean, oh thousand, right? I mean,

Jorge Abreu

we’re talking about no more than 600 bucks, 700. You know,

Ben Fraser

You are, you basically make money within what, five months

Jorge Abreu

? Eight months. Yeah. Insane. Yeah.

Ben Fraser

That’s, that’s pretty crazy, man.

What, what other things, So you like how, I’d love to hear from. Kind of going back to younger Jorge and been through different market cycles, different strategies, what are the things that you’ve learned as you’ve kind of scaled to this, this level? I think that’s something that’s so interesting being where you’re at, because there are so many syndicators that are coming onto the scene and seeing what worked.

Maybe in the last cycle or the last few years, it’s probably not gonna work going forward, like we’re talking about with these Class Cs. And how have you kind of shifted your perspective? What are the things that maybe have been underweighted. By, you know, younger, you know, glossy eye beginners that they need to be overweighting when you’re looking at a deal and you’re, you’re digging through the due diligence, you know, or vice versa.

Jorge Abreu

Um, I think I mentioned it already a, a little bit, but just, you know, what it’s really gonna take to, to ex execute some of these business plans. Um, the work it’s gonna take, like some of it might sound nice on paper and in your performa. But are you ready to actually do the work that it’s gonna take, um, to get it there?

And do you have the team, right? Are you, are you setting yourself up for success or, um, or for failure, really? Um, you know, this is, this is, it’s gonna be a great few years for some. Good operators, and then it can be a really bad couple years for some that aren’t ready for it. Um, yeah. And, and I’ve, We’re ready, We’re ready to, to seize the opportunity and, and really pick up as much as we can.

Um, you know, I feel like we didn’t buy enough the last time in the down cycle, so we’re, you know, that’s one thing I’ve learned. We’re, we’re ready. We’re ready to keep buying and, and buying as much as we can.

Ben Fraser

So what are ways that you’re kind of preparing, you know, when you’re, you’re making acquisitions, obviously basis is the end all be off you.

If you make a good purchase on the front end, you can weather a lot of storms, right? But outside of basis, what are things that, you know, if we do go into some turbulent territory over the next 12 to 18, you know, months, what do you think as an operator, what are the, the, the important things to be aware of as you’re navigating, you know, challenging circumstances?

I think

Jorge Abreu

number one is, is debt and capital stack. Like how you build that, right? Number one is, is per preserving your investor’s money, right? You never want to be in a position where a bank or, uh, you know, private equity can, can take over your deal because then your investors. Aren’t their first priority, right?

Mm-hmm. . Um, so I think that’s number one, being smart about that, not getting over leveraged and not getting into a bad loan. Um, and then number two is location. I know everybody always says real estate’s, location, location, location. But it, it really is, you know, especially now like you, you wanna make sure.

You’re picking locations that have strong, good growth and fundamentals and that a recession’s not going to wipe it

Bob Fraser

out. You know? Let me, let me jump off there for a second. So, your, you, your strategy in 2008. What you did is you just held right, You weathered the storm, and ultimately storms do what storms do they pass, right?

Mm-hmm. . And the key is just to not take, It’s the key is to have staying power, right? Is to be able to stay in the game and the way you stay in the game. Is by managing your debt the way you get, you get creamed and you’re, to your point, it’s where you’re, you’re over leveraged, or you can’t service your debt.

If you can’t service your debt, you lose the debt and they will take your property and wipe your equity out, right? So the key is managing your debt service. . And so, you know, I would say that’s really the most important thing operators need to be doing right now is, is coming up with a Plan B, which is a 10 year plan, right?

Because in 10 years, at 8% inflation, literally at 8% inflation, the value doubles in 10 years. Right. So a 20 million property is literally a 40 million property if it just keeps space just with inflation. So, and if you, if you put in, you know, 2 million bucks to buy that 20 million property, or, you know, that’s optimistic, but well, all of a sudden it’s worth 22 million.

You’re two, 2 million become 22. You did super well. The key, the key is you to ride. That wind, you have to be able to service that debt and stay in the property right and not get wiped out. And the key is debt service, debt service, debt service. Pay attention to the debt and have a plan B where you can flip your business plan over you.

And that was my big problem with the bridge debts is they had, you know, three year expiration dates with floating rates, and you have to refinance in year three. Well, what happens if you can’t? Yeah. You know, and that was, I just, it was to me like a bug looking for a windshield, you know? It’s like this, this is.

If everything is great, then it’s gonna be great, but there’s a lot of risk here. What if you can’t refi? What if you don’t have enough debt service to refi? What if the rates are higher, the cap rates are higher, when at the moment you wanna refi? Well, now it’s just massive risk. So I think debt service is really the, the way forward is to, is to manage that and as an investor, to understand what does the debt stack look like and the terms of the debt.

Jorge Abreu

Agreed. Agreed, a hundred percent. Awesome.

Ben Fraser

Jorge. Well, thank you so much. I, I don’t want you any other thoughts, but I definitely, I have one more question. Yeah.

Bob Fraser

So, okay. On paper, right? I’m a, I love paper, right? I love paper profits, you know, and big ideas. So you look at multi or you look at hotels, they’re in fire sale right now, right?

No one wants these things, you know, uh, you know, a comfort in or something, you know. You get these super low prices for hotel properties, you get these super high prices for multi-family. Hey, it’s kind of the same. It’s got rooms. Let’s just boom. Do a paper switch. Is that real? I mean, so you ever, You’ve actually done some of this, right?

So Yeah. Yeah. You end up with kind of a weird product that no one wants, or is it a good product? Are you excited about this? What’s the, what’s the real scoop on hotel conversions? On hospitality conversions.

Jorge Abreu

I’m excited about it. I’m, I’m really excited about it in, in certain markets, right? I think it needs to be the right market where you’re running out of affordable housing and pretty much what somebody can do is downsize, right?

And they can go into these smaller units, studio units and um, we’re able to get ’em at a really low basis like you mentioned. So that’s the. You know, I originally started by saying that we’ll still look at value ads and we’ll still do ’em a heavy lift if we’re getting it cheap enough, which we are on the hotels.

Um, It’s quicker than, than building from the ground up. Right? So if I’m gonna do new development, so it’s somewhere in the middle between a renovation and a new development, um, but I can get ’em done much quicker than I can a new development. So I’m excited about it. We’re, um, about to close on three of ’em in the next couple weeks.

Bob Fraser

Really have, And you’ve completed, uh, more than one right?

Jorge Abreu

No, no, this is gonna actually be our first three

Bob Fraser

that we do. Okay. This is the first, Yeah. So we have yet to see if you can make a product that the, the, the dog food, the dogs will eat, right? I

Ben Fraser

mean, we, we’ve

Jorge Abreu

Right, we’ve built from the ground up. So I mean, we, uh, trust that we can get the construction part of it done with no problem.

Um, and then their is, uh, case studies in the same market that have done it and. And

Bob Fraser

successful and they were. Wow. Yeah. I mean, to me that’s, if, if you can crack the code on that seems like, um, just an easy way to mint money. Yeah. Um, you know, and like everything, it’s re repurposing unwanted real estate into what’s wanted.

It’s a service, Right? It’s doing a service to the, to the, to the nation here or the city, right. Creating housing, which is what they need, and getting rid of hotels, which is what they don’t need. So I will say,

Jorge Abreu

do not close on ’em without getting ’em rezoned. So that’s . We’ve been working on that. So we, we’ve got ’em all rezoned now and that’s why we’re closing.

Got it. Very good. Yeah.

Ben Fraser

Great, Great, great point. Then you’re just

Jorge Abreu

stuck with a hotel

Bob Fraser

.No, nobody

Ben Fraser

wants. Awesome. Well, Jorge this has, uh, been fun. Always get some good nuggets and talking with you and appreciate you coming and sharing, sharing the wisdom and, uh, looking forward to some of these opportunities that are kind of coming up.

So, you know, you’re out there looking. We’re out there looking and, you know, stay tuned. Uh, we’ve got some fun, exciting things coming together.

Jorge Abreu

Absolutely, man. Absolutely. Looking forward to partnering with you guys. Awesome.

Ben Fraser

Thank you so much.

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