0:00:00.0 Kurt Baker: Interested in exploring alternative investments? Curious about real estate ownership without the hassle of landlordship? Join us for insights from Brent Ritchie, founder and president of Enriched Investment Group Inc. Boasting over 18 years of experience in real estate, infrastructure, engineering, construction, and project management. Let him guide you on redirecting your funds and gaining control of your financial future, empowering you to take control of your wealth. That’s awesome, man. I love it. That’s actually… I don’t know if you’d realize, this is actually, I started off in life, so to speak, kind of tripped up into it.
0:00:29.0 Kurt Baker: I ended up… I ended starting a real estate investment trust. I had a bunch of guys that wanted to invest in real estate. I asked a lawyer, what do I do? They said, hey, put your money here, here’s the structure, ended up being a REIT, which I didn’t even realize, but it was a small one, but it was fun. So interesting. So I love what you do. Yours are probably much larger than mine ever was, but that’s pretty cool. So, tell me a little bit about what you do and how you got started, if you don’t mind.
0:00:51.8 Brent Ritchie: I love it. I love it. And yeah, no, and just right before that, a lot of people kind of tripping to being a landlord, right? They tried sell a house, can’t sell it, and they’re like, I guess I gotta rent it. And a lot of people that kind of experienced that in the last cycle. So, myself, I grew up on a farm, in rural Ontario, Canada, and just constantly, yeah, I guess was seeing a bigger and a better life, and something a little bit different. And so, that took me on a journey, eventually ended up doing structural engineering, did a lot of infrastructure projects, kind of projects all over the world. And then some north America bound, which is really great. This little book, it’s on my shelf over there, but the little purple book that devastates a lot of workforce minds and gets us thinking of some different options. The Rich Dad Poor Dad book.
0:01:50.7 Kurt Baker: Oh yeah.
0:01:51.4 Brent Ritchie: That kind of tripped me, I would say, into a different paradigm shift in looking at things differently, right? And instead of just, hey, you’re stuck in this trading time for money, which is not a bad path for some people too. For me, it was almost just, hey, what is… I never liked this wanna save up enough money, so by the time I’m 65, hopefully I have enough to have, to spend before I die. So I never liked that paradigm. So I kind of had more of the entrepreneurial focus, looking at a couple different businesses, opportunities and long story short kind of led me to the multifamily space.
0:02:34.8 Brent Ritchie: And so, a lot of the engineering kind of background, the analytical side, my life for 10 years was spent around all these nerdy, socially awkward engineers, being one of them. And I just thought that’s how everybody thinks. But really, kind of seeing that it’s a niche space and I think a certain skillset that suits well into doing what I’m doing. And so that’s really what got me going into, hey, I’m working a job, but I want… Really trying to create something different for my life. And so that was starting to look into getting and buying multi-family real estate apartment complexes.
0:03:24.9 Kurt Baker: So you started off right into the multi-family investments. Is that what you did? Did you do that just yourself, or did you create a partnership to do that? Or how did you… ‘Cause I mean, some of these complexes are pretty expensive, so I don’t know what you ended… Did you buy a small, four unit and then go to 12 and 20 and a hundred? I mean, well, how did you get into the multi-family? I’m assuming what you did, and you correct me, is that you said, oh, one house, that’s not a good ROI, because you gotta buy this house for whatever, $200,000 $300,000, you’re gonna get 2000 a month and I gotta fix it up. And oh, wait a minute, look all the expenses.
0:03:56.7 Kurt Baker: But when you start multiplying that out over a much larger complex, you get that efficiency of scale. One roof and maybe there’s four, four units under instead of one unit, right? So you got four times the income coming outta the same roof space you might have in a house, that kind of thing. So was that the engineering side of you that said, hey, look, the numbers here look a little better if I go to multi-unit right away. Is that kind of what… Is that what you did? The analytical side of you kind of took over or why did just jump into it? .
[laughter]
0:04:23.6 Brent Ritchie: No, great question. I did a little, back in end of high school, early university, I did work for a couple landlords, doing some renovations and some landscaping and contracts. Snow removal, this is up in Canada. And then doing some leasing and showing. So I did that kind of for maybe two, three years during that end of high school, early university period. But really went off different courses of engineering for quite a while. And so there was a couple paradigms that were shattered for me and maybe I can shatter for a bunch of your listeners too.
0:05:02.2 Brent Ritchie: So, it’s kind of how you accidentally shift into investing in real estate through a REIT, right? Through a group of people putting it together and buying real estate. Similar paradigm for myself. And so it was looking at, hey, it’s actually easier to own a, I would say now in today’s world, 70, 80 unit plus rather than a two three four, 10, 20 unit. And so you’re like, what? How does that work? ‘Cause now you’ve got somebody on site, a property manager and a maintenance guy is taking care of all those elements. A lot of people, they wanna own real estate, but nobody wants to be the call, hey, my toilet’s broken. You know? Right?
0:05:47.2 Kurt Baker: At 3:00 AM. It always happens at 3:00 AM, right?
0:05:49.1 Brent Ritchie: Yeah.
0:05:49.3 Kurt Baker: Absolutely.
0:05:49.7 Brent Ritchie: Exactly. I’m on vacation and you don’t deal with these issues. And so, that’s where if you actually actually scale bigger and you do bigger projects, that allows you utilize economies of scale. And like you said, hey, instead of buying 40 properties and if you’re looking at like, what number do I need in order to replace my income, it’s a different equation. And so you got a great economies of scale. So for our first project was actually 120 unit property in Glendale, Arizona, which is kind of like BMX MSA. And yeah, it was starting there, put a group of people together, created a great opportunity for people to invest in and the vehicle for that. And so collectively pull the group together, people that wanna, hey, I don’t wanna be the landlord, but I wanna own some real estate and just helping them make fantastic returns.
0:06:51.8 Kurt Baker: If my math is right, that would’ve been around 2005 you started doing this stuff, right? Is that roughly when… ‘Cause you said 18 years. When was the… Is that roughly when you started ’05, ’06, ’07, that range or was it later?
0:07:06.8 Brent Ritchie: No. Yeah, that was kind of like… I got into that somewhat as student residential, student housing early on, so that was back early 2000.
0:07:18.1 Kurt Baker: Oh, 2000, so earlier.
0:07:19.8 Brent Ritchie: But then in the engineering field, went into the engineering field for many, many years, and that was really the project management side, the construction management, designing, actually I did bridges, designing and building bridges kind of all across North America and some projects globally. So that was the job side, and then the hustle, side hustle, building something on the side until it became big enough to replace doing what I was doing was really back 2017, kind of starting into that multifamily space. So our first property we got under contract was end of 2018, close to early 2019. And so that was the start of that. Yeah.
0:08:07.3 Kurt Baker: So you hit things that are interesting time, which yeah. So you missed the ’08, ’09. I was just curious about that. But you did hit… If you started ’18, ’19 and you had multifamily units, and I don’t know how Arizona handled it, but I know some parts of the country when we hit roughly March of 2020, didn’t things change a little bit for landlords at that time, potentially where people didn’t have to pay their rents? Well, that was like an optional thing.
0:08:27.5 Brent Ritchie: Yeah, that was a scary…
0:08:28.4 Kurt Baker: All of a sudden.
0:08:29.1 Brent Ritchie: Yes. Yeah.
0:08:29.4 Kurt Baker: How did that affect you guys?
0:08:30.9 Brent Ritchie: It was difficult in New Jersey. Especially for your listeners in Jersey, right? I know several of my investors too that live in Jersey and have some properties there, and that is a challenge. And that is why, I was in the Toronto area, but I really… We just bought in the Sunbelt states and we just bought in landlord and business friendly areas for that specific reason of mine. And so it really… We focus on landlord friendly business, friendly areas, ’cause that’s a significant risk factor, like you said. Sometimes you’re gonna have some massive hurdles and challenges with your local government there to be able to operate a facility and…
0:09:14.5 Kurt Baker: So they were a little more friendly towards the landlords ’cause what I found interesting in the hindsight, and you can explain this to the listeners better than I can, but a lot of people still had the ability to pay their rent and they just decided not to. Which I understand if you’re struggling, yes, okay there’s a problem. You lost your job, your business closed, yes, okay, we need to help you guys out. But the ones that are like, hey, look, I’m fine. I can keep paying my rent. And they just said, well, I don’t really feel like paying it this month, I’m gonna hold it and invest it or whatever. That was a little, to me, a little sketchy. But people could do that in certain parts of the country, but I guess the Sunbelt you’d say handled that a little differently, I guess Arizona. Well, you’re in Florida now, right? So was that primarily…
0:09:50.5 Brent Ritchie: Yeah, yeah.
0:09:51.5 Kurt Baker: The southern states you pretty much were in?
0:09:53.0 Brent Ritchie: Yeah, Texas, Arizona, Florida, and even Georgia in certain areas actually wasn’t so friendly on that side too, but I think you saw a lot of people with some new cars, new TVs.
0:10:04.4 Kurt Baker: Oh, right. You wondered, right?
0:10:05.5 Brent Ritchie: I think electronic payments went up through the roof, but they’re not paying rent, and you’re like, well, you just got a brand new TV. So yeah, in certain areas you realize, hey, there’s different challenges in each market. And for your owner that’s a certain appetite that I like to avoid. There’s this fundamental thing called if you sign a contract to agree to pay rent, you should pay rent, and if you stop paying rent, yeah, there’s some great programs in that time for people kind of helping them on their feet, but if that’s three months, six months, nine months, 12 months, and you’re still in the same situation, we’re a job market out there that’s… Yeah.
0:10:54.5 Kurt Baker: Agreed. Well, we’re gonna take a quick break, you’re listening to Master Your Finances, we’ll be right back. Welcome back, you’re listening to Master Your Finance. I’m here with Brent Ritchie, and we’re talking about multifamily investing and pretty cool, you started off in Ontario, you ended up in Florida. So you kind of went from one end of the continent down to the other, which is kind of interesting to me. Hopefully you get to visit Ontario occasionally. But we were talking a little bit about the epidemic, the COVID, how things shut down and how government can affect business for sure and it affects people obviously, too. We had an issue and we dealt with it differently in different parts of the country. So I know here where I… I’m in the northeast, were pretty heavy handed as far as what the government came in and said landlords could and could not do.
0:11:36.6 Kurt Baker: And I just remember a lot of landlord people I knew, they were like, hey, well, that’s great that the tenant doesn’t have to pay their rent, but the mortgage company is still asking for their mortgage every month. And that took them a long time before they started giving some assistance to the landlord saying, hey, look, I can’t not have income and still have the debt. [laughter] That’s not the way the business model works. And they finally started saying, well, okay. And they made the mortgage, the lenders started saying, okay, well… And they were probably doing it anyway proactively ’cause they would just come to them and say, and that’s the key. Right? When these things happen, talk to the other party. Right?
0:12:11.1 Kurt Baker: If you’re a landlord and all of a sudden for some reason you have issues with the rent, coming in and you’re like, I gotta pay the mortgage, talk to the bank right away, don’t hide from them for six months ’cause they’re just gonna foreclose on you. You have to… They really don’t wanna have the property back, contrary to popular belief, they want you to keep owning it and keep you managing ’cause they don’t want to be a landlord. So you said, we talked a little bit about how the southern states are a little bit different. So I’m sure you still had issues, do you wanna talk a little bit of how you kind of dealt with whatever might’ve come up? ‘Cause some people did lose their jobs, it didn’t matter what part of the country you’re in, so what ended up happening for you guys?
0:12:40.0 Brent Ritchie: Yeah. And I heard from somebody else, it’s like, first… I think it’s Bob Iger, who was the CEO of Disney for many years. And he was like, first, be human and just look at it on everybody’s individual basis, and kind of see what their situation is and try to work with them. So I think that was for us, it was drilling down on an individual level and making sure our property managers, if somebody was in challenge, to reach out. And like you said, don’t hide. [chuckle] So let’s work together, let’s create a plan, let’s see how we can funnel you towards some other resources that are available for helping.
0:13:20.1 Brent Ritchie: There’s a lot of great organizations that step in, and also help chip in, too. And so I think that was it on that side of things. With anything, there’s some bad apples in the mix, and some people that try to take advantage of the situation, but by and large, I don’t think that’s the intent of people. And so trying to work with the residents and tenants in your specific communities that you’re serving and working in. And so I think that was, it’s specific and localized to those areas. Yeah.
0:13:56.5 Kurt Baker: Okay. Well, you’re kind of a special class, which from the investment side we talk about, is called on alternative investments, which tend to be a little less liquid. So if you buy a piece of real estate, you can’t buy it at 10:00 AM, and then sell it at 2:00 in the afternoon without a little bit of cost there, as far as… You could, I guess, but very expensive to do it that way, unlike a stock or a bond or some of these other things that tend to be fairly liquid. It’s considered relatively illiquid. I mean, you can cash it out but there’s a process. In fact, some real estate investment trusts and things like that are sold pretty easily. And some are not, you have to go as the secondary market where you have this guy in between that says, I’m going to find you a buyer and a seller and you’re going to have to take a haircut of some kind, probably because it’s just not very liquid. So typically, people get an alternative method, it’s you get into it for the durations.
0:14:42.5 Kurt Baker: If you’re going to buy a piece of real estate, 120 unit building, the idea is you’re going to be one of those investors while the building is there, and you’re looking at the cut, just like if you bought the thing on your own, without any other investors, it was just your building. You don’t buy with the idea that in six months I’m going to cash out and go do something else, that’s just not the way real estate tends to work. So you want to explain a little bit how you talk to the community and how you bring in the investors and why they would come in as asset class, because frankly, it’s done pretty well recently, especially in the south, the real estate values have gone up, rents have gone up, people are moving out of some of the states up north, it tends to be especially in COVID, a lot of people move down there where the restrictions weren’t quite as great. They could open a business a little bit easier so there was a lot of jump, basically. And some of that’s continued from what I’m seeing. I mean, you kind of tell me what’s going on and what’s happening now.
0:15:34.5 Brent Ritchie: Oh man. Big time, big time. You still see those migration trends, and I was just at a conference last weekend or the weekend before in Dallas. And you’re seeing those massive, tons of people like to have freedom and don’t like to be heavy handed and assessed and want the ability to own and operate and conduct their lives in a way that they see fit, without the government’s overreach. And so you still see those strong trends. If you look at your top five metros, you’re looking at your Dallas and your Houston and your Tampa and Orlando and Raleigh, and those strong metros across the nation. Phoenix had huge immigration, and I think maybe there’s a little bit of a shift right now. But I still think the future forecast of Phoenix is strong. But yeah, you’re seeing seeing that trend continue quite strong.
0:16:27.3 Brent Ritchie: And yeah, like you said, on the on the real estate side, the way that we REIT specific do it and own it. REIT is a different structure. So the REIT is the overall fund that’s going to buy a bunch of different assets, people coming and going. And so there’s some flexibility and liquidity in that. The way that we specific structure is we’ll buy, we’ll scout and we’ll kind of… We’re networked across Sunbelt States, and we’re networked with a bunch of brokers and partners and various sources that are constantly bringing us deals. And so we’re chewing through many, many opportunities to really find where we see great goldmines, where we see huge value add that we can come in and bring value to that community. Maybe it’s an area where… If your home has wear and tear, from your family, just imagine a home with 120 families, or a property, a complex, a community.
0:17:24.3 Brent Ritchie: So apartments kind of go in dog years, and everything’s accelerated. So it just constantly needs capital infusion and love and styles change, and your wood paneling is no longer in favor, and the grays are maybe shifting a little bit more. And so it’s a continual process to put money back into these communities. And the government also doesn’t want to be a landlord. They want people to invest in these communities. They don’t want to fix them up. They want to create the opportunities for groups of people like us to come, pull it together and buy and invest in and create better lives and communities for our residents, across the nation. So I don’t know that… I know we kind of went two different ways but does that answer some of it?
0:18:13.5 Kurt Baker: Yeah, you had a couple things, sounds like it. Well, it sounds like you had a couple things, like the deal flow, people referring. These projects that are maybe… Are you building new ones? Are you coming in renovating older projects and revitalizing the areas? It sounds like you’re doing like a government private partnership, where I know the government doesn’t have the skill set to go in and redevelop 120 unit complex, as an example. I go like, oh, I’ve got an issue here, let’s go find a partner that can do this, and who has some experience coming in and doing this, because we do want people to move back to the city or back to this area. And the way to do that is to make the area nice.
0:18:44.0 Kurt Baker: If it’s a nice area, people will be there, they can bring their families, the kids gonna go outside and play, that kind of thing. So they’re very concerned about the quality of an area. And when you have, especially a large complex, that’s deteriorating. And that typically happens because people are not… The owners are not reinvesting. And that’s part of the issue that you see with these large projects is that they cash flow really well. But part of that cash flow is really reinvestment cash flow. And if you just spend it on yourself, at some point, you’re going to have a problem because now you’re going to start losing tenant, your rent increases are going to decrease. And you get this domino effect where it’s just going to go… It’s going to roll downhill.
0:19:17.1 Kurt Baker: And then it gets into distress, maybe there’s an estate sale, and the person passes away that owned all this property, things like that, where they just sat around and just ran the thing into the ground and just lived off of it. Right? I’m sure you’ve seen that. And so these are the kind of projects you kind of get involved in, you come back, say, “Look, we need to really upgrade this whole thing.” Which involves obviously quite a bit of money, not just the asset itself, but you have to put a lot of money into it. So tell us how that goes. And like you said, deal flow. So what makes you decide what’s a good one? What’s maybe not such a good one and where do you go and when do you say, “Well, that maybe is not something we really are… We can do for whatever reason?”
0:19:51.2 Brent Ritchie: No, great, great question. So, if you’re looking at the macro outlook, your bigger perspective, we look at the markets where there’s jobs being created, people are moving to, you’ve got that overall net migration that those people moving to an area are taking up what’s available. And then there’s less available. And so, it’s a good supply demand demographic. And so that’s… Those are really your top two fundamentals of apartment complex, of real estate in general. If a bunch of people are leaving the area, [chuckle] it’s hard to sustain the value versus if a bunch of people are moving to an area, your values just continued to rise. And lived in Toronto for a bunch of years, and that market is just still on fire. It’s crazy. You got like 500,000 people moving there a year.
0:20:35.3 Brent Ritchie: And so first we look at that fundamentals, supply demand, where is everybody moving to, like Wayne Gretzky talks about you go to where the puck is heading, not where it is. And so, everybody here for the northeast, all of my hockey fans out there. So, that’s a key thing, right? You’re just looking at where those supply imbalances exist and where are things about to explode or where do you see just strong, strong fundamentals. And from there then we’re looking into the specific submarkets. We’re a strong submarket of, don’t buy in the hood, if your property looks too good, price is too good to be true, it probably is. And so really finding those areas in the city that are growing, that are gentrifying, that are improving.
0:21:29.3 Brent Ritchie: And then within those, you’re gonna have, maybe you got six apartment complexes or kind of apartment complexes and some need, like you were saying, need that love, need that care, need that money poured back into it, need to take care of the roof and the exterior, needs painting and asphalt and just interiors need renovating. So you see where those opportunities are. And we do more of a fundamental approach, and this is probably the engineering side. So sorry if I’m getting too detailed here for all your listeners. But we are not as much pioneers in this space. We look at something that’s more proven, “Hey, if we got a bunch of apartment complexes, we see some that would be comparable properties if we do these renovations.” And now we can go in there, fix it up, improve it, improve that community, and as a result, get rewarded in better rent.
0:22:27.1 Brent Ritchie: People will pay different for a 2023, renovated property rather than a 1970s vintage, looks like nothing’s been touched in it for years and years and years. So that’s where we really look at those properties, see a proven case of somebody that’s already getting those rents, that’s already crushing it in the submarket. We like to look at properties that are… A submarket that’s relatively occupied. And so you don’t have little, a bunch of vacant units. We looked at our properties in Cleveland, Ohio, and God bless the people in Cleveland, Ohio. But like 25% vacancy rate is not so good. So those are more kind of like we look at proven models in that specific submarket. That’s a great submarket. And then find where we can truly come in, bring value for residents.
0:23:22.8 Kurt Baker: Sounds great. We’re gonna take another quick break. You’re listening to Master Your Finances. All right, welcome back. You’ll listen to Master Your Finances, I’m here with Brent Ritchie. And we’re talking a little bit about the fundamentals of buying the real estate. So it sounds to me you kind of do the, it almost sounds like the Warren Buffett model of investing in real estate. You kind of buy the value in the neighborhood. You wanna buy the one that’s a little… When you’re buying houses, I know whenever you buy a house, you say it’s good to buy the house that’s a little distressed in the nice neighborhood. [chuckle] You get that discounted price. Everybody’s house is nice, but that one’s a little bit rundown, but once you fix it up, you’re gonna get a good return on your investment when you do that.
0:23:56.1 Kurt Baker: So you’re just doing that on a much larger scale. And I noticed another thing you said. I know that we’ve had that issue with some of the cities here in Trenton where you’re constantly trying to go in and redevelopment. It’s really hard to be that first anchor, investor because you need several to kind of change the dynamic of the neighborhood. So that’s extremely risky for investors. So until you get a little bit of a stability, and that’s key. That’s sometimes where people understand that are on the outside of investment. Until you get a little bit of stability, it’s hard to attract the rents and attract the people in if they don’t feel the neighborhood is good. Now, you can do a great building, but if the neighborhood’s not shifting, it’s really struggle. And that’s been a struggle that goes on a lot of cities these days.
0:24:34.6 Kurt Baker: So, anyway, just something to recognize. It’s not that people don’t want to invest, it’s just a tough, tough thing to do, and you have to figure out a way to make it work. And I mean, they’ve tried to open a hotel several times in Trenton, and it just never… They just always have a hard time with it because they don’t have the people around it yet. Now, it’s getting better, but it keeps taking these waves and it keeps taking a few tries, and every time they get a little closer, a little closer, a little closer. And hopefully they succeed because I’m always rooting for Trenton, believe me ’cause it’s a great city, but I know it’s a struggle from an investor standpoint. So you guys are kind of buying the one that’s a little… So you mentioned buying the house from the 70s and you upgrade it to like 2023, right? So you throw in things like AC and stuff like that, right? [laughter] It’s like…
0:25:17.4 Brent Ritchie: That’s right. Yeah.
0:25:19.0 Kurt Baker: Anyway.
0:25:19.3 Brent Ritchie: The old school car back in the day comes with AC.
0:25:21.3 Kurt Baker: Right. Yeah. So there was a time people forget, you just bought an old apartment building, there was no AC, you just flipped the windows open you, and you got that breeze coming across. That was it, man. [laughter] The breeze was off. There was no AC. But nowadays people pretty much expect it. I mean, that’s kind of a… I’m sure that happens rarely these days. I’m sure most of them have some kinda AC but that’s what you’re doing. You’re really modernizing and updating it, ’cause I would say, back in years ago, maybe the closets were smaller. Now they’re bigger. Bathrooms are different. We focus more on a bathroom than maybe we did, 30, 40 years ago. So there’s little changes in tastes and styles and what we like. Is that the kind of stuff you guys do and the engineer in you? So let me tell you, let me ask you…
0:26:05.5 Brent Ritchie: Yeah, I know, the recovering engineer. [chuckle]
0:26:06.7 Kurt Baker: Yeah, the recovering engineer. So what kinds of things, if you’re buying that older building, what are some common changes you end up making saying, “Hey, we wanna really be like, instead of being the one that’s on the low end of the scale, we wanna be the one that’s a little bit on the higher end of the scale.” ‘Cause those little improvements can really return well on the rent. If you do those little extras that people are looking for.
0:26:23.9 Brent Ritchie: Oh my Gosh. Big time, big time. A lot of our listeners that were going to rent something today and you saw your 1970s product, you’d be like, “I don’t know.” Right? Especially my wife. Versus, hey, this thing looks beautiful, it’s nice, I’m gonna be willing to pay a premium for that. I’d gladly spend another $200 or $300 for… Now, I got granite countertops, I got stainless steel, I got new flooring and lighting and light fixtures and all of those features. And then it’s almost like if your property looks a certain way, especially if it’s a bit more rundown, maybe your landscaping hasn’t been taken care of, maybe the paint is older, it just looks tired. That’s gonna attract a different demographic than maybe the one that you wanna serve. And so, first thing we love to do whenever we take over a new project is those immediate curb appeal items. What are the immediate, how can we make this place when you drive up, you’re like, “Wow, this is nice.” Versus, “Oh my gosh, lock the doors.” [chuckle]
0:27:24.4 Kurt Baker: Right. Yeah, and that’s great. It’s something important. You start with the curb because that’s what people see and you go, “Oh, look at what you’ve done on the outside. What do you see what we’re gonna do on the inside,” right? [chuckle]
0:27:35.8 Brent Ritchie: Yes, yes.
0:27:37.0 Kurt Baker: Then they’re immediately like, “Oh, this looks totally, that’s a totally different place.” And that’s interesting you start from the outside ’cause people could see that and you’re really starting kind of the buzz, you’re starting to work on this place. And especially you’re doing many, like a hundred or more units, it’s hard to do them all at once. You’re probably doing them in phases. You’re doing parts of it, I would assume if you have a big comp, unless the whole thing is empty for some reason. How do you typically go about this?
0:28:03.2 Brent Ritchie: Yeah. So typically we’re gonna buy existing properties that are already 90% occupied. And so generally as the tenants move out, that’s really our opportunity to come in and renovate those older units that aren’t to the level that we’d like to have them. That we wanna do a really good job and make a beautiful place for our residents in that, specific to that submarket. And so, yeah, generally it’s on turn, and when people move out or maybe it’s somebody that wants to renew, but hey, I see the neighbors got nice updated cabinets and counters. Can I do that? And I’ll pay an extra 100 or $200 or whatever that would be for those improvements.
0:28:47.1 Brent Ritchie: And so yeah, that’s generally your natural attrition in apartment communities is, about 40 to 50% turnover a year. And so you typically have a good amount of inventory that you can take and renovate. So that’s almost like the exterior. And then you try to… What are amenities? What are amenities where we can… Our residents with love that makes this place a fantastic home for them, that they wanna stay, and they wanna invite their friends to. And so that’s where we look, the exterior, the interior of the unit, the clubhouse, and then what other amenities we can make and ad for our residents. It’s ultimately trying to improve their lives, so.
0:29:34.3 Kurt Baker: Because I know around here we do see a lot of advertising for luxury apartments, and I know when I go visit down in Florida, there’s a lot of large, really nice apartment complexes going up, which is interesting. It almost feels like, it may be just my imagination, it feels like there’s more rentals going up than houses sometimes. Is there some kind of shift happening that… Do you see a reason behind that? It just feels like a lot of rental units are being built maybe compared to what I’m noticing, at least on the residential ownership side. So what are you kind of seeing? Or is that just my imagination, the fact they’re upfront? Maybe the other ones were in the back somewhere. [chuckle]
0:30:09.4 Brent Ritchie: No, no. You definitely see, especially in the last 12, 18 months, especially Florida, we can talk Florida specifically. You saw a ton of people moving to this area, which is kind of what fuels that need for developers to come and develop more units and bring them online. I don’t have the stats on me right now. We are with the rising cost of everything, we are seeing that start to slow down. Your debt costs, of course are through the roof, but it’s creating quite an affordability crisis. And so, of course that rent to own gap, you kind of monitor that.
0:30:44.4 Brent Ritchie: If you’re buying a house today, [chuckle] and we’re in this situation, if you’re buying a house today, your costs are dramatically higher than what it was two, three years ago. So that gap between how much does it cost me to rent versus how much does it cost me to own, really also fuels the need for the rental market too. So you see both, but I think Buffet recently, what we were seeing in that coming to Robert’s event, buffet invested 800 million into the three major home builder housing sectors. Just seeing that major supply shortage in the market. So there’s still opportunity and still a need. Yeah.
0:31:30.3 Kurt Baker: So what are you seeing? They always talk about… Florida, I know I grew up down there, so we used to see these boom and bust things like, hey, there’s a great opportunity, then everybody from around the world seems to come in and build and all of a sudden, hey, we overbuilt. I mean, hotels are famous for doing that. I know residential is famous. And all of a sudden it’s like, “Hey, now we have way too much capacity.” And all of a sudden, for whatever reason, that trend drops off just enough where it’s like, uh oh, now we’ve got too many units and we’re not absorbing the way we thought we were gonna absorb them. So do you ever worry about that? And how do you counter that? ‘Cause these Southern states are famous for that.
0:32:00.8 Kurt Baker: ‘Cause if you wanna build something, you go outta the town, and you say, “I’m zoned for this. I’m gonna put up so many units.” Like yep, you’re right, stamp, two, three months later, you’re building the units. Whereas up in the North, it’s like a much different bureaucratic process. Well, how are you gonna affect the next town? And just a lot more conversation goes on, impact about the whole area. Even if you are zoned for it doesn’t really matter. They still have these conversations. It takes months and months, if not years to get something approved. Down there, it’s a lot quicker, which means it’s cheaper. But on the other hand, you get it up, so you worry about that or you project that, like who else is building with you? To see or…
0:32:37.5 Brent Ritchie: Oh yeah.
0:32:37.6 Kurt Baker: Add new capacity. Are we getting a little too ahead of ourselves? Should we maybe tap the brakes a little bit? Or when do you start, what do you see happening, as we’re moving ahead right now?
0:32:48.6 Brent Ritchie: Yeah. No, great thing. And that is so specific to that area, right? Miami, you saw that, way over built, tons of high rises and everything else that they were putting there and really creating that. [chuckle] You get too many people building at the same time. Now they gotta run specials and now your project’s not doing as well. You need a certain rent, you need a certain occupancy in order to have a successful project, and that lease, that period is critical. So yeah, you’re constantly looking at that supply demand imbalance and making sure that you are not in a sea of other development. But you’re seeing space and opportunity for you to serve an under, a needed demographic that is in a shortage. Yeah, it’s something that you keep an eye on, what other projects are going up, what other ones are being proposed, listen in their pipeline, for planning and hopefully be the first one there to pull the trigger and go when you see the need.
0:33:48.5 Kurt Baker: Well, that’s awesome. We’re gonna take another quick break. You’re listening to Master Your Finances. Welcome back. You’re listening to Master Your Finances with Brent Ritchie, and we’re talking about multi-family investing, which is, I don’t know, it’s pretty cool investing, frankly. It’s an interesting area of the market that not a lot of people get a lot of exposure to. And really you’re coming in, which I think is one of the lower risk ways of doing it. You’re finding projects that are a little bit in distress, so to speak. Maybe they haven’t been kept up over time. You go in and you update them and then you can raise the rent and really you’re adding value to the neighborhood. You’re adding value to the tenants. Kind of a win-win all the way around.
0:34:21.9 Kurt Baker: And you get a better product. You get a little bit of a return. Give us an idea of how you would… You were talking about deal flow. People come into you and give you some projects. So when you see one that looks of interest to you, give us some ideas about what do you do next to make sure, “Hey, this is gonna work.” You usually have to put a decent amount of capital into this over a period of time. Right? Explain to like, you have a rent, it’s X and you’re gonna put so much money and you’re gonna get Y and obviously you might have some debt involved, I’m assuming at some point and things like that. So how do you do the analysis of the projects to figure out if this one’s likely to work or not?
0:34:56.8 Brent Ritchie: Great, great, great question. And we’ll keep everybody excited on this second segment ’cause we’ll get into the numbers a little bit, but not too detailed. So, it’s kind of we can look at a basic, let’s say we’ve got a hundred unit apartment complex, it’s needing some renovation, it needs some improvement, it needs some curb appeal, it needs to get rid of the wood paneling, as an example. And so say we’re able to go in and…
0:35:23.5 Kurt Baker: It’s still out there, huh?
0:35:35.7 Brent Ritchie: [laughter] It’s still out there. Say we’re able to go… Especially those Northeast states. Say we’re able to go in and we’re gonna be… Apparently with families coming back, I guess.
0:35:36.6 Kurt Baker: Oh, was it really? Interesting. Okay.
0:35:36.6 Brent Ritchie: Yeah, yeah. So if we look at that asset, everything is traded on what they call a capitalization rate, a cap rate. It’s effectively like if you just paid cash for a property, how much cash on cash would this property generate? And maybe in today’s market, depending on where you are, it might be give or take of 5%, something like that. So if you bought this apartment complex today, all cash, it would generate about 5% return. The beauty with real estate is you’re putting debt, and maybe that’s about two thirds or three quarters or half, depending on the performance of the asset and the debt. And then you’re gonna put the rest in investment. Equity. And so you’ve got… That is what they call the capital stack. And so you have what it takes to buy that asset. So you got the debt and then you got your equity. So your equity is actually leveraged, so now it’s a two thirds ratio or it’s two to one or it’s three times, four times depending on the debt. You actually are able to take advantage of the leverage, but… Do you have a question?
0:36:51.5 Kurt Baker: Oh, no, no. Leverage is interesting.
0:36:51.8 Brent Ritchie: Oh no.
0:36:52.5 Kurt Baker: I was gonna comment that. Yeah, I wanna explain leverage, just to clarify. So leverage is cool because it can… Well, it’s good and bad. Let’s take this simple example. 50% leverage, you put 50% down, you have 50% cash. So now you’re 50% leverage ’cause you’re really using another lender’s money. And that’s great because now if you grow the asset, you’re gonna get all of that. But you’re gonna be paying down the debt at the same time out of the cash flow. So literally that mortgage money is going down, as long as your cash flowing, your equity is going up. So you’re getting… Instead of getting, whatever, 10% return on the equity, you might get 20 because you borrowed half of it right there. Because if it goes up 10%, you got 20%, which is good. But the downside of it is if you have another in Miami where the property drops 60% in value, all of a sudden, you’re underwater, 10, 20% based on the current valuation. Equity can cut… Leverage can cut both ways.
0:37:44.5 Kurt Baker: And that’s why, I think you mentioned briefly, depending on the asset class, you were talking about leveraging at half or two thirds or three quarters. And I’m gonna assume that’s based on kind of the risk profile of what you’re buying and the likelihood that it is to go down 10, 20, 30%. ‘Cause right now, it’s harder to imagine now that property actually does go down because we’ve been seeing all these great increases recently. Real estate is a cyclical business. It doesn’t go straight up all the time, just like any other asset class. That’s why we tend to diversify in my world of wealth management, you don’t want to be all in one asset class. ‘Cause if it crashes you want have something else to counter. But no matter how much you love it, if your asset crashes, tech crash, real estate crashes, bonds crash. They all crash at some point. But you don’t want that to affect your lifestyle or your long-term investment goals.
0:38:30.2 Kurt Baker: So you always wanna make sure you’re managing this risk by doing what you said is, doing the Wayne Gretzky thing, looking ahead where the puck’s gonna be and try to figure all that out and adjust. I just wanted to explain why that’s important because it does have an advantage. It increases your return on investment. ‘Cause you’re literally putting a half or 25% of the cost of the building down yourself. Now that doesn’t mean you don’t still have to put money into it, right? So why don’t we talk about that? Now, you set it up so it’s gonna obviously cashflow upfront, right? And in a relatively conservative way. And just in case you have a higher bucket vacancy rate than you expect, you still want the building to sustain itself. In the meantime you want to have money to put into it. So how do you kind of determine that aspect of it as well? And what do you expect a new rent to be? How do you analyze that and figure out what the new rent’s likely to be?
0:39:20.0 Brent Ritchie: Yeah, no, really good questions. I love it, and diversification is critical too for sure. And I think it’s which… So I guess a couple of things, one is selecting the right debt to making sure that you’re able to ride through the market and the times that you’re in. And so that is definitely a key factor and key element. And the second part is just, if you’re looking at the assets, so you find the area, you find a demographic, you find a submarket that you’re gonna serve. And you see the opportunity where, hey, I could take this property. I can renovate these units and I can get what the neighbors are getting, and so let’s use a hundred unit property. Say I’m able to increase the rents by a hundred units or by a hundred dollars if I renovate the unit. And then a hundred dollars is pretty, pretty modest. And so a hundred units, a hundred dollars a month, so that’s 10,000 a month. And then times a year, $120,000.
0:40:16.3 Brent Ritchie: So you’re like, okay, I increased the cash flow on this property by $120,000. But with capitalization rates, kind of how they’re evaluated, how they’re sold, if things are trading at a five cap, that’s a $2.4 million increase in value you just created for that property of a hundred dollar increase. And maybe the CapEx or maybe the capitalization expenditure that you put, you know how much it costs you to renovate and fix up those units. Maybe that costs you $5,000 a unit and $5,000 a unit times $100, $500,000. So you just increased your value by $2.4 million and it costs you $500,000. So good equation there. You said another key thing too that I wanna also hammer with you or reiterate, is making sure that the deal can stand on its own two legs, because you don’t know what’s gonna happen, occupancy, everything else. And so making sure it’s not a deal that you have to constantly feed cashflow to, but it’s something that you’ve kind of conservatively looked at and underwritten.
0:41:28.6 Kurt Baker: Right. Yeah. And you pointed out some pretty important things and I’ll just restate what you said, but yeah, so whenever you increase… Basically, when you look at… I would look at it as… Think about it as almost like a bond yield. So if you get the 5% bond yield, so how else are you gonna get the $120,000 if you had to actually put cash down to get that 120k at 5% yield? That’s how you got your number, the two four, that actually increases the value of the piece of the asset itself, the real estate, because you just created another $120,000 in income. Which is pretty, that’s one of the beauties of real estate.
0:41:58.2 Kurt Baker: It does that, if you can get the rents up, even modest rent increases have a dramatic effect on a large complex, because you go back and say, well, if I were to buy something like a bond and try to create that same cash flow, what would that mean as far as an asset value? And that’s literally how you increase the value of the piece of real estate itself. Which is something… It works both ways too. If the rate rents go down, it can hurt the asset value too, ’cause it affects the capitalization rate which is what we’re talking about, the yield, basically, the return on the investment number, right?
0:42:30.6 Brent Ritchie: Yes. Yes. And it’s almost like certain businesses are gonna be sold at equity multiples, right? Maybe three, four, five, six, seven, eight, whatever that number is. And real estate, just if you can buy and structure it right, and kind of ride through economic times, a five cap is about a 20 multiple. So any increase in your income or reduction in your expenses is gonna have at a 20 multiple, which is fantastic. So yeah, that was definitely a key spot. And then just overall, the multi-family asset, industrial and multi-family, those have kind of been the two darlings of real estate investments office. Of course, is hurting retail a little bit more too. But the…
0:43:15.4 Kurt Baker: You just touched on office really briefly. We only have a couple of minutes left, but I wonder if you wanna touch a little bit, because I know some offices are being repurposed and I’ve even seen some are being repurposed to residential. What are you seeing in South Florida? I’m just curious in the markets you work, because there are some higher vacancy rates and people are wondering, well, what’s gonna happen as these notes become renewed and the mortgage rates have gone up, so they’re gonna renew at a higher rate and still have this, a pretty high vacancy rate compared to what they had historically, many of these complexes do. So it’s gonna be, it’s an interesting thing. I’m sure they talk about in your world, like what’s gonna happen in 23, 24, 25 range as these things actually come to play. What do you think? Do you think there’s opportunity, I guess on the residential side there? Do you think you’re we’re gonna see some repurposing of any of these properties as far as what’s going on?
0:44:01.9 Brent Ritchie: Yeah, yeah. You are seeing some… Even cities kind of give incentives for developers or multi-family operators to come in and repurpose some office space. I’d be curious to see that one massive one in San Francisco, the tower that sold. What is it? 30% discount or 20% discount. So I think you’ll see a lot of those repurposing taking place. You are seeing that in old malls that are kind of getting run down and how do we reimagine the space into a better yield for that community and for investors. Yeah. So in the multi-family sector, I would say yeah, we’re definitely seeing… The demand is so strong especially in certain areas and in certain markets. You’re seeing that prove out true. And other areas are being impacted by Florida insurance. It’s a massive, massive issue, Houston Insurance as well. But Dallas is still trading hot. So it really, I think it does get into those specific submarkets and those kind of communities that we’re looking at.
0:45:14.8 Kurt Baker: Well, Brent, this has been awesome. Any final words? Real estate is really hot now, it’s doing well. So I commend you for everything you’re doing to help provide good housing for people. Any other thoughts before we cut off?
0:45:25.4 Brent Ritchie: Yeah, thank you, thank you. No, yeah, that’s what we constantly do. And we look at how do we create value and how do we improve kind of our investors’ lives and the lives of the people, our residents that we serve in our communities. So it’s an honor and constantly learning, never stopping. And so thank you very much for having me on the show.
0:45:46.0 Kurt Baker: All right. Thanks again, Brent. You’re listening to Master your Finances. Go to masteryourfinances.us and subscribe and listen to the show and subscribe to the transcript. Have a great day.
