Getting Results in Multi-Family Investing with Jake and Gino

Nate: Welcome back to another great episode of The Real Estate of Things and we are in for a special treat today, focused with some multifamily specialists. I call you guys certainly a deadly duo. Not only are you great guys, I know that you are great friends for, well more than a decade. A very impressive what you guys have done, acquired more than$ 225 million in assets under management. But I know a lot of what you guys take pride in is the amount of people that you help along the way, which is many. And so we're going to cover a lot of ground here, but I would like to welcome Jake and Gino to the show. Guys, welcome to The Real Estate of Things

Gino: Nate. How we doing brother?

Nate: We're doing good. We are doing good. So, let's get started. This last couple years in multifamily and the market has been a little bit of a roller coaster and a lot of things have happened, but one thing that we've probably gotten away from is some of the fundamentals. So, the first thing I want to tee you guys up for is what are some of the fundamentals in multifamily investing that has probably never changed or shouldn't change regardless of what's going on in the market?

Jake: Yeah. Gino, I'll jump in on this one. And I think it's something that we focused on from the beginning and it's long- term fixed rate debt. And this is a component of what we call our finance right strategy. We believe that Sound Multifamily Investing comes down to buying right, managing right and financing right. And we systematize everything in our organization through those three pillars. Now, if we talk about long- term fixed rate debt and you go back to 2021, 2022, all of a sudden there was a ton of money pushed into the market. Syndicators were flushed with capital, rates were low, and ultimately in the market you saw inflation happening and rental rates. Okay, the amount people were charging for apartments was going up and up and up and up. So it was a feeding frenzy. Everyone was trying to get in on the cheap debt and plow into the market. And what happens when a syndicator is flushed with cash? They're going to spend that, okay? And then all of a sudden, the cost for apartment complexes is going to go up, supply and demand. It's that simple. The issue that we've had over the last few years is that we don't love bridge debt because we've always looked at the rate risk. And in the finance right component of our investing strategy, we attempt to take rate risk off the table. The earliest that we have anything coming due in our portfolio currently is 2027. So, we're feeling pretty good about things right now. We don't have any short- term duration risk on any of our loans where we're going to go from 4% to 7%. That would be a problem. For a great example, we had deals that were in the high four's and low five's that were on fixed rate deals. And we had some internal team members saying, " Oh, you should try to get these out to three and screw the prepayment, just do it and this, that and the other thing." And I said, " Look, we're good. We're making money on them, we're holding the loan for the long term. We're going to stay right where we are and we're fine." So I think one of the issues that people had over the last few years is that they didn't take long- term fixed rate debt seriously. And that's one of the most important things you can do in this business, because once you buy it, it's done. You can't go back and change that. And what we like to say is we like to fix it long- term with fixed long- term rate debt. So the debt's done and you can hone in on the management component of your asset because that's what can really drive the NOI over time.

Gino: Jake, we should also say that if it doesn't cash flow, you let the grass grow. And I think we got away from that. I mean, deals weren't cash flowing. I mean, if you're going to buy, join pro forma.

Jake: We as in us are people in general.

Gino: Me and you, man. That's what we were doing. We've been buying that's why-

Jake: Yeah.

Gino: ...I see people out there with these rosy pro formas. I mean, if you know the asset can go from$800 in rents to a $ 1000, and you've proven it in your market, you're going to buy that in the pro forma. That's what you've been doing. But Nate, to give you an example of what I'm talking about. Jake and I, when we first met back in 2008, 2009, I had been doing real estate in New York and I'd already seen the frothiness of the market. I didn't understand it back then. So, we started out in buying assets at the specific time of what's going on in this part of the market cycle right now. And you're seeing 2009, 2010, 2011 where there's the euphoria is gone. I mean, rates are up right now. There's not as much demand for the assets as there was even a year ago. And that's what we were seeing back then. Cap rates were a little bit higher, there was very little syndicating going on back in 2011, 2012. And we're starting to see that now. And the only difference is back then rents were$ 350 for a one bedroom, now they're$ 1100. It's going to stabilize itself, but I'm seeing a lot of similarities that when we first started as what's going on right now, and it's called a market cycle. We're transitioning from a seller's market cycle back into a buyer's market cycle. This is taking a little bit longer because there's trillions of dollars still in the economy that are just sloshing around. There's really nowhere else for people to put money because we can see what happened to crypto, we can see what happened to the banks. I mean, maybe T- Bills. T- Bills are great, but that's not something you're going to invest long term. So this inaudible hangover's taking a little-

Jake: Banking alternative. Yeah.

Gino: Yeah, this hangover's taking a little bit longer to wash itself out. But listen, we've got two deals in the last two months. Owner financing. Owner financing is going to come back. Our first's deal back in 2013 was an owner finance deal. We did another huge one in 2015 that's coming back. So whatever happens in 2000.

Jake: Did inaudible. Huge, it's huge.

Gino: No, it didn't... It's huge. It is huge. I want everyone, let's not forget history because history repeats itself. What happened in 2010, 2011, 2012 is what's going to happen in 2023, 2024 and 2025. There's no escaping it.

Nate: I mean look, first off, as a predominantly multifamily bridge lender, I couldn't agree with you more. Sorry, I could not agree with you more. You still need to... When you get a property stabilized, fix it in, lock it in, create stability and create your business plan around that. I do not disagree with you whatsoever. I think it's been interesting. People have been become way too complacent. Certainly, there is some place in home for bridge debt, especially when there's true value add and you can't qualify for permanent financing. And I think to the point of someone inaudible.

Jake: But not on stabilized deals, Nate.

Nate: True. Amen.

Jake: That's the thing, that's the issue that I have with is when you have a stabilized deal and you're forcing bridge debt on it to just acquire it. Now if a deal is a true value add, that's where you come in and you put the bridge debt on it and then you get it to stabilization and you send it out to pasture. The issue is when you have something that's already been repositioned six times-

Gino: Yes.

Jake: ...Flip five times in the last eight years, there's issues, that's frothiness guys. That's not what intended for.

Nate: It's the dreaded out for frothiness without a doubt. I think at the same time, what's the business plan and story that you tell when you have a stabilized deals that you take bridge on it? " I'm a better manager than the last person." Well, sure. Everybody thinks they're better at all the things to manage a property and drive higher NOI or inaudible.

Jake: And now we're seeing capital calls.

Nate: And that's what happens. And so again, I couldn't agree with you guys more on all of that. Also, Gino to your point on seller financing. Look, on any realm permanent or bridge debt right now, your proceeds are not as high as it used to be one, two years ago. Because not only was everyone buying on pro forma, but we were lending on pro forma. Let's just be real about that. And so, your seller finance deals that even that they may be high 50s, 60s, but you're getting 2%, 3%, low 4% debt. I mean, you can't pass that up, especially when the gap between the proceeds on, curve financing is not as wide as it may have been a couple of years ago. I love the pillar, the three pillars, I should say. Buy right, finance right, manage right. So specifically fundamentals on the buy right side, talk to me about your thoughts on that?

Jake: Yeah. Yeah.

Gino: When we onboard our students in the Jake and Gino community, the first thing we always ask and we always want to really impress upon them is what is a deal? A deal to Nate who's been in the business for 20 years is different than a deal to Gino who's just walking into the business. So you need to set up your buy right criteria, and that's different for everybody. And when Jake and I... We go to events and we speak oftentimes to really some high level sophisticated investors out there and we'll ask, what's your buy right criteria? Does anybody have one? And you can hear crickets, they don't even... Like, it's just amazing that you would think that people who are buying deals would at least understand what they're trying to buy. And they're trying to buy everything, and it's not like that in multifamily or anything else. Focus on something, set up a buy right criteria. For instance, what's the median income you're trying to target? Where is this specific market or submarkets that you're trying to target? What are the vintage that you're looking at? What are the number of beds? Do you like two beds, three beds? Do you like types of amenities? Is it brick? And for me, it's important to understand when you're looking at an asset, every market is different. That's right. If you're investing in Greenville, South Carolina, it's different than Jacksonville, Florida. You need to have a buy right criteria for every specific market. And I think the other thing is when you're buying these deals, many people don't even think about what their exit strategy is. And we talk about another three pillars of three pillars of real estate, which is market cycle, debt, and exit strategy. If you're not figuring out what your exit is, are you flipping this thing? Are you refining this thing? Well, how do you know what kind of debt you're going to get on it? And then ultimately, the market cycle plays into it because your buy right criteria changes as the market cycles change. Back in 2013, we're buying older assets, older vintages because we're buying at great prices. We're able to fix them and flip them and ride the wave upwards or refi them. Now we're looking at properties in the 1970s, 90s, $ 500 a door. We're not buying that at that price point. If those price points go down, then we'll really convert or tweak our buy right to say, " Hey, we're looking at older assets because these prices are coming down." So I think the first pillar is the buy right. Figure out what the buyer criteria for you is and start looking at deals and underwriting deals based on that buy right criteria. Jake, I'll let you hit financing inaudible.

Jake: Yeah, I want to expand on it from the reason why you do it. And clarity will set you free as a multifamily entrepreneur. When people are getting started, they don't have clarity on what they want, but they know they want to own assets. Okay, that's great. So, it gives you the ability to sift for gold much quicker. And then when you land on the deal that makes sense for you because you set this criteria up, you know when to move forward. So when people are confused, they get stuck. And when you're stuck, nothing happens and you eventually quit. That's why so many people early on feel like multifamily is this pie in the sky and they can't get there, because they don't have clarity. Clear buying criteria will give you clarity. Now, you're not always going to hit. If you have 20 things on your buying criteria list, you're not going to get every single one of those in a deal. But if you get a majority of those, you may be able to say, " Okay, the median income I was shooting for is 60." This is 55, but I think it's close enough, okay? But we're not going to accept 40, for example. Or we really love two bedrooms, but there's a little bit more ones here, but I know there's a need for it in the marketplace. So, it's those types of things that you can make a rational call when everything else is lined up and you're looking at it objectively versus, I just want to buy everything. And that's when people get stuck. They go into too many markets, they're in multifamily, they're in self- storage. Starting out, you need to drill down and get laser focused. That's how you're going to convert early on, and then you're going to start to snowball from there.

Gino: Gee, daddy likes that shit.

Jake: I love inaudible.

Nate: We got to love some clarity. And look, I think we're going to keep talking to all multifamily, but as somebody that's exposed to a lot of single family investment strategies, those principles and having clarity and-

Gino: Exactly.

Nate: ...Your buy box, your acquisition, what's your disposition and your financing, all the things you just said hold true no matter what strategy you take, you have to have clarity.

Jake: It doesn't matter what business you have. Yeah.

Nate: Hey, you got me there so I couldn't agree with you more. Gino, go ahead.

Gino: No, I was going to say Nate, I mean, you made a great point. If you're in self storage, you have to know how to buy-

Jake: Some shit.

Gino: ... Managedfinance. If you're in the RV, buy man. And you also have to understand the three pillars of real estate, the market cycle, the debt, and the exit strategy. It's in every asset. If you understand those frameworks, you can apply them to I think any asset that you're looking at. We just like multifamily. I mean, you lend on multifamily, it's a scalable business. Single family's great, it's just more incumbent upon the market. Prices go up, what's a three bed, two bath. It's a little bit harder to actually go out there and asset manage these things and property managers because they're more spread out. You have to do more deals. I mean, we're probably-

Jake: Were still labor too. Like, your maintenance guys really need to be able to go into a variety of assets and understand how to repair them as well.

Gino: Yeah, we're probably preaching the choir. I mean, we have students who've done a hundred single family homes and finally say, " I can't do this anymore." They'll go out and do a 30 unit multifamily, it's like, " I'm done for the year. I don't have to buy any more single family homes. I just did one deal. It's so much easier to do that." And it's just rinse and repeat. I think people get used to it and comfortable to what they're doing. They don't look outside the box and go, " I've been doing all this work." And to closing a hundred single family homes in two and a half years is a lot. If you could do that, you can buy inaudible.

Jake: ... Who's got time for thatshit? I'm saying, it's-

Nate: So, like what inaudible.

Jake: How you living if you're doing a hundred closings a year? Come on.

Nate: Hey man, us action junkies. Sometimes you just like it, but let's go down this road. So I think you've started to articulate a lot of why multifamily versus single family investing from your perspective, but let's get into the many of people that you see, talk to, work with, educate, train, who have taken the transition from single family to multifamily. So, what's just some of your observations and/ or advice in that regard?

Gino: Well, we've seen in our community the three types of people that do really well in multifamily. The first one is that single family fix and flipper. They know real estate's great. They understand the power of real estate and they've done it. So they already have the confidence. The second group of people that work really well in our community are small business owners, entrepreneurs, people who are doctors, lawyers, engineers. They understand numbers, they understand multifamily. And the third group in the Jake and Gino community is small multifamily owners. They understand that, " Wow, I've got 35 units. How do I scale up? I need that wheel of the wheelbarrow, the manage right." And I think that I've seen the single family space, they understand that, wow. At Jake and Gino, we create multi- family entrepreneurs because it's a business at the end of the day. And I think people forget about that. I think they're just buying homes, you're not just buying homes. You're creating a business. You're able to scale this business. Yeah, and our first deal is a 25 unit deal. And we had a resident manager, Jake is driving around, he's a pharmaceutical rep. I'm up in New York as the pizza guy. We can still manage that asset and run that asset with 25... We could not have done 25 single family homes on our first deal. Would never have been able to happen. But that first 25 units, then our second deal was 36. So within six months, we've got 60 units that we're managing it ourselves. We're able to scale into that and we're hiring resident managers, we're hiring maintenance techs. And I think that's the big difference. I think once single family operators see that, " Wow, it's just I'm buying businesses." And each property we look at is its own little mini business. And you're buying a future stream of cash flow. So if you can buy a future stream of cash flow that has 50 units as opposed to a future stream of cash flow that has two units, which one is better? I mean obviously, the 50 unit is better and you're stacking those just at multifamily is a team sport. Single family operators usually like to be on an island all by themselves. Whereas people in the multifamily space go, " Wow, I need to raise capital, I need to asset manage, I need to work with investors." And maybe I don't want to do that, but let me tell you the benefits far outweigh investing in multifamily doing single family.

Jake: Yeah. I think it's like the solopreneur mentality as well. The people that are on the single family game, it just gets hard to get out of that. You're doing so much of it yourself and then you try to systematize it, but it doesn't lend itself to that. Where multifamily is a bunch of these little franchises that you can create over the city or a multiple cities, and really systematize that into something that you can grow, have a team behind you and then you are acting and doing things that your highest and best value is required for. And other people are doing what they're good at. And I think that's the key. Whereas if you're stuck in the single family space, you can scale it, it's just going to be much harder. So, I think business is hard enough. So I'm looking for efficiencies in everything that we do so we can grow and honestly do more things that we want to do versus being forced to take maintenance calls and things like that. That's probably not an efficient use of your time as a business owner. You need to find a team that you can surround yourself with to take care of that.

Nate: So, I think you just said... I mean, business is hard enough. I mean, the rate at which any small business fails is extremely high. I don't remember the exact specifics. So, what are some things that you've seen people transitioning, whether it's from single family or from W2 employment into multifamily. What are some of the consistent stumbling blocks that you see people run into?

Gino: I mean, Jake, I can answer this real quick and then I'll let you finish up. The biggest mistake that I see is that people don't give it enough time. They get into a market and after two months they're like, " Ah, I'm done. There's no deal flow here." You need to really get into a market, understand the market. We had an event with Ryan Serhant back in January. We did a mastermind with him. It was great branding. I met a broker named James Nelson down there. He's one of the top commercial brokers in New York City. And what James did early on in his career before they had Google, he actually went to a part of the New York City and learned the entire submarket. He knew what the rent per square foot was, he knew what the replacement value was, he knew the business owners, he knew all the other brokers. He spent three months just doing that before he picked up the phone and even started calling brokers. If we could spend a couple of weeks understanding the market, understanding valuations, knowing who the real estate players are in that market and trying to get deal full that way. I think people just get on Google, they get a little comfortable, they don't even visit the market and they're like, " Ah, deal's not for me." So I think that's the issue. And I think the other thing is they don't stick in it long enough. They've been doing it for a few months, they get no traction. They're like, "You know what? This crypto thing's a lot easier. Let me go trade crypto. Or you know what? RVs are great right now, and RV's in an awesome segment right now. It's fractured. There's a lot of mom- and- pops in that industry," but they jump into that then they can't find it in there and they go, well, sell inaudible.

Jake: We're always looking for the easy way out of the shiny object.

Gino: Yes.

Jake: And then to piggyback off that, if you know the minute they actually get into the space and they start owning assets... I'm going to speak from experience because I think that's the many times the best teacher. We were penny pinchers early on. We didn't hire people quick enough. We tried to be too cheap on our PNLs, and it's very important to manage the cash, but it's also important to reinvest in systems. And then on our fifth deal, it was a 281 unit owner finance deal. Jim Clayton, who actually started Clayton Homes largest mobile home manufacturer in the US sold that company to Warren Buffet was financing our deal. So he took the money from the sale of Clayton Homes, bought a bank, and the bank was actually financing our deal. Meeting with him in the broker in town at Aubrey here in Knoxville. And he said to me, he said, " I like everything that you're showing me. I like your business plan. My fear is that you haven't systematized or scaled your business enough yet." He still did the loan with us. But he basically looked at me and said, " This is where I think your holes in your ship are," scared the crap out of me. Because one, I didn't think I was going to get the deal, and two of Jim Clayton's telling you that you're doing something wrong, you better take it seriously. So from that point on in 2015, Gino and I became systems junkies. And that's why you're probably hearing scale culture systems, because we've spent well over six figures now on systems coaching because that's everything once you get a business up and going. So, if you don't put attention to your culture, you don't have good people, you don't have proper systems in place, the business is not going to grow at a healthy or scalable rate. And that's one of the keys, and that's why we've poured so heavy into our education. And then we've taken everything we've learned and applied it to our property management company, and then we share that with our students now. Look, we'll go out, we'll get the coaching, we'll take it internally, process it, and then share it with our folks. So that's how we've operated throughout the years. I mean, stop penny pinching, hire more people, hire quicker. I'm going to challenge everyone listening to this right now. Who's your next hire and why haven't you hired them yet? Stop being afraid of it. Lean into that because that's going to lock new doors for you. And I guarantee everyone listening to this right now has one of those going on. Stop being a little bitch about it. Go hire the person.

Nate: I mean, I don't have much to dispute on that. And I think it's funny that you guys are-

Jake: We've all lived it, that's why.

Nate: You guys are such system junkies too, that the way you even talk about is so systematized because you have the systems and processes in place to repeat. And that's the purpose of it. I want to ask a similar question than I just did, but a little bit different spin on it. So, as people look to get into multifamily because it's such a great asset class and helps create mailbox money, generational wealth, whatever the key buzzwords you want to say. What are some of the main misnomers, misconceptions, misunderstandings that you see people often have?

Gino: I mean for me, when I look at it, people think it's passive. There's nothing passive about it. You're either managing the asset yourself or you're managing the manager, or you have somebody doing that for you. And it may take years for you to do that. Like Jake and myself, if we want to really cash out, we could sell our assets, we can get a ton of money, we can find somebody to run our deals if we elect to do that. But it's taken years to get to this point. I think that's the first big misnomer. I think the second big one is what I mentioned previously, it's a business. I mean, it's income over expenses. It's not rocket science, but it is a business and you're going to need to have to either manage people or you're going to have to have people who manage people. And there's always things popping up that you're going to have to take care of. One thing that I'd like to mention with Jake when he talked about systems, and systems are not complicated. That's the thing, everyone thinks that systems are complicated. It could be as simple as how do you answer the phone. What does that script look like? How do you greet somebody?

Nate: Inaudible.

Gino: Yes, yes. But one thing I like to say about that is when we really started taking off is, when we started creating our core values. I think core values and mission statement and Big Hairy Audacious Goal. Once you start getting clear on that, it's okay, now you can start hiring. Now you can start getting on podcasts with people who align with you. Our core values aligned, so I want to share the message with your people. Now you can get vendors, now you can start working with other team members. Who are you hiring? If you don't have those core values flushed out, if you don't have your mission statement, it's going to get a little murky. And I know this because I had one restaurant for 20 years. I mean I didn't have any core values, I didn't have any mission statement. The business was all about generating money for me and my family. I didn't have a vision. Jake and I, the real estate the first few years it was very similar. But at that 281 unit deal, that's when everything started changing. We started getting those systems, those core values, and from there we were able to really scale up.

Jake: Hey, Gino said it, it is a business and an investment, okay? It's not just an investment, and that's the mistake people make. And I think the biggest mistake people make is they don't manage the cash. It's great to see, here's my Yardi and here's my accrual and all this like hunky- dory shit. I look at the cash, I look at something we call PPU that stands for Profit Per Unit. The number one metric I look at every month on the first when I do our drawer reports. And yes, I still do cash drawer reports myself. We have five people that comprise our accounting team. I'm still doing that. That's the most important thing that I do every month is I look through and I go through the cash and I know where the cash is at. You need to manage your cash. There's nothing more important than that. And if you don't know which units are provided in the most profit, you have a problem. And that's how you actually create your buy right criteria. So early on, you create your buy right criteria on things that you're looking for. But our buy right criteria morphs and evolves based on the markets that we're in and how things are performing because it gives us insights that Yardi, CoStar and blah blah blah, you name the bullshit. They're not going to have access to because we have internal reporting, and we see how things are actually performing on the street in real time. That's how you can evolve your buying criteria over time as well.

Nate: Man, those are some fundamentals all across the board on what we've just been covering here. I want to pivot a little bit to the market. So, just a broad blanket-

Jake: Come on, man. Let's talk about cash more. Cash, baby. Cash.

Nate: We love cash and I'd ask you how much you'd like cash, but I think we just heard that one there. So on the market, lots have happened. End of 2022, the beginning of 2023 has certainly been interesting. Transaction volumes are super low. I'm interested, how-

Jake: I'm going to challenge you on that because we're buying more now than we did then, but that's a whole nother story.

Nate: We're just going to get the process and the systems to do so where others don't. And the frothiness has allowed people to get complacent like we said earlier. But what's different about investing in today's market, or maybe Jake, tell me inaudible.

Jake: No, I want to talk about that because ultimately, we're buying deals right now at a higher rate than we were prior because every once in a while we'll do a syndicated deal if it makes sense for us. But we buy everything with our own internal cash, right? So the purchase price over the long term is very important to me in terms of how that asset's going to perform. And so it's like, " Oh, you're being cheap, this, that and the other thing." Maybe, but I know I've been in this long enough that the price per door is still super important to me in making sure that we're going to be able to have cash on cash at the end of the day. We don't buy on cap rates, we buy on what's the cash return going to be once this is stabilized. So what we've seen is that people are trying to get into the market right now where they're considering selling, they thought it was going to go on forever and it didn't. So they got caught and now they're trying to exit and... We just bought a deal, it was a 2005 build gray area in Knoxville for 70k a door, and it had$500, 000 in owner financing. We're doing another deal very similar to that. So we're buying good vintage, we're seeing deals come across that makes sense. But you're going to say, " Well, hasn't the financing dried up?" No, it has not. It's just not what it was. And so what we're counting on right now is we're going in, we may be doing 6% debt on a five- year term, okay? With two years IO that we're looking to roll out of this in 24 to 36 months to agency. So, exactly what you were saying there. We're locking for five getting out, and that's the deal that we're doing right now. And I'm going to tell you the risk right now in this market is someone is going to buy an apartment complex, and at the end of 2022 they leased a couple units at$ 1500. The real market rate though is probably$ 1300, but it was very aggressive still people couldn't find apartments at the end of last year. They have yet in 2023 to lease anything up to that. But they're selling as that's the market rate. Meanwhile, it's actually$ 200 to $300 less than that. So if you do your pro forma based on that, that's where you're going to get caught and that's where you're going to get screwed. Now on the flip side of that, the opportunity is with the mom- and- pops. The mom- and- pops that didn't go from$800 to a $ 1000 to where the market is, or say the market was at a thousand and they didn't get up to$ 1200. That's the opportunity to go out and find those mom- and- pops that did not stay up with the inflation over the last two years. And they're still below market. So, the key to this market right now is being laser dialed in on what the true market rate for your units are. And that's going to determine how you can acquire these. Because if you're new to the game and you're looking at a deal and you're basing everything solely on what the seller's telling you the market rate is because they achieved a couple of those back in 2022, you're at risk for getting screwed there. You need to know your comps. And when I say comps, you need to know your comps for what the rental rates truly are in your market to execute at a high level right now.

Nate: So, let's dissect that briefly because I know you guys are experts on this. With the ever- evolving market, how do you keep an ear to the ground on the street of a given local market?

Jake: And this goes back selfishly for us, what we tend to use is our internal data. So we have 1600 apartments in our market, so we're relying heavily on our data to do that. But you can also, you can go on apartments. com, see what things are being leased for on the front end, what the market the going rate is. You can go onto Rentometer, there's different websites out there. I think the CoStar data is typically the best. But also, if you're in a market, and this is bootstrapping, right? You're looking at a deal, there's five apartment complexes around it, you call them up, " Hey, what is a two bedroom going for today? How many do you have available? We have 20 available, it's going for$ 1500." Well, it's probably needs to be a little bit less than that, right? Or we have one available and it's going for$ 1300. That's probably the market rate right now. So, I think there's various ways to get comps, and also lean on your brokers and the people that are on your team to help you out with that as well.

Gino: And I think the other team member you can lean on is a property management company. If you're going out there and you're interviewing property management companies-

Jake: Great point, Gino. Yep.

Gino: ...Just call a couple property management companies saying, " Hey, what are you seeing in this part of the area for expenses income?" I would also caution everybody, be careful with property insurance. Property insurance has skyrocketed over the last two years, especially in areas like Louisiana, parts of Texas, Florida especially. So when you're underwriting deals, make sure you're underwriting with insurance that is actually not$ 250 a door anymore. In some of those markets it's like$ 800 a unit, maybe even more in Texas, in Houston, maybe$ 1300 a door. And I would also say with property taxes as well, because property taxes are resetting. So make sure you underwrite for those two, and you have to be conservative with those two. Because I know a lot of brokers over the last couple of years didn't have that in underwriting. They were showing actuals, but when you actually went to buy the property and you plugged in what was really going on, that totally blew the property, the analysis up. So be careful now going forward that you put those two numbers in and be careful about those two numbers.

Nate: Yeah. I mean look, as a lender representing, I've never seen a performer I didn't like. And nowadays, it is probably one of the biggest... It's the most common items, taxes and insurance, but it's some of the biggest misses. And those numbers can skew things materially from a deal-

Gino: Yeah.

Nate: ...That even is problem, not even in the future but today to something that's just is a unfeasible business plan. So Jake, you brought up a word that's somewhat of a buzzword. Jay Powell has talked about it a little bit and that's inflation. So you hit this a little bit too, but can you guys educate me a little bit more on how is inflation affecting multifamily investing?

Gino: So the definition of inflation is the increase in the supply of money. Most people don't know that.

Jake: You didn't know inaudible on the board today, did you?

Gino: No bro, I've been really struggling to trying to understand it.

Jake: Hit it again. Hit it again. Hit it again. No, hit it again with the definition.

Gino: So an inflation is an increase in the supply of money. That's been going on since QE has been going on forever. Now the cause effect that what happens with inflation is usually prices rise, right? That that's the big difference. Now, prices have always been rising. The job of the Fed really is wordy about inflation. They want to keep inflation at 2%. That's the job, that's what they're trying to do. Now, they said inflation was transitory two years ago. I think they should all lose their jobs because you see the demand, the supply chain problems. Then they overreacted by pushing rates up so quickly in such a short amount of time that the market can't adjust. And now they're stuck because they're trying to figure out what to do with inflation because inflation is still rampant and raising rates. So it's part of the market cycle, but it's also what I've noticed over the last three or four cycles, it's the interest rate cycle. When you raise interest rates, economy slows down. And then as the economy slows down, you actually start dropping rates to restimulate it. Now, with Jake made me watch this Age of Easy Money documentary on PBS. And I was flabbergasted by how amazingly incompetent people of power are. You have the head of the labor union, AFL- CIO, she wants to keep rates low. You have-

Jake: Elizabeth Warren was screaming about it.

Gino: Okay.

Jake: You're doing this, you're doing that, putting people on work.

Gino: They want to keep-

Jake: You can't have it both ways. Everything in society now is there's no losers. We're all winners. Everyone gets a trophy and it's permeated through everything in society. And if nothing can fail, you're going to keep kicking this can until you blow the damn thing up. And I think that people don't think that's possible. The great United States of America. It can't be harmed. Guys, that is the furthest thing from the truth. We're playing with fire right now. We got to take it easy.

Gino: So, my only point was when you keep rates really low, it's easy money. It's cheap money that's what fueled this. So you're keeping that income inequality is getting even better. So the people with Unions they want-

Jake: Income inequality is getting worse. It's widening. Yes.

Gino: It's getting worth because of the policies by the Fed.

Jake: Yes.

Gino: And the reason why the Fed's doing this, they used to be the central bank, but now the government is so in inept and they can't work together to actually create plans to help the economy that the Feds take it over. So if people want to criticize the Fed but their hands are tied, they can't do anything. They just should have reacted a lot sooner. They should have understood that inflation was a bigger threat. And if they had raised rates a year before that, 2022 would've seen deal prices come down a little bit, that frothiness come down. And with 0% interest rates over the last eight or nine years, that creates a lot of risk. That creates a lot of speculation. People have a ton of money, and then you throw in what happened in 2020 with all that money coming out there, people are putting money that they don't have, that's not theirs. And to assets that if they lose, it's okay. It's not really their money. It's actually a good thing for us going forward now because rates are getting up, there's less demand for these assets, there's less free money. People have to really think about these investments, prices are going to come down. And as you see, they are coming down across the board and that's a good thing.

Jake: Well, and also Congress can't get anything done. So now they've tasked the Fed to free up money and kicking the can down the road. At some point, this has got to stop to a certain point and let people actually fail. And if you think about it like propping these banks up, that's another form of stimulus, that's another form of inflation. They are addicted, they cannot stop doing it. So I don't know when this ends. I don't know if inflation will ever truly slow down to 2% again. I mean, that's a pipe dream at this point. Even where rates are at because the amount of money that's already circulated around. So I don't know, it's a freaky situation and I just challenge people that are on the small business side of things that are buying deals. You still need to be responsible because they're not going to bail your ass out, okay? You still need to be able to make money on the things that you're buying, and don't think you're exempt from that because they will let you fail. They may not let a bank fail, but if you do not perform on your multifamily asset, that shit coming back.

Nate: Agreed. I mean, I couldn't agree more. I think the banking crisis is going to take a lot of regional banks off the street, and then a lot of inaudible.

Jake: Oh, let me touch on that a little bit too because-

Nate: Go right inaudible.

Jake: ...Now what we're seeing with the regional banks is that their deposits are getting sucked out of the system and rolling up the JP Morgan. Now they don't have enough money to lend, so they're having to borrow money to lend, which is exacerbating their rate prices. So if they would've been at 6%, now they're at seven and a half because they're borrowing money to lend because they don't have enough demand deposits. So this is going to continue to be an issue here going forward, and it's going to kill the regional banks. So it's going to be like, everything's going to get pushed up to JP Morgan, everything's going to be pushed up to these big banks. And then the flip side of that is there's going to be a handful of banks left and the government's going to have more control because they're going to have a few banks that they're basically playing puppet master with. It's not good. I don't see any of this as a good thing.

Nate: It's really not. And I think you couple that with all time or historical high in the amount of debt that's going to mature a specifically in commercial realm. I mean, that gets scary. Let's see if we scare inaudible.

Jake: Hold on. Hold on. One more piece to this.

Nate: Hit it again my man. Hit it again.

Jake: That's why we got to stay in the shadow markets with some seller financing because we got to find ways to get away from these guys. Play in the gray, play in the great folks.

Nate: As long as you're inheriting long- term fix rate debt. Then you go back to the original principles that you started with. So, I definitely agree with you more, but let's see if we scare our listenership a little bit more with this question. So from your guys' perspective, the other big buzzword is the R word recession. Are we in for a recession? Small, medium, large? Where do you guys stand with that?

Jake: What's the definition of a recession?

Nate: Where's the Wickham master Gino over here?

Jake: Two quarters of negative GDP. We already hit that last year so I don't know what to tell you. We've already hit it, but they say that that definition is not applicable anymore. So I don't know how to answer your question if we're not using definitions any longer.

Gino: Well, I think...

Nate: You'd stop me. You'd stop me. I don't have anything to say on that. I just completely agree.

Gino: Nate, to me personally, I think we've been in a recession since 2020.

Jake: Gino identifies as a rich guy.

Gino: Honestly, I think we've been in a recession for the last three years. I think it's just been euphoria. I think it's been free money, but when you really get down to it, wage growth has sucked. For the average person out there, when somebody's living on paycheck month to month and you got 60% something of the people don't have$ 400 in the bank for a necessity. I think we are there. I think it's just been covered up by people's home equity. I think people have borrowed credit cards and credit limits. So I personally think that we have been. Now what's going to happen is as these rates get up and the credit markets start to tighten, you know this, debt is a circulatory engine of the economy. You know as things starts seizing up back in 2008, companies can't borrow and all of a sudden they can't employ people. And then once people start going on unemployment, that's why the Fed really wants to work on inflation on unemployment. Because if people are not employed, then all of a sudden what ends up happening, things have to drop, prices have to drop, but there's going to be a lot of pain and that's when the recession starts. So for me, I personally think we've been in a recession for the last three years just because this whole demand supply thing with supply chain prices, that really screwed everything up. I mean, it really kicked the can down the road. In 2020, Trump had raised rates. Because if you remember back in 202,0 they raised rates and he lost his crap and it became really political and they had the pullback. If he had stayed out of the way and not done that, you could impeach him for whatever, right? I don't care about the impeachment. That was the big mistake that we made. He injected himself into that problem and we should have... But then what happens is he had COVID come and then would've reverse the policy anyway.

Nate: I guess we can say though, it's a huge mistake maybe inaudible.

Jake: Huge. Huge.

Nate: Inaudible. I mean, consumer debt is spiking significantly and I think the thing that scares me most is affordability. And I truly think we're in affordability crisis. Just like I may have been sleeping, not knowing that we better in a reception. I think a lot of people are sleeping at that. Affordability levels have gone over 40% and that is pre- tax calculation, which I think is crazy. Any thoughts on affordability or anything therein?

Jake: Inaudible interesting, Gino.

Gino: I think it's also-

Jake: Because you're going to see, and you're seeing right now a rise in unemployment, right? So not only are things going to get less affordable, which they have already, but you're going to see less people working. So, no one has a harder job right now than the Fed, because ultimately they're trying to bring down inflation to make affordability better. But there's going to be more people out of work, okay? So people will have less money because they're not going to be working as they try to squelch inflation. So nobody has a greater or more challenging task right now than the Fed. So, how do they thread this needle? There's no way to get around it, then there's going to be some pain. Is it going to be long- term pain? Is it going to be short- term pain? I don't have an answer, I mean, as multifamily operators, the last thing that we want is more unemployment because the only... We're at the back end of this, right? Meaning that multifamily gets hit when unemployment rises, because as long as people have jobs they can pay for their rent. So that's what I'm saying is ultimately as selfishly as a multifamily owner and operator, more unemployment is not great, but something's got to give to get out of this thing. Otherwise, people are not going to be able afford the rents because the rents are going to continue to rise with inflation. So ultimately what I'm telling you Nate, is you're dumb if you do and you're dumb if you don't. I don't see a way out of this. I don't. I personally don't. I wish I had an answer for you, but good luck Jay Powell, you got the hardest job in America, pal. Wish you the best.

Nate: Man, let's look a little bit more glasses half full then because with any realm of pain there is opportunity. And it sounds like when you all got into multifamily, there was coming out of some pain, you guys took advantage of the opportunity. So where are the biggest areas of opportunity moving forward?

Jake: Buying deals on actuals. That's all I can tell you to do. Because no one's been buying deals on actuals. So, the thing that's going to happen is I think there's going to be some people that over levered on some short- term debt. I think there's going to be opportunities there, and there's going to be opportunities with the mom- and- pop space with owner financing that we touched on, but also mom- and- pops that have not kept up with inflation and they're everywhere. And there's not a ton of them, but the mom- and- pops that's... Oh, well, I don't feel right about raising rents. Look, that's fine, but you're either stuck in your asset forever and you have the downward death spiral, which we call it, or you're going to have to sell and you're not going to get what you wanted for and therefore you're going to be able to buy something closer to actuals than you normally would. So I would say, look for the mom- and- pops that have not raised rates and that are open to owner financing, I think that's a huge opportunity. And then somebody that may be busting out a short- term debt that over levered.

Gino: And also look at the operators who are professional but just aren't operating their assets. And there's a lot of them, they thought that multifamily is passive and they got into it because, " Hey, I'm just going to get third party and I'm going to sleep."

Jake: Oh yeah, they'll handle it. I don't got to worry about it.

Gino: There's a lot of those assets out there right now, and there's a lot of people doing capital calls. So I think there is a lot of opportunity, and I think if you sit on the sidelines, now's the time to build the business. Now's the time to build the relationships. Now's the time to start stacking the capital, when cash is trash. I wish I had a little more cash that was trash right now. I think that's the opportunity that we're seeing next.

Jake: Oh, how the tune changes so quickly huh, Gino?

Gino: It does real quick, and I think everyone just go back in just a little history. See what happened in 2008. The people that really got into trouble had that short- term debt. I mean, in real estate we say there's only two times you really care about what the value of your property is, is when you buy it and when you sell it. I mean, what do you really care if you've got long- term debt and you can ride this little bump that we're going to have in the next couple of years. If you're still cash on this deal and you don't have to sell or you don't have to refi out of this thing, you're okay. So I think that's the opportunity right now when you're seeing these operators who aren't operating these assets properly, they thought they were going to get them to $ 1300, they overpaid. So I think there's a big opportunity.

Jake: Listen, 20% rent growth year over year is pretty common and typical. We can just expect that going forward, right?

Nate: That's what all the pro formas that I see inaudible. So, I think I agree with you on that one.

Jake: Got to be true.

Nate: So Jake, I want hit back to something you touched on. We've been in the gap shrinking, but there's been a huge gap between the price that somebody thinks they should be able to buy an asset for and the price that sellers think they should sell a asset for. And you say buy on actuals. Are you seeing that gap shrink? Do you think it'll shrink or any thoughts on that topic?

Jake: No, we literally saw a deal last night that came across our desk. And Gino and I are going, wow, we don't love the area so much. Now going back to our buying criteria, right? And we don't love the age of it, but the deal makes sense. The ask for what the rents are and where they probably could go, which is maybe a $ 100, they're a little light. It makes sense. It just going to that buying criteria, okay- ish market, not loving it, 70s vintage, not loving it so much. We'd rather have 80s and a little bit better of a market. Heavy on the ones, we like twos. Going back to that criteria, but ultimately price fairly well broker. Well done, right? We're going through, we're like, we haven't seen this in the last two years. So, that was pretty cool to see. And this was literally last night.

Gino: Well that the thing is, I think that's going to shrink if and only if the seller has to sell. That's why the deal flows slow down because sellers are still thinking, " hey, they can go out and get debt at three and a half. My property's worth what it was six months ago." They're slowly coming to that realization that, " Holy crap."

Jake: Yes.

Gino: And I think the other thing is that we don't touch on, if there's a person out there who's getting freaked out by this and has owned the property for 20 years is like, " I didn't have to sell a year ago because there was no recession, there's no bank crisis." All of a sudden, " I want to get out." I mean, " I got to start stocking food and ammo. I got to buy gold. I don't want to own this multifamily."

Jake: Gino's been talking to me on the sidelines too.

Gino: That's right. Deal baby, Inaudible.

Jake: Inaudible my friend.

Nate: Inaudible I guess too, right?

Gino: I'm telling there's a lot of people were freaking out-

Jake: Don't forget the water Stress.

Gino: ...They're emotional. Yeah, they want to sell this bad boy. So that's an opportunity, we've seen that. We've seen a couple of deals like that come across. So, if you're out there wanting to buy some guns and ammo and some water and some supplies, sell the multifamily and you're going to see those deals coming across also.

Jake: Get you a cabin out in the woods.

Nate: Oh man. Man, man. We're spinning the heads of you listeners here, but I think with some really insightful information. So, as we look to wrap, what are you seeing in the future? We talked almost on this topic, but what are you seeing in the future? And actually, maybe even give a different spin of should you be a multifamily investor now? I think that one might be a layup for you guys.

Gino: Jake, real quick, what I'd say is we like to say buy right and sit tight. I think now the whole times are going to be longer. Whether you want to or not. Back in 2018 and 19, people were flipping out deals in a year or 18 months. That's going to be done for the next few years unless you find the unicorn and you still want to flip it out. I think now you have to buy these deals and you have to have to operate these deals. And I think the other thing that we've noticed is, wow, your property manager's really got to lease apartments now. They got to have some sales skills. Whereas a year ago you got to mirror, someone fogs the mirror and the apartment's rented. So there's a couple challenges there. Now, knowing your exit strategy, knowing if you want to flip out of a deal in 18 months, then that may not happen. Maybe you either change your exit strategy or you just get out of real estate altogether because that's where the cycle is right now. It's back to where 2011, 12 and 13, we're headed to that point. So understand that. And for me, I don't mind buying right and sitting tight as long as the asset is a little bit newer. And I like the area, I like the community income, it checks our buy right. I don't mind buying all those metrics.

Jake: Yeah. And it's much like crap as we're talking right now, because I do think there's some fundamental issues in the economy. We're buying more right now than we have over the past two years because the deals make more sense to us, and we can make sense of the deals because they're not these astronomical wishes and hopes. They actually pencil out, and we have the data to support it. So, while we're nervous about the economy in a general sense, we do see at the local level where we're acquiring these, that these deals do make sense and a lot more sense than they did. And that long term, because we are buying hold investors, we're going to do really well with them. I think the key is you just need to make sure that you're able to cover your nut and you see the upside and you're not lying to yourself, right? You're not promising 20% year- over- year rent increases. You know what the market is doing, what it can do. And you're not overshooting that. You're actually being underrated on the conservative side of that line.

Nate: Hey, I think we've come full circle here. So as we depart, please each individually, where can we find you, where can we reach you? And then any quick tidbits departing notes to the listener.

Jake: Yeah. Gino, I'll hit it. jakeandgeno.com. You can go there. You can schedule a call with our team. It's results base education guys. We teach the fundamental framework for multifamily investing, buy right, manage right and finance right. And ultimately we go through our trials and tribulations, and we teach on what we've produced over the years. And that's what it's all about, because I think you need to have a framework so you know where you're going. It's the yellow brick road for multifamily investing. And we have a large team around us that supports it. And when you talk about results-based education, this is over 4 billion in assets that our students have done. We've done a quarter billion personally, our students have done over 4 billion. So, there's a lot of net worth and there's a lot of experience within the community, and it's a team sport. Look, it's all about fulfillment. We do one event per year that's open to the general public. Everything else, we do six other events that are all fulfillment. They're buy right boot camps, manage right boot camps and finance right boot camps. And when you go to those boot camps, that's where the magic happens. That's where people meet their partners, that's where they find their vendors and that's really where they're able to grow their business. So, that's what we're about. We make it happen.

Nate: Proof's in the pudding. Gino, anything last from you?

Gino: No, my boy said it right. His hair's looking good. He's got a nice color shirt on. He wrapped it up-

Jake: Damn. Ain't wrong, ain't wrong.

Gino: ...He put a little bow on that thing. So I'm all done.

Jake: Gino's going to have a cannoli. He's happy.

Nate: Hey, I'll be right there with my fellow inaudible there too. I'm going to give you a plug over your left shoulder if people are watching the honeybee book. I got one of those five star audible reviews for you out there, man. So, got to keep plugging. Jake and Gino, guys, couldn't thank you enough. You guys truly... We covered a lot of ground and gave a ton of value here. Now we know where to find you and we'll catch you soon.

Jake: Thanks, Nate.

Gino: Thanks, Nate.

Nate: That's a wrap. Thanks a lot to Jake and Gino coming on The Real Estate of Things Podcast, covering tons of ground all the way from the fundamentals, the economy, the Fed, the market. If we were making the rules to best practices and a little bit of predictions on what to do in the future here in multifamily investing, make sure to check out The Real Estate of Things Podcast, dropping new episodes and live content every Tuesday. And you can always find all things about it at our website. realestateofthings. co. We'll catch you next time.