Jul 28, 2021
James Scott is an Entrepreneur,
Investor, Advisor, Author and General Partner partner at Bar Down
Investments, focused on buying and repositioning Large Multifamily
Properties. In the past two years James Scott bough, built, sold,
rehabbed, lent on and held over 70 millions in Property all around
the country. James holds Advisor Roles in several companies and is
the Author of BiggerPockets books, including "The Book on Flipping
Houses"
In this episode we talked about:
Useful links:
www.connectwithjscott.com
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, welcome to working capital the real estate podcast. I've a special guest as usual. His name is Jay Scott. He's an entrepreneur investor advisor, author and partner at bar down investments focused on buying and repositioning large multi-family properties.
In the past 12 years, Jay has bought built rehab sold, lent on and held over 70 million in property all around the country. Jay holds advisory roles in several companies and is the author of bigger pockets book on real estate investing, including the best selling the book on flipping houses. Find out more about Jay we'll put it in the show notes, connect with jake.com. Jay. Great, great. Thanks Jesse. I appreciate you having me here. Absolutely. You just mentioned that you're basking in the sun and Sarasota or not so much,
James (1m 8s): Not so much. Normally we'd be basking in the sun, but I'm in the middle of a really bad thunderstorm. So if anybody hears some loud crashes in the back, you'll know why. Yeah. Eric
Jesse (1m 17s): Just saying we'll have to mute, unmute the mic. Well, Jay, thanks so much for coming on. Really happy to be able to spend the next little while with you. We were both. I saw you on the list for the BP con or bigger pockets con conference. For those that don't know, 2021 is on in new Orleans and you're going to be a, a speaker. I
James (1m 36s): Am, I actually, I spoke back at the original bigger pockets conference back in 2012. Most people probably don't even remember that there was a bigger pockets conference back then. It was a small little thing that Josh dork and the founder put together. And then since then I've written four books for, for BiggerPockets and, and I'm an advisor for the company. And I'm looking forward to speaking again this year.
Jesse (2m 1s): I didn't know there was one in 2012. I thought you were referring to the one, the last one in Austin, Texas, which I guess was called the first one. But, but apparently there was a, there was an original
James (2m 11s): Yeah, 2012 was the original one. And, and for some reason it didn't happen again. I think Josh was basically working on his own and the company back then. It wasn't even, I don't even think he had Brandon back then. And so I don't think I had the bandwidth to do a second one, but it was a really fun conference. Gave us a chance to meet a lot of people in the industry that I'm still doing business with. It's a great community, was fortunate enough to speak at the, I guess the official first BiggerPockets conference last year. I, my wife and I were actually the MCs for that event.
And we're looking forward to getting back there again this year in new Orleans. Yeah,
Jesse (2m 46s): For sure. That's probably where I first saw you. And a lot of the guests subsequent to that were, were on the show and yeah, absolutely. It's been a, it's been really cool to see people from a variety of different backgrounds, a variety of areas in real estate for yourself, for listeners that, that haven't, haven't heard you before, or know a bit about your background. Maybe you could take us back, you know, where, where you grew up, how you got involved in real estate. Yeah. Basically how you got the bug. Okay. Yeah.
James (3m 15s): So I am by education, a, an engineer and a business guy. I actually spent much of my career in Silicon valley in the tech world. I was a couple of big companies, Microsoft and eBay, doing everything, heard of them. Yeah. A couple of people may have heard of them and doing everything from M and a to product, to, to some business stuff. And so back in 2008, my wife and I, we worked together at eBay, decided to get married and wanted to kind of give up the hundred hour work week.
She was traveling literally three and a half weeks a month. I was traveling a couple of weeks a month and we decided we wanted to start a family. We were getting older. So we quit our jobs. We moved from California back to the east coast. We settled in Atlanta, Georgia. And it's not an interesting story, but we kind of fell into real estate accidentally. We flipped a house back in 2008 and that led to another and another and another. And, and over the next 10 years, we flipped about 500 houses and bought rentals.
We did pretty much everything you can do in the single family space. We did new construction. We did flipping, we did rentals. We did lending. We did you name it? We probably did it in the single family space. And so then around 2018, I started to get burned out and I said, look, I just, I, I need a break from real estate. So I took a good portion of the end of 2017, beginning of 2018 off.
And I woke up one day and the beginning of 2018, I said, okay, I'm ready to get back into real estate, but I don't want to flip houses anymore. And I found myself in, in an interesting situation. One, I had a whole bunch of cash that I wanted to deploy. And single-family back in 2018, wasn't a great time or place to deploy a lot of cash and single family really tough to find deals. It just hard to scale a single family business after like 2015 or 16, just because the market got really hot.
And secondly, I had a whole bunch of partners that I had worked with for many, many years who were lending me money, investing with me, partnering with me, who also wanted to be deploying capital in real estate. And they didn't really have a vehicle to do that. So I decided in 2018 that I was going to get into multi-family and specifically I was going to get into multi-family syndication, have a, a friend, somebody that I had known for a long time. Her name was Ashley Wilson. Who's a long time multifamily investor.
And I asked her what we kind of teach me the business where we kind of point me in the right direction. She was very, and ultimately took me under her wing and has spent the last two years basically teaching me the business and multifamily syndication. And so over the last several months, I've kind of come out as a multi-family investor. I've kind of kept it under wraps until I felt like I had a little bit more experience. I'm not somebody who likes to jump around and do new things very often. But after 10 years I decided it was something, it was time to do something different.
And so last two years of my life had been focused on multifamily syndication and I expect the next five to 10 years will be the same. Yeah. It's, it's,
Jesse (6m 34s): It's kind of a journey. You don't hear it take an as often, not the single family to multifamily. You hear that very often, but you know, we had Darren Batchelder on the show, very similar in the sense that you kind of came into that space, you know, you're, you're coming out into, into multi-family and doing it in 2018, you said, right?
Speaker 2 (6m 51s): Yeah. So for,
Jesse (6m 53s): So for that deal, I mean, you come into that area and the, one of the benefits that you have, obviously you're doing single family, but not so much in the sense that a lot of, a lot of, a lot of it translates, but a lot of it doesn't. I think people think the credibility that they have in single family is going to transfer to multi-family and it oftentimes doesn't happen that way. But what you do have is you have a long career that you're not, you're not the idea of building a business is not foreign to you. So what was it that when you decided to make that transition, obviously you, you reached out to somebody that has done it and has been successful doing it.
What were you zeroing in on? You're the first, you know, these are the first few things I need to learn about the business. If I'm going to proceed down that avenue, I'm
James (7m 36s): One of those, those people that takes the learning side of things really seriously. I know there are a lot of people that are kind of the, the ready fire aim type. I'm more of the ready aim, fire type. And I like to do my research. I like to have a business plan. I like to execute on a plan, not just kind of fly by the seat of my pants. Not that there's anything wrong with that. My wife tells me often that if I were, were more of the fly by the seat of my pants type, we would have done a lot more deals by now and she's right, but I'm conservative by nature. And I very methodical.
I'm an engineer by trade. And so 2018, I asked Ashley to kind of teach me the ropes. It wasn't until last year, 2020 that I actually did my first syndication deal. We did a $20 million deal in, in Houston, Texas, but I needed to feel like I understood the business. One of the things about syndication is, again, I wasn't getting in just to make lots of money. Obviously I liked the idea of making lots of money, but I was looking at syndications as a vehicle to deploy my own cash.
I was looking at someplace to put my investments because I'm a control freak, and there are lots of great operators out there. Lots of great multi-family investors out there that I should trust with my money, but I'm one of those people that I just I'd rather have my money in my own than somebody else's. So I was very conservative knowing that I was going to be putting my own money in these deals. Secondly, a lot of the investors I was going to bring with me, when you do syndication, you typically raise money from, from private investors, passive investors. I knew that a lot of the investors I was bringing with me were people that have invested with me for many, many years.
And if I was going to put their money at risk as well, I wanted to be absolutely certain that I knew what I was doing, that I was being conservative, that I understood the deal and that I could be successful. So I basically spent two years learning the business before I did my first deal across comfortable doing my first deal. And so two years later, we, we did that first deal. And what I realized was exactly what you said, the credibility going from single family to multifamily it didn't translate.
Didn't transfer. The hardest thing about doing a multi-family deal was sourcing that first deal in the single family world, I can pick up the phone and I can call anybody in the single family space and say, Hey, it's Jay Scott, can we grab lunch? And I don't mean to sound conceited or anything, but there are most people in the single-family world will know who I, who I am and say, absolutely, let's, let's grab launch in the multi-family space. I would call a broker and say, Hey, I'm Jay Scott. And they're like, great. What can I do for you, sir?
And I'd be like, well, I've done 500 single family deals, and I've done over $60 million in real estate. And okay, great. What can I do for you, sir? And I'm like, well, I'm looking to get into multi-family. Okay, great. What can I do for you? And so they, that, that, like you said, that that credibility didn't transfer. Basically. They wanted to know what multi-family deals had. I done, what deal, what size deals have I closed? And what I realized was with multi-family brokers, the single most important thing to them is that they have buyers that they are a hundred percent certain can close deals.
I can tell them I've done 500 single family deals. I can tell them I've done $60 million in deals. I can tell them I've raised tens of millions of dollars. They don't care because if I've never closed a 200 unit deal, I'm now a risk to them because if they get the reputation of bringing a buyer to their seller and that seller and that buyer doesn't close the deal that brokers unlikely to get another deal from that seller or any other person that sellers network.
Because I basically proven that I, I can't deliver. So basically in the, in the multi-family world, if you want to build credibility, you've got to do a multi-family deal. And that was part of the reason why I was very fortunate to, to have found somebody that had done deals in that space who could give me credibility, who could basically walk me through, help me get that first deal. How did we get that second deal? And, and allow me to start building a new set of, of, of credibility within a new space. Yeah, that's great.
Jesse (11m 51s): You know what, I want to talk a little bit about the team and then going forward into this first $20 million deal, you said it was in, I was in Texas. Yep. But before we do, I have the opportunity here to ask somebody that has had 500 single family, just for us in, you know, in the brokerage world, you see that Blackstone, I think it was 2012 and 2017. They took a really big look into, I think, what they created invitation homes with, which they eventually went public.
And I think Jonathan Gray, that's the CEO of Blackstone at the time. He said, it's not about buying homes. It's about building a business and it's a challenge to scale a single family. So, you know, what is it about that piece? They were obviously successful in doing it. They created this, they spun it off. You know, what is it that, that limits the ability to do that? You were at 500 and you know, I'm sure it crossed your mind at that point, is that, you know, can we scale this? Can we, can we put this, can we engineer this to actually be able to be a scalable investment for, for outside capital?
James (12m 54s): Yeah. So, I mean, there, there are two types of businesses. There are two types of, of scaling for businesses. There's businesses that can scale linearly and businesses that scale by step function. And what I mean by that is there are those businesses that as they grow in revenue, they need to grow in, in team. They need to grow in systems and processes. They need to grow in investment. And it's pretty much a linear growth. If the, if the company is wants to do twice as much revenue, they're probably gonna need to hire about twice as many people and have twice as much investment or income coming in.
And then there's the step function type businesses, the businesses where you can grow to a certain point, and then you're going to stagnate. If you don't add a lot of capital and a lot of, a lot of people and real estate, single family, real estate is one of those step function businesses. What I found is I could pretty much run the business, myself doing something like 10 or 20 deals a year. So if I'm doing 2, 3, 4 deals simultaneously me, my wife, a couple of contractors, and we're good if I wanted to get to more than five deals at a time.
Well, that was a, that's a step, that's a step function. And to do that, I had to bring on a project manager. I had to bring on a construction manager and I had to have some other dedicated resources. Great. Well, now, if I want to get to 10 or 15 houses at a time, that's another step function. At that point, I have to start hiring a, basically a hierarchy. I have to have a construction manager. That's managing multiple project managers. I have to have a team that's raising money. I have to have a team that's doing sourcing and acquisitions and a transaction coordination and all of those things.
And so every time you take another step. And so from, from one house at a time to five houses at a time to 15 houses at a time to 30 houses at a time, whatever that step is, you basically have to redesign business. You have to create a whole new set of systems, a whole new set of processes and a whole new management and organizational structure to support that step. And so what I find is that with most single family investors that try and scale their business, they get to some point where they're not comfortable taking the next step.
They're not, they can't figure out how to design the organization. They can't figure out how to design the capital stack. They can't figure out how to design the construction side of things so that they can take the next step. And for me, I got to the point where we were doing maybe 8, 9, 10 houses at a time. And I realized if I'm going to get to the next level. And that's nowhere near the black, the, the, the, the, the, the, the major institutional companies, whatever, whoever they may be. It's, I, I was still like 10 steps below them.
But if I was going to get to the next step 20 or 30 houses at a time, I was going to have to do something very, very different. And that was the point where I started to burn out and what I find there's a lot of single family investors get to that point, they'll take a step or two steps or three steps, and then they'll get to the point where they burn out. And so it's, it's really in the single family world. There there's some resilience that's needed and some creative thinking. And a lot of times you'll find that the best single family investors have business coaches, because it really isn't just hire one more project manager, hire one more broker, hire one more, whatever it may be, you have to hire 10 more people to get to that next step, and you have to change your capital stacks completely to get to that next step.
And so that was the challenge in single family. And that's, that's, it's, it's a little bit less in multi-family because you can scale a little, little bit more linearly because most things are hired out anyway, and multi-family is more of a team sport from the get-go, but you're going to find that in any aspect of real estate. Yeah,
Jesse (16m 45s): It's really, it's a great comparison. I've ever heard it put that way before, but it reminds me of, you know, you have people that are, have started businesses that are very similar to that step function. That would be very good in single family. You know, whether it's, you know, automotive manufacturing that very, you know, you have to build that base and build business where multi-family sometimes, you know, you kind of get the training wheels because the business is built around the asset. You know, you buy an 80 unit apartment building. There are, there are things that are built even, like you said, hiring out for a lot of that stuff.
But just the fact that there's all these other businesses that exist to necessitate doing things to a property of that size. So take us to this, this $20 million property and, you know, set the stage in terms of, you know, you're fairly new into this, which hat did you wear? And how did that, how did that project go?
James (17m 37s): Yeah, so we got that project under contract, the end of February, 2020. And I think it was like March 3rd or fourth or fifth 2020. I was scheduled to step on a plane to go start due diligence on this project. And the day before everything shut down, this was COVID. And so we, we, we actually had two deals under contract simultaneously, and COVID hit. And obviously think back to March of last year, everybody was kind of freaking out. Nobody knew where things were headed.
The stock market was, was dropping thousands of points at a time. And so without giving a thought, we backed out of both deals. So luckily we didn't have any harness money put up at that point, so we didn't lose any money. And we just stepped back and we said, let's wait and see. So one of the deals that we had under contract that we backed out on, they ended up selling to somebody else. But the main deal that we had under contract, we look back, come beginning of June and we realized they hadn't sold yet.
We reached out to the broker, we said, what's going on? And they said, they're still interested in selling, but they haven't put it back on the market yet. We said, well, how about if we, we kind of revisit, we look at the financials from the last few months, we ended up putting in an offer another offer on that property for about 11% less than, than where we were for the first time, quick negotiation. They accepted our offer. We move forward and we purchased the deal in September. So we basically come June of last year.
We still didn't know where things were headed. We didn't know if things are going to be locked down for another month or another two years, so somewhat of a gamble, but it was a great deal. And, and so in terms of what my role is, my role was, I am, I'm kind of the, the analytical one. So I was helping out in a lot of places. I wasn't the main, anything on that deal. This was my first deal. I didn't want to be the main, anything I wanted to be helping everybody and learning from this deal.
So I was involved in the sourcing. I was involved in the underwriting. I was involved in the due diligence. I was involved in the fundraising. I was involved in everything that took to get it to close Ashley. My partner is the best asset manager I've ever met. So I I've had no role in the asset management, but basically everything from the sourcing to the day we got that property closed. I had my hand in now moving forward, Ashley and I have formed a partnership 50 50. And so I'm mostly responsible for the fundraising and the underwriting and due diligence.
She's responsible for the sourcing and the asset management, but we do have a fairly sizable team that kind of helps us with all aspects of, of the operation. And I
Jesse (20m 30s): Suppose your, your history with investors in single family homes, I mean their money still green. So it's, it's a nice import.
James (20m 39s): It's very nice. I know a lot of people, I'm very fortunate. A lot of people, they do their first multi-family deal. And then they have to freak out about where the money is coming from. We were already planning to raise the money. They had already raised some of the money, but I was able to put out two emails and raise about a third of the total equity raise in the project. So I, I was fortunate that, that I had some history there,
Jesse (21m 3s): Right on one of your, I guess author compatriots said, BiggerPockets, I'm just, just running through his book right now. Brian Burke, the hands-off investor. We were talking a little bit about this. And he talked, he gave a good analogy of, of the, the fund versus a single asset syndication, where one is, I mean, they're both trust vehicles, but the, the, the fund is definitely, you know, you're getting on a plane because there's a, if there is air Canada or Lufthansa has a history for getting people to their place without, without issue for what you're doing today, w you know, single asset syndication is their preference.
And in doing that, is it something that you're going to evolve in out to potentially doing a fund structure? What are your thoughts on that? Yeah.
James (21m 51s): I mean, it's natural growth of any company that that's doing. Single purpose vehicles like syndications is to move towards a fund model, a couple of requirements for the fund model. And I know Brian's talked about this a lot. I mean, the nice thing about a fund is that you have diversification. So if somebody puts money in, they, if one asset underperforms, they don't need to worry as much because potentially there are other assets that are, that are outperforming, but there are a couple advantages. And I'm not saying that that single purpose syndication is better than a fund or worse, but there I'll point out there, there are a couple of advantages.
One with a fund you're basically trusting as, as an LP, as a passive investor, you don't necessarily get to do that underwriting of the deals. You don't necessarily get to say, I want to be in this deal. I don't want to be in that deal. I want to be in this one. I don't want to be a no story. You're basically at the whims of the operator, you'd have to trust that the operator is going to be making good decisions with a single purpose fund. You get to vet the deal. And if it's not a deal, you're interested in you move on and you wait for the next one.
From the operating side, the difficulty with the fund is that you have to have enough deal flow, that you don't have money, basically sitting in a bank account, earning half a percent or a quarter of a percent interest. And so there's pressure on the operator to find deals when they've raised money. And if the deals aren't available. And certainly Brian, Brian is one of the best operators I know. So this, this, I'm not saying this applies to Brian at all. He's fantastic. I invest with Brian, but there are some operators because they're going to feel this pressure to deploy capital because they need to hit their blended returns.
They may end up doing a deal that's thinner than a deal they would otherwise do because they have a fund and they need to deploy that capital when you're doing a single purpose vehicle. Well, you're raising capital for a specific deal, and we've gone now at this point, about seven months since our last deal, there's no stress on us. Like, obviously we would love to do another deal tomorrow, but if we don't, we don't have capital sitting in a bank account. That's, that's, that's losing value.
Jesse (24m 3s): Yeah. And I, I don't think it was a, you know, one better than the other. I think we were talking about just some of the attributes attributes of, of both of them. So in, in terms of, so now, you know, you, you did that deal. You said September 20, 21, we just did a deal through COVID. It's kind of a, you know, it's a weird time to do a deal. It's been a while since, you know, I remember back to doing a deal, oh, 8 0 9. I, but definitely this time was a little bit different in the sense that we went into a deal with certain market rents that we were expecting to go in with one strategy, ended up having to pivot just because the market was not there.
And we, you know, you anticipate that it might be, but that, that definitely seems like something that would, you know, just be a challenge, especially for yourself, the deal itself, just, just for, for Houston, Texas. We're where are you getting where's the market right now in terms of per unit pricing, it's
James (24m 58s): A crazy market. So we're downtown in an area of, of Houston called the Galleria. One of the nicest areas of Houston, most of the assets in that area are a class. We were actually, the property we bought was one of the very few B class properties, which I love. I, I would rather be a B class property in the main class area than vice versa. And it was an eighties vintage, mid eighties, vintage hadn't been renovated for awhile. We came in, I think it was about 130,000 per unit, which is, is pretty high.
But in that area was actually pretty reasonable cap rates in that area are crazy. We're recording this. And the end of June and cap rates are right around four and three quarter percent entry cap rates, exit cap rates are around four and three quarter percent. So it's a, it's a very, very competitive market, but this so far has been a home run deal. We've we've, we're at near a hundred percent occupancy. We're near a hundred percent collections. Whereas I know a lot of properties around the country aren't so we we've been very fortunate to find the right property in the right area.
But like I said, Houston is hugely competitive. Cap rates are hugely compressed. And so finding more deals in that area has been tough. And so we're starting to expand into other markets because we're having trouble really keeping the deal flow going in that one market. Yeah. I can't
Jesse (26m 23s): A nickel for every time on the show, we've talked about exploring different markets or being an expensive markets for us. You know, you just can't buy property in, in my area, we're at, for downtown core, we're talking 350 350,000 plus per per unit. It's just the reality. You go to 18 hour cities, you go outside and just kind of changing the strategy with the, so that was what would that be? Approximately 150 unit buildings. 152. Yep.
So we have a lot of people that come on the show that talk about, there's an inflection point where, where they really want to get over in terms of scaling certain properties. And it seems to be somewhere in 70 to 90, where anything below that just doesn't work for their model. I mean, listen, I it'd be great for I'm myself for a lot of people to be like, if you can get a 65 unit building, but what is it about that? And is it that first of all, is that the case for you? And what is it about that, whatever that area is?
James (27m 21s): Yeah. So first of all, everybody needs their own, what we call buy box. Everybody needs to decide what they are interested in, what types of properties, what vintage, what condition. And so for us, I've invested in a lot of mid-size multifamily, not for the syndication model, just putting in my own cash. And we've bought a lot of stuff in the 20 to 60 unit range. And what we found is that those kind of mid-sized multi-families are very, very difficult to manage.
If you have a single family or duplex or a fourplex, or even a 10 unit, you go out and you hire whatever property management company is popular in the area that does single family houses. And they're going to take care of you. And you're going to pay eight, nine, 10% of the gross rents and property management fees. And you're probably not going to be bothered too much as the owner operator, you get into the 80, 9100 unit range. And you basically, at that point can hire, you have enough income coming in that you can hire full-time property management, one site, property management.
You have an office typically at around at around a hundred and twenty-five units. You can hire two people. You can hire an office manager and you can hire a maintenance person there, essentially. Full-time at the property. If people want to rent a unit, they're going to stop by during the day, there's going to be somebody sitting in the office and a chair that can walk them through a unit. If somebody has an issue in the middle of the night, there's going to be a maintenance person available to take care of it. So under 10 units over about a hundred units, management's pretty easy in between, especially in that 20 to 60, 20 to 70 unit range.
Management is very difficult. You have too many units where not having somebody on site to make things very, very difficult. You may have two or three people that want to see units every day, but if you don't have somebody on site, you're basically deploying somebody. And so they're spending half their time driving. You're probably gonna get enough maintenance issues that you're not keeping them full a maintenance person, a busy full-time, but they're going to have something to do every single day. So you have somebody that literally needs to drive out and drive back. And so you're paying a lot of part-time people and you have to find people that are willing to work part-time to manage your units.
Typically, those aren't the people that are going to be the ones that care the, about your units. And so you ended up doing some weird management scheme, maybe a hybrid management thing, where you find three other apartment owners in the area and you say, Hey, let's hire a couple of people and we'll split them. You take them a third of the time. I'll take them up there at the time. Joe will take them a third of the time, which is great, except when Joe ends up needing them three quarters of the time. And then they, yeah. So you say, so management tends to be the thing that makes those, those mid-size multifamily is really difficult.
And what we've found is typically when you get to a hundred, a hundred and twenty-five units management becomes a whole lot easier. So we're willing to do less than 150, but if we're going to do less than if we're going to do fewer than 150 units, we typically want to have multiple assets really close together so that we can matrix resources across multiple assets. And so 150 units as kind of our baseline minimum
Jesse (30m 38s): Point where you're saying that you could hire two full-time, essentially full-time office manager and maintenance, w D D in terms of the actual property management, you mentioned over one 20 or one, you know, whatever, a hundred, 120, where you're very well serviced on that end. And you're very well serviced on the low end. Are you saying that from the perspective of, you can either build out your management property management on your own at that size or there, in addition to that, you can also go to various companies that will service that size.
James (31m 10s): So I don't want to speak for other operators, but I think I will, because most operators of larger multifamily have found. And I know you had Brian Berkland a couple of weeks ago, and he's one of the few I was going to say, he's very burdened. He's one of the completely, one of the few completely vertically integrated multi-family operators. I know most of the rest of us, we don't want to be involved in property management. So if you've ever dealt, where here even managing your own single family properties or small multi-family properties, it is a very high touch, very frustrating, very low margin business, and to be successful in that business, let's be honest.
That is the thing that's gonna make or break a multifamily value, add property as syndication, where you're taking a rundown or distressed asset, and you're turning it around to, hopefully we sell it. Your property manager is going to essentially make the difference between your success attorney around that property. And not in fact, when you're buying a distress multi-family property, the reason it's most likely distressed is because the current owner doesn't have good property management in place. And so, unless you think you can do a better job than companies who were their core competency is property management.
My recommendation is typically find somebody that does it in the area and, and hire them. Now, there are some benefits to having a great property manager over and above just property management. When we're looking at properties, we typically invest out of state. We invest in Texas. I live in Florida. My partner lives in, in, in Philadelphia. Our property management company in Texas knows that market like the back of their hand. So if we say, Hey, we're making an offer on this property. If I call property management lead there.
And I say, we're thinking of making an offer on this property. She's going to say, yeah, I know that property transacted back in 2017, the team that bought it, isn't really doing a good job. I know they're having problems with, with occupancy and they're having problems with, with deferred maintenance, but I'll go take a look. I'll set my eyes on it. I'll let you know what we think. The cap ex and estimate for the cap X might be. And so they're doing all these things for us that we would never be able to do ourselves without getting on an airplane and flying there every time we want to see a property.
And we're, we're looking at 20 properties a week. We're not going to get on a plane 10 times a week and go look at properties, chubby, a great property management company. They're also going to perform a lot of other functions for you. In addition to just managing your existing properties. They're great. During due diligence, they can do forensic analysis of, of, of leases when you're, when you're going through due diligence, they can find discrepancies and inaccuracies and leases. Basically they are your due diligence team. They're your scout, they're your property manager.
They're everything. Yeah.
Jesse (34m 1s): I've, it's amazing how much that will take even seasoned investors by surprise or just something that they don't think of. I I've said that since I, I started buying properties and even student rentals where even if you're buying single family property managers know the areas better than anybody. And like, it's, it's to the point where you get in some smaller towns and they know the individual tenants in certain, in certain buildings. So that's, that's a great point. And I think, I think the, the aspect of vertically integrated, it's funny that that was tangential to the point about funds.
I think what would happen with Brian and hopefully I'm getting this correct was I think when he moved to the fund model, for whatever reason in the private equity world, they wanted to see vertical integration. Just maybe that's just something that when they buy businesses or when they invest in businesses that that's just expected, but real estate seems a little bit different. I think there's a lot of, like you said, great companies that that's their core competency, property management. Yeah.
James (34m 59s): And vertical integration. There's, there's a level of control that comes with vertical integration. And for those that are familiar with the term vertical integration means basically pulling all aspects of the operation in house, as opposed to hiring third parties. There's a lot of control, obviously that that comes along with, with vertical integration. But there's also risks because you're probably you as the owner of the company probably don't have core competencies in all of these areas. And so it's your responsibility to ensure that the people that you hire do and you need to manage them.
And so it's, it's yeah, there's, there's good and bad with that with the vertical integration. And what I find is that a lot of multi-family operators will start out not vertically integrated. And then they'll add pieces in with property management being kind of the last piece, if ever being vertically integrated. And again, Brian is one of only two people I know in this industry that has, has done full stack, vertical integration. Yeah. At
Jesse (35m 56s): P it's a thankless job. I mean, they're like, you know, kudos to everybody that, that works in that, in that area. Jay, you've been really generous with your time here. We typically ask guests for questions where we, where we end off before we do that, I 20, 21, 20 22 opportunities, you know, what, what are you looking at? What's on the horizon for you?
James (36m 18s): I think that there's going to be a lot of opportunity in multi-family in general. I'm, I'm very bullish in real estate. A couple of years ago, I wrote a book called a recession proof real estate investing back in 2017, 18. And I really thought we were going to see a downturn in the market before now. I think COVID may have kind of derailed the downturn. I guess that's a good thing. And I think the next few years should be pretty interesting. I think hard assets are gonna are going to continue to outperform the market.
I think we're probably going to see multi-family real estate do really well simply because it's been reported that there are about 5 million underserved or 5 million units that, that we're under. What's the word I'm looking for? We're we're, we're, we're low about 5 million units across the country to, to meet demand. We haven't done. Yeah. And we haven't done a lot of buildings since 2008, so there there's still population growth and there's, hasn't been nearly as much housing growth.
So there's at this point about 5 million, too few housing units. And we're likely to see inflation over the next couple of years, which is going to lead to potentially more cap rate compression. It's likely to lead to more rent inflation. Even if we see some interest rate increases, which I think we likely will over the next couple of years, maybe a point, maybe a point a quarter is what the fed is talking about. I think that's going to be outweighed by, by the, the rent inflation and, and wage growth.
So I think the next few years is going to be a good time to be in real estate can be a good time to be in, in multifamily real estate, right on,
Jesse (38m 5s): All right, Jay, we got four questions. If you're ready for them, I can serve them up.
Speaker 2 (38m 9s): Let's do it. All right. Something,
Jesse (38m 11s): You know, now in your career, whether it's in real estate or other areas that you wish you knew when you first got, got into the game,
James (38m 20s): I wish I knew that that real estate is a full-time job and you can't push off family and other things that are important to you thinking I'm going to get to the point where I'm going to have everything I want. And then I can go back and focus on them. I got into real estate because I wanted to put my family first. And I spent the first many years in real estate, not doing that thinking I'd eventually get there. And what I realized was if you're somebody that loves to work, you'll never just get there. You just need to make that decision and you need to decide what's most important in your life and prioritize things correctly.
That's
Jesse (38m 56s): A great answer. All right. Number two, in terms of mentorship for younger investors, entrepreneurially minded people, your view on mentorship and what they should be doing. I am
James (39m 9s): A huge fan of mentorship and that doesn't necessarily mean paid coaching. That means mentorship. And typically mentors are people that help you because they have a vested interest in your success. And the reason somebody might have invested interest in your success is because they have a personal relationship with you. So seek out people that are in this industry, that they already know you, maybe their friends in the family, maybe they're friends with friends, where there are people that feel like they owe you for some reason. And what I tell people is provide value first and you'll get mentorship in return, go out and find somebody that if you want to do, I'm gonna make it up.
You want to flip houses, go find somebody that's successful, flipping houses and say, Hey, can I come work for you 20 hours a week? Don't pay me. I just want to help you 20 hours a week. And in return, be able to ask you questions, see how your operation works. I promise you that if you go put in a solid effort for them for a few months, they're gonna be happy to help you out. So when it comes to mentorship, give first and ask second.
Jesse (40m 9s): Yeah, absolutely. That's great. What is a resource or book that you find recommending time and time again? Whether it's an old one new one, what do you got?
James (40m 18s): I'm a systems and processes guy. I love systems. There is a book out there and for some reason it's not a whole, it's not as popular as it should be. It's called the goal. And it was written in the eighties. It's a best seller, but for some reason, it's just not as popular as I, as I think it should be. I try and read that book at least once every year or two. But it's all about clearing roadblocks in your business and making your business more efficient. One roadblock at a time.
Yeah, that's great. Yeah. The title is the, it's the theory of constraints
Jesse (40m 54s): Like it. All right. Last question. First car maker.
James (40m 58s): First car. I had a bright orange. It was called the, we called it the fire engine Dodge Omni from, it was my grandmother's car that she bought in like 1982 and gave it to me when I got my driver's license in like 1987 where I just dated myself. But yeah, the 1982 orange Dodge on me,
Jesse (41m 21s): That's the first dog Dodge Omni we've had. I've always liked this. I don't know if you're big, if you're a fan of a master's in business, the podcast and just re Ritholtz. I was like, you know what? That's a great question. I mean, that question. All right. Four for listeners. I mean, everything today is a Google search, as I always say, but for those that want to either link up to S see, when you're read one of your books, download one of your books, reach out to you. What's the best way to get ahold of you. We'll put it in the show notes.
James (41m 52s): Yeah. So anybody that wants to get in touch with me or getting the connect with me, www.connectwithjayscott.com and that'll link out to everywhere.
Jesse (42m 3s): My guest today has been Jay Scott, Jay, thanks for being part of working capital
James (42m 7s): Gassy. Thanks. I really appreciate you.
Jesse (42m 15s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse, for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.