241 How To Find Emerging Markets | REI Show - Hard Money for Real Estate Investors
Bill Fairman
00:00:01
Not this time. Oh, we're on now. What a surprise. So there's been a lot of discussion about how to get into markets that are not overpriced. So we're gonna do a show today about finding emerging markets, and you will get that information right after this.
Bill Fairman
00:00:44
Good afternoon everyone. It's Bill and Jonathan and or special guest hunter. But we were, we were gonna tease him in, but too bad he's already here. Thank you again for, well, not again, but thank you this time for joining us on the Real Estate Investor, Show Hard Money for Real Estate Investors. We are Carolina Capital Management. We are a private lender for real estate professionals in the Southeast. If you have a project you'd like us to take a look at, please go to carolina hard money.com and click on the apply Now tab. If you're a passive investor looking for passive returns, click on the accredited investor tab. Don't forget to like, share, subscribe, hit the bell, all that good stuff. Excellent. And don't forget, Hey, Brian. What? Oh, Wendy. Wendy. Don't forget about Wednesdays with Wendy. She, and yes, I will talk right through the graphics. Anyway, Wendy devotes 30 minutes per person on Wednesdays that wants to talk anything about real estate. So there's her link. It will also be on the comments and chat section on the right side or underneath, depending on the platform that you are viewing us from. She usually gets booked out about two months in advance. So book your spot now
Jonathan Davis
00:02:16
For everyone out there wondering. I'm six foot two hunter's, just seven foot.
Bill Fairman
00:02:24
Yeah, I'm
Jonathan Davis
00:02:25
Just sure. I'm trying to keep my head in the
Bill Fairman
00:02:26
Frame for you. I can go ahead and admit that I'm vertically challenged. Oh, that I don't have an issue with that. No. So yes, we have our, our guest Hunter B he is with Elevate Capital. We have what about a three year history? Guess? 4, 4, 4
Jonathan Davis
00:02:45
And a half. Four and a half year history.
Bill Fairman
00:02:47
It's a great story. We're gonna let him tell it instead of me or Jonathan tell
Jonathan Davis
00:02:52
It. Yeah. And before he tells that, I just wanna get some quick information in for everyone. Just want, this was some data that we have that will kind of lead into what Hunter's gonna talk about, but also about the emerging markets. We are, this is what, the third month in a row where we've seen rents slow, but they are still rising. Charlotte is kind of, I think in the top seven on still rent increases, which is 11.5% year over year. The median rent in Charlotte right now is almost $1,800. And if you've followed the show, you also know that the median house payment for a mortgage is 18, 18 50. So they're, they're right there with each other, which is, you
Bill Fairman
00:03:49
Know, that means there's room to grow.
Jonathan Davis
00:03:50
I suppose so. I suppose so. So we're also seeing, give me a second.
Bill Fairman
00:03:57
No issues.
Jonathan Davis
00:03:58
We're also seeing a slow down and starts on single families and a slow down and starts on multifamily. However, construction that is in process is up on multifamily by 27% and up on single family still by 4%. So we're still seeing, you know, there's still growth, but we're next, you know, Hunter and I were talking a little offline a little earlier, and you know, as the next month and, and two months comes in, we're gonna see that decline and that slowing down hit even harder and boasted because of the interest rates. Supply chains, picking up lumber, you know, as we were talking about earlier, as, you know, back to pre pandemic levels, which is good. So also if the, if you're in the way of the hurricane, we're very sorry. I think, Bill, did you lose a home?
Bill Fairman
00:04:51
Well, yeah, that's what I was gonna jump in into before we got too, too far into this that you guys pray for the folks in Florida, we have some short-term rentals down there, but we don't live there full time. So it's not affecting us like it would the people that live down there full time. And there are people that are missing as well. So keep 'em in your prayers. It's gonna be a while to recover where it hit the hardest. Yeah. That said, starts almost always do this when there's a coming recession.
Jonathan Davis
00:05:24
Exactly.
Bill Fairman
00:05:25
People are being a little bit more cautious. Banks are kind of holding off on commercial and residential development because through every downturn, or we'll just call it a crash. Yeah. What's the first thing that goes under? And it's the start of a development. Exactly. So it, it, here's the problem though. We're still 5 million homes behind where we need to be based on the population growth. So all it's gonna do is increase demand for what's out there. Yeah. Right. Yeah.
Jonathan Davis
00:05:57
Well, talking about increasing demand, want, you know, get Hunter talking here. We wanna know kind of, you demanded each stop by we demand. So wanting to know kind of how you all got started, What was the first project, and then just kind of take us through and, you know, I'm sure Bill and I will interrupt and jump in from time to
Hunter Bick
00:06:17
Time. Okay. So like the three to five minute version, not the 20. Hey, you
Jonathan Davis
00:06:21
Take all the time you need. We're on your time, man. Yeah.
Hunter Bick
00:06:23
All right, cool. So we kind, we, our, our partnership Elevate Cowboy Group got started really, we started 2017 ish, mid 2017. And one of our partners, it was high school, buddy of mine, his name's Matt. And then we met our third partner, Shannon, pretty shortly thereafter. And we just really clicked really well. And you know, we at the time, even, even now, but like the, the whole idea is effectively we do is value add multifamily, where we can go in, find something that's underpriced because of distress or a bad rent roll or whatever it is. We can go in, renovate, improve the quality of life, improve the asset. And
Jonathan Davis
00:07:06
You pulling those off with mls, right?
Hunter Bick
00:07:08
No. Now the very first one had been on LoopNet, believe it or not, our very first deal was in an emerging market. So good segue. Yeah. In Fayetteville, North Carolina. And it had been on loop net, we made an offer, didn't get it, came back to us a few months later, fell out a contract and it was $2 million for 56 doors in Fayetteville, which in today's world would be Absolut absolutely unheard of. That was, and that was in
Jonathan Davis
00:07:33
2018.
Hunter Bick
00:07:34
It was 2018. And at the time, everyone told us we were idiots for wanting to buy anything in Fayetteville, and we'll get into that in a minute, but they were wrong. And so we had an appraisal for this property and we had like a hundred grand to buy an apartment building. And we had an appraisal, said it was worth two and a half million. And Shannon and I were talking about it, We were like, Well, why don't we put hard money on it? So we came down here to Carolina Hard Money, aka Carolina Capital Management now, Excuse me. Yes. Yep. And showed you guys what we had and you guys got it. And that's what helped launch us. We wouldn't be here today without, without that first deal and all the other ones we've done together and, and you guys gave us a hundred percent of the purchase and some rental money five months later, that thing appraised for 3.3. Yep. And we did a cash out. I think our new loan on it was two and a half, maybe paid you guys back, took some cash out to put towards future renovations. And that's kind of how we found our model. It's basically like a leveraged buyout private equity type model. Yeah, we've done that. We've done what, 20 deals now? We've done most of them in some similar structure. I was gonna say on this first deal. Yeah.
Bill Fairman
00:08:55
It was based on market conditions. It was pretty much fully occupant, right?
Hunter Bick
00:09:00
Yeah. It was like 85 something.
Bill Fairman
00:09:02
Yeah. And while it, there might have been some updates that could be made. It wasn't that it was in bad shape, it was just outdated. Right? It
Hunter Bick
00:09:13
Was, it was compared to some of the stuff we've seen, it was not in bad shape. Yeah. It, it definitely needed some deferred maintenance. It had some issues. The that one though, the, the income statement was where lot of the value add was, right? Like the expenses were off the charts. Like the previous owner was, this is not, this is no joke. He was spending $400 a month to lease a copy machine. Why on earth does an apartment comp? First off, you could buy one for half of that. Second of all, what is an apartment comp? Like what is it like, why would that be on an apartment complex as
Bill Fairman
00:09:45
Books? Right? It was installed in a new car. That's the difference.
Hunter Bick
00:09:48
It must have been. Right. And so, you know, we knew enough to say, okay, 400 times 12 is $4,800 a month, $4,000 a year to divide that by, at the time it was like a seven cap. I mean, the math on that is big money on the valuation. And so we, we, we fixed a lot of stuff like that.
Jonathan Davis
01:10:09
And that's, you know, just, just to jump in. I mean, when you're looking at these that it's not what you can increase. Everyone thinks what can, you know, what's the rents that I can increase, You know, and under market rents. That's, that's, you know, a great way to look at it. However, this particular asset that when I was underwriting it, it was actually the, you know, when I joined with Wendy Bill, this was the first multifamily that I under underwrote for them. We could see immediately there was exorbitant amount of expenses on there that shouldn't have been there, that created hundreds of thousands of dollars of value once they just removed them.
Bill Fairman
01:10:44
No. Now on, I was gonna say on the reverse side of that, if your brother-in-law is gonna be able to do stuff a lot cheaper than the market Yeah. That's not gonna count than the valuation. So something to keep an eye on when you're looking
Jonathan Davis
01:10:57
At these things. Yeah. You can't say like, you know, well my expense ratio is gonna be 20 when market's 35. Right. You can't say that.
Hunter Bick
01:11:04
No. I mean, you can, but no one's gonna believe you.
Bill Fairman
01:11:06
No
Jonathan Davis
01:11:06
One no, no price's
Hunter Bick
01:11:07
Gonna use that. Yeah, no, no. Good lender will buy it. Yeah. Yeah. And so, you know, the commercial real estate is valued on the operating income, the, the, the net operating income, the noi, and that's the game. And depending on the deal, it could be that could be through, you know, buying an empty property and fixing it and, and leasing it to market. It could be cutting expenses from mismanagement. It can come in many different ways. Yep. And you know, a lot of 'em, the CapEx, some of them need so much CapEx that doesn't generate revenue. Like we looked at one where capital
Jonathan Davis
01:11:40
Expenditures, things that you have to do to the property is what CapEx is. Yeah.
Hunter Bick
01:11:45
Thank you. Yes. And so, but there's different types like roofs, structures,
Jonathan Davis
01:11:52
Hvac,
Hunter Bick
01:11:52
H H V C
Jonathan Davis
01:11:53
Sales things don't add value because people expect a roof and they expect, you know,
Hunter Bick
01:11:57
Exactly. A lease is a two-way document and these things are supposed to work per your side of the leasing, the lease contract. And so you don't get bonus, you don't get anything for that. But if all of the, all of the CapEx that a property needs is unit upgrades or improving the landscaping or the curb appeal or things like that, those things drive value immediately. And that, and so you ideally you want properties that have new roofs and new parking lots and don't need structural work. Yep. And you can just go renovate doors. Now all your CapEx money is going to where it makes the biggest difference. Yep. And so you can see any combination of that. Some, you know, some deals work, some people don't. But you know, that's definitely something to, to look for.
Bill Fairman
01:12:41
And and your typical business model is essentially whatever the, the best deal is. Right. It's not just about buying hold, it could be buy or renovate and sell at the same time, depending on the high
Jonathan Davis
01:12:55
Best use for the
Bill Fairman
01:12:56
Property. Cause there could be some great offers that are coming in. Yeah,
Hunter Bick
01:12:58
It could be. Yeah. You know, when we go in, we, we don't want to be married to a particular exit strategy. Sure. You know, and so if, if the deal only works, if we can turn around and sell it in a year, 18 months, probably not gonna do it. Right. There have been a couple, there would, I can think of a couple exceptions to that, depending on markets and different types of assets. But in general, like, you don't wanna be locked in to one path because if that one path doesn't work and you're gonna, if if it doesn't work and you're gonna lose money, that's tough. That's not a situation you wanna be in because real estate's illiquid, it's expensive to sell. You don't wanna be in a situation where path A you lose X and path B you lose X times two. That is not a situation. Our job, my job is to keep us outta that situation. Right. So everything we do, we wanna be able to have the option to refinance it. Yeah. We
Jonathan Davis
01:13:48
Sell it. Absolutely. Yeah. That's, we talked about multiple exits always. So why, why is Hunter here on this show for emerging markets? That's because when I talk with him and his partners, what's really important and what they're really good at is sourcing deals and underwriting deals. So much so that like, you know, in 2018 they were, you know, in Fayetteville before a lot of people got into Fayetteville. And what we want to talk about is, Hunter, what are some of the metrics that you look at when you're underwriting a, a project or a property and maybe it's in a, you know, a market that you're not familiar with or you're thinking about getting there, or it seems like it's a great deal, but, you know, what are the metrics you look at for those particular markets?
Hunter Bick
01:14:38
Sure. Yeah. So the first thing we, the first thing I wanna look at for any deal is the rent roll, right? Is I wanna know where are these rents compared to the average or median in that market, right? You look at some markets where maybe the rent roll 600 bucks, it's like, okay, well that, that could be high, that could be low. It depends on the rest of the market, right? Yeah. And so then the, you know, the, the second thing, if it's a new market, we wanna see rent to median income. Yep. Where, how low are the rents compared to the median income? And if you look at, But that only matters if you look at a bunch of other cities too, right? Everything's relative. So when we were looking at Fayetteville, for example, in 2018, Fayetteville's rent media income at that time it was like 18%. If you, Charlotte was like 32, all these other cities were like high twenties, like Raleigh times 20,
Jonathan Davis
01:15:24
They're 25 and up.
Hunter Bick
01:15:25
Yeah. Yeah. They're all 25 up. And then here's Fayville, like all the way at the bottom, like way below like every other, you know, 30 other cities. And we're like, okay, clearly the media income in Fayetteville can support higher rents, you know, in the near
Jonathan Davis
01:15:38
Future. And, and in rents to median income, it's, it's just a, a hunter's way or someone who's buying multifamily or lender. It's the same way as looking at like your debt to income. That's, it's it's the exact same thing. So kind
Hunter Bick
01:15:52
Of at scale it's
Jonathan Davis
01:15:53
Yeah, yeah, exactly. At scale. So it's instead of an individualized debt income, it's a generalized debt to income for what are the average people making and what are the average rents. Right?
Hunter Bick
01:16:02
Exactly. And so, and, and so then, so you wanna have an idea of not only where, where are rents at this particular asset, relative to this particular market, but what higher risks can this market in general support? Yeah. So that's kind of the by far away when you,
Jonathan Davis
01:16:17
When you 18% you think could
Hunter Bick
01:16:20
Rise. Yeah. Yeah, it could rise. Absolutely. Yeah. When plenty of other cities are sustaining at 30, right?
Jonathan Davis
01:16:25
Yeah. But when you see something at, at 28, you're like, hm. You know, Yeah. It might rise a little bit, but there's not a lot of potentially a lot of meat
Hunter Bick
01:16:32
There. And it may not disqualify it either because even, let's say, let's say it's a 28 or 30 for the market, but this particular asset is still $200 below the average in that market. Still a great deal. Right?
Jonathan Davis
01:16:43
Exactly. Yeah.
Hunter Bick
01:16:44
So, you know, so you wanna, you just wanna have the perspective of all that together. The other, the other big one of course is what kind of employers, what's the job base? How stable are these jobs? The case with Fayetteville and you know, we tell the story a lot, but so many people told us we were crazy to be buying in Fayetteville because obviously Fort Bragg is in Fayetteville. That is the biggest military base on the planet by far.
Jonathan Davis
01:17:10
By personnel. Yeah.
Hunter Bick
01:17:11
Yeah. By, by by count is 45,000 active duty soldiers. It is the home of the US special forces and, but then there's another like 30 or 35,000 civilian contractors that work on that base every day. So obviously that's a key economic driver of Fayetteville. No question. They also have a lot of healthcare, higher education. They have other job, the other industries that are doing well and growing. Yeah.
Jonathan Davis
01:17:37
This their support systems all around for for that.
Hunter Bick
01:17:40
Yeah, exactly. So people were like, Well, you're crazy mother, what if Fort Bragg goes away? It's like, okay. It's like, can we talk in probabilities please? Because okay, sure that might happen. But what is the probability of the US government moving the biggest military base on the planet out of fort away from Fayetteville? Why would they do that? That will probably never happen. So, I mean, I'm a former poker player, everything's a probability to me. Let's put a probability on this point. Oh oh 1% maybe? Sure. Maybe oh oh two, maybe oh two. Perfect. I can model that. Yeah. Great. I'm willing to take that chance to buy something that is half off. Yeah. That is half, literally half of what this asset is worth all day long. Yep. No problem. I'm happy with that risk.
Bill Fairman
01:18:25
Now do you still have that asset?
Hunter Bick
01:18:27
We actually did sell that one. Okay. That one we 10 31 into try house. Oh
Bill Fairman
01:18:32
Nice. Now let's start at the beginning. What'd you pay for it
Hunter Bick
01:18:37
For? For Apple Applewood. AK metal metal 0.2 million. Right. 2 million. And then
Bill Fairman
01:18:43
And you sold it, You exited for what?
Hunter Bick
01:18:45
Four three. Four four. And
Bill Fairman
01:18:47
You did that and how many years
Hunter Bick
01:18:50
Was it two years? Yeah, it was 18 months. 1818 months was 18 months was 18 months. I think it was 18
Bill Fairman
01:18:55
Months. So not a bad roi.
Hunter Bick
01:18:58
No, that's going, That's going. Yeah. I wish, you know, I wish all of them were as easy to underwrite as that one and that one, you know, our thing with FA too is like the cash on cash yield for buying doors at 40 grand a door in Fayetteville when the rents were like 700 average, the cash on cash was ridiculous. It was like almost double digits, right? Yeah. And so we were like, it is only a matter of time until bigger institutions who already love North Carolina noticed this. Yep. And these properties are gonna bid up like crazy cuz the cash yield is so good. And so we, everything we could find under, I think under 50 a door, like we bought a couple hundred doors under 50 a door and we didn't say no, whatever it was, we just, we said we had figure out to own this and that's what we did. And just a couple years later, man, I mean a hundred a door on average, I've seen things straight for 1 25 a door in Fayetteville. Like Yep. Decent bs not even a's or anything. The A is over 180. Yeah. You know? Exactly. So that did end up happening. So we were fortunate there, but trust your analysis, you stick your guns
Bill Fairman
02:20:00
As these larger markets and, and even Charlotte is not exactly a major market. It's approaching one, but it's the largest market between Atlanta and say DC Yeah, right. So we'll, we'll
Hunter Bick
02:20:13
Call it And multi in multifamily is a major market though.
Bill Fairman
02:20:15
Yeah. Well, we'll call it a major market. That said, how do you, how do you find or how are you marketing to get properties in these smaller tertiary markets?
Hunter Bick
02:20:28
Yeah, I mean really just building relationships. You know, one of our partners, you don't know Margaret, do you, We don't only do much, you know, one of our partners, his, his primary focus is, is our deal sourcing. And without, you know, we talk about this a lot, but without a deal that has a lot of money, you know, money made on the buy basically like built in equity off market has a lot of upside. Once you fix the problems, you can, you can come up with the most brilliant financial strategy in the world and you can be the best operator once you own it. You can be the best operator in the world and you can have the best construction crew in the world, but none of that's gonna matter if you overpay for a deal. Sure. Like you can't engineer your way into a great return if you're overpaying at, at the beginning. And so, but do we always
Bill Fairman
02:21:16
Say you make your money on the bank?
Hunter Bick
02:21:17
Hundred percent. Absolutely. Even
Jonathan Davis
02:21:19
In multi-family money. Even in
Hunter Bick
02:21:20
Multi-family or you
Jonathan Davis
02:21:21
Have forced appreciation because you can only force that appreciation based off of the cap rate, the capitalization rate in that area. And you can only force it to market rents and maybe slightly above. So it's, there's, there are limitations even there.
Hunter Bick
02:21:37
Absolutely. And, and so, you know, we realized pretty early we're like, look, we have to have, we have to be able to find off market deals that need a ton of work and have a lot of upside. And and that's really, that's really where it starts and makes
Jonathan Davis
02:21:52
Me think of what's, was it that one off of Arrowwood
Hunter Bick
02:21:56
Victory aka Greenwood Village Town Homes.
Jonathan Davis
02:21:59
That's okay. Greenwood. Yeah. So this was in Charlotte and what was it, 24 units, is that right? 24
Hunter Bick
02:22:07
Doors, Yeah, 24 doors. Town
Jonathan Davis
02:22:08
Homes. And
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