By Harman Nagi and Anish Patel

Justin Smith | Student Housing and Construction Expert

Justin Smith is the CEO of Relequity Enterprises. His broad experience spans student housing, development and construction, and large multifamily syndications

• Cooler inflation!!: Personal-consumption expenditures price index, rose only 2.6% in December from a year earlier, far below the 5.4% increase at the end of 2022.

  » Implications: This latest report improves the prospects of rate cuts later this year.

• BIG Bet on Single Family Rentals: Blackstone agreed to acquire Tricon Residential, owner of tens of thousands of single family rentals, for $3.5 Billion.

  » Implications: Lots of perspectives on this online. On the one hand, more institutional money pouring into the single family sector will drive valuations higher. The Blackstones of the world have access to much cheaper capital than Main Street, not to mention fully vertically integrated acquisition, rehab, and management capabilities. On the other hand, institutional ownership of single family rentals is still a relatively small percentage of the overall market, so may not have as drastic of an impact at the national level.

• Huge supply influx: Nearly 672,000 apartment units are projected to be completed in 2024, according to RealPage, the largest growth in supply since the Nixon era.

  »Implications: While this sounds like a major headwind for rental growth, this article doesn’t account for the fact that while absolute supply growth hasn’t been as high since the Nixon era, the US Population has grown by over 60%. Furthermore, new supply is falling off a cliff given so few developments broke ground in 2023 given development costs rose so significantly last year.

It’s not how much you make but how much you keep

This incredible chart shows how even a total household income of >$500K can contribute little to wealth growth without the right approach to personal finance. The OP is a joint couple in their early 40s with 2 children under 4 years old working at Fortune 500, non-FAANG tech companies.

From Stressed Out Investment Banker to Real Estate Retired

By Harman Nagi

He bought his first rental property in 2017.

Now he’s real estate retired, passively managing 90 units across 64 properties in 6 different states. 

And he got started not just out of state, but out of the country while he was living in London. 

It Starts With One

A journey of a thousand miles begins with a single step. Likewise, a real estate empire starts with one property. In Nikhil’s case, it was an 8-unit in his hometown of Rockford, Illinois. The property was on the market for $625k. Being an infrastructure investment banker who worked on 30-year discounted cash flow models for airports, toll roads, and other large capital investments, Nikhil eagerly put his financial modeling skills to use. He forecasted how different population and GDP growth scenarios for Rockford and varying inflation assumptions would impact the deal outcomes. He basically built a municipal development plan for Rockford!

Having analyzed the numbers forwards and backward, he couldn’t make the deal work for more than $450k. He almost didn’t move forward, worried that the broker wouldn’t even bother submitting such a lowball offer. But he did move forward, the broker did submit the offer, the seller accepted, and the rest is history: he went on to buy three more deals in his hometown within three months. 

Looking back, Nikhil says his model was “best practice but overkill” – he didn't need to overanalyze; he needed to take action. Unless you’re buying large commercial real estate, real estate math is actually pretty simple and in fact the deal should be able to pass the napkin test. 

One of the key lessons Nikhil learned from the first deal was the power of equity creation in real estate. The property manager installed water submeters and billed water usage back to his tenants, saving $35 per unit per month. This seemingly simple change had a remarkable ripple effect on the property's value, adding $40,000 to its worth! Multifamily buildings are valued on a multiple of income, so $35 per unit x 8 units = $280 per month = $3,360 per year = $40,320 at the prevailing 12x price to earnings ratio in the market! Ben Franklin said “a penny saved is a penny earned” but in real estate a penny saved can mean thousands of pennies earned!  

Across the Pond to Across the States

Many aspiring real estate investors find it hard to imagine investing out of state, but Nikhil did it while living in another country! 

In 2017 when he was a junior banker living in London, he realized he may not be able to keep working at the same unsustainable pace forever so he set a goal to invest in real estate by the end of the year. Why real estate? He did analyze other paths such as long-term index fund investing; while that would have been a lot less work, it also would have taken a lot longer to reach the financial freedom he desired. He wanted the freedom to make working an active choice rather than a necessity, so he was willing to put his nose to the grindstone (on top of what is already a very demanding career!) to make it happen. 

Like many real estate n00bs, he started binging the BiggerPockets podcast and listened to pretty much all 300 episodes that had been released at the time. He would be in work meetings taking notes on one side of the page, and simultaneously doodling about real estate on the other side. 

How did investing from overseas make it harder? Nikhil says it was challenging working with US lenders and trying to show them how much income he made, having to walk them through currency conversions from British pounds to dollars (one lender asked “do they even speak English there?”). And of course, not being able to go and visit every property in person meant relying on counterparties for information. But he leveraged the advantages: being 5 or 6 time zones ahead, for example,  allowed him to do phone calls during the US afternoon away from work. And while Rockford IL wasn’t exactly a booming metropolis, being his hometown it was a known entity which made it so much easier to get started. No one becomes financially independent from their first deal, so at the end of the day it doesn’t matter what market or asset class you start in, all that matters is that you do start and make that first investment. 

Once the Ball Starts Rolling Down the Hill…

Once you get started, one thing leads to another. After doing a few deals, Nikhil connected with an experienced investor in Phoenix who was doing lease options. A lease option is a rent-to-own contract where in addition to paying monthly rent, the renter pays an upfront option fee for the chance to buy the property down the line. The investor was working on a deal and needed cash quickly to close it. Nikhil went out on the ledge and lent him money. The deal ended up being successful, but even more importantly, a couple of months later the investor called and said “Hey, I have another deal but don’t have the capital, do you want to do the deal yourself?” Again, Nikhil went out on the ledge and took down the deal. 

That one connection ended up leading to another new market and new strategy. Nikhil went on to successfully deploy the lease-option strategy another 10 times in Phoenix. The buy-box was straightforward: buy a house in an exurb like Casa Grande for around $100k, put $10-20k of rehab into it to yield an ARV (after-repairs value) of ~$150k. Then rent it out via a lease option and refinance at 75% of ARV. 

Lease-options are great for a couple of reasons:

1) You increase cash flow, since in addition to the monthly rent you collect an upfront option fee

2) You don’t need a property manager! The renters are hoping to buy the house once they save enough for a down payment and/or clean up their credit. So they take care of the house like they own it, because they do in fact want to own it. This means lower repairs expenses, and saving the 8% of rent that property managers charge.

3) Lease options are typically 3-4 years, eliminating vacancy.

Property Managers: Love 'Em or Hate 'Em, Here's How Best to Use Them

Most people get into real estate for the cash flow. Nikhil was no exception. 

So in AZ he self-managed to save on management fees. But after getting to a couple dozen units and entering another new market (Tampa), his bandwidth was maxed out. So he hired Filipino virtual assistants; paying $5/hour to overseas VAs was more palatable than 8% of total monthly rent to a third party management company. 

What he came to realize though was that while you may save on fees, you pay for VAs through your time: you have to train the VAs, you have to manage them. What’s the opportunity cost of your time? You could save $1500/year on management fees, but not have the time to take on another value-add deal that could net you $100k of equity in a year. Cash flow pays your bills, but equity makes you rich. So in August ‘23 he decided to fully outsource property management. Rather than trying to do everything yourself, let someone else handle the transactional parts of the business so you can focus on the needle-movers. 

School of Hard Knocks

Pull back the curtain on any success story, and there are going to be failures, or rather, lessons learned the hard way. Nikhil was transparent enough to share a couple of his.

Being penny-wise and pound-foolish: real estate is a long-term game, so you have to focus on the pot of gold at the end of the rainbow rather than the lucky charms at your feet. We already talked about him skimping on property management. Similarly, when the pandemic hit in spring 2020 Nikhil just knew that the Fed’s actions would have inflationary consequences. He had an opportunity to take down a value-add deal, but he would have had to leave around $5k into the deal after the refinance, and he estimated the deal would “only” yield $300/mo cash flow versus his $500/mo target. So he passed on the deal. A year later, that house had appreciated in value by more than $100k! In his short-sighted focus on $500/mo = $6k/year cash flow, he passed up the bigger opportunity for $100k of appreciation. 

It’s a people business: It’s the people involved that make or break the deal. In a value-add strategy, the #1 point of failure are the contractors. Dealing with bad contractors on some of his early projects taught a lot of hard (and expensive) lessons about the importance of assessing each person’s competence and honesty when dealing in real estate. These days, he spends as much time on people due diligence as property due diligence. The other week he got a 17-property deal in contract, and immediately took a red-eye from Oakland to North Carolina on a Monday night, and returned Tuesday night. It was exhausting, but being able to meet the contractor face to face and go through the rehab plan in detail will save lots of headaches down the road. 

Real Estate Retired

What does he do with his days now that he’s “real-estate retired”? He’s not just sitting on a beach 365 days a year, he wants to continue growing his real estate portfolio. So to prevent meandering and social media doom-scrolling, he schedules out each day so that there is something to do pretty much every hour. But he says, “the most important thing is those to-dos are mine, not dictated by anyone.” In his words:

I have a day each month with one of my kids. We drop the other kids off at school, and then do something that that kid will uniquely enjoy. My seven year old is passionate about animals, the five year old is already a budding foodie, and the four year old is full-on into superheroes. A lot of the weekend activities are constant compromises between the three, but that dedicated day is just for one. It's a game-changer for building a stronger bond with each child and for knowing each one better.

We take family vacations roughly once a quarter and I truly unplug. Over the years I worked a lot while being "on vacation," to the point where I was basically hanging out on the phone/laptop near my family for a few hours each day. Roughly once a year I would have to fly back early for some client meeting or whatever, leaving my wife to finish off the vacation with the kids. Now when we go on vacation, I relish setting the phone on DND for several days in a row.

I also now exercise six days a week for about an hour, whereas most of my adult life I was pretty proud to get to the gym on a Saturday morning. All my health indicators are much better vs when I was in banking.

Finally, I'm reading a whole lot more. I'm averaging about a book a week.

In addition to having control over your time, being real-estate retired gives you the freedom to work on what you’re passionate about, rather than having to work for money. For Nikhil, this means merging his background in finance and real estate with his passion for staving off climate change. He’s working on financing for industrial-scale precision fermentation facilities, and shared pilot/demo scale facilities for precision fermentation startups (kind of like a WeWork for lab space but with specialized equipment to save startups significant capex). As venture capital for climate tech startups has dried up in recent years, he hopes to make a dent in the funding landscape since addressing climate change is getting increasingly urgent. More to come on this in a future deep dive! 

→ Get in touch with Nikhil at his LinkedIn!

→ Do you have a story to share, or know someone with an interesting store we should feature? Reply and tell us! 

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The views and opinions expressed in this newsletter are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Please contact your legal, tax, and financial professionals before considering any investment.