The daily lives of a real estate developer and investor have some overlaps. There are key differences that distinguish them from each other. Scott Choppin is the Founder of the Urban Pacific Group of Companies. He will walk us through his journey as a real estate developer. He will also discuss his new housing innovation called Urban Town House. They have a historical internal rate of return of 22.66%.
“Being a real estate developer is, it’s different than being a real estate investor. I, always sort of put those together, but more recently the last few years, I’m really thinking that they’re distinctly different, different skillsets, although there’s overlap that’s what, so sometimes has people think that, they’re, they’re the same or similar. And so really as a real estate developer, and particularly going through the 2008 recession, it really taught us a law of, good and sometimes hard lessons. And one of those lessons was to not compete in a space where everybody else is competing. Product type locations, geography, unit design, unit type, those kinds of things. And so, in 2016, 2017, we were finishing a group of projects that were ended up being very successful, but they were in a specific product category.” –5 Talents Podcast
To learn more about being a real estate developer and IRR, click here.
Scott Choppin: If you self-selected to be an entrepreneur, you have the capability to take risk and the stomach for it. Then what you got to do is pair that up with, getting the crap beat out of you and learning hard lessons. You don’t do that again. And, use people, mentors, internships, joint ventures, have other people’s mistakes, inform how you do things and you don’t have to pay for them yourselves.
Abel Pacheco: Hello. Hello. Welcome to the five towns podcast. I’m your host, Abel Pacheco. I interviewed the top commercial real estate investors and industry experts. So you can learn from their experiences. If you’re an investor, a high W2 earner, or real estate or tech sales professional that wants to invest in real estate without having to manage properties or leave your day job, then this podcast is for you, or if you are ready investing in real estate, but you’re doing it part-time and you want to become a full-time multifamily or full-time commercial real estate investor. This podcast is for you too. You’re going to learn a ton. You will learn from real-life multi-family investors and other professionals in the industry. They are going to share their blueprints for success, and I’m super excited that you’re here. I hope you enjoy the show.
Abel: Hello. Hello, Abel Pacheco here, your host for the five talents podcast. We are super blessed to have just an amazing guest, Mr. Scott Choppin. Scott. Thanks a lot for joining.
Scott Choppin: Great to be here. Abel appreciate the invite. Happy to be here.
Abel: Thank you very much. The pleasure is ours. I think you’ve had a tremendous background and talking just briefly before our show, I know our guests are going to see or have a lot of insights and wisdoms from the conversation that I know we’re going to bring on. I’m excited about that. So if you don’t have Scott, let me at least say a few things about him and tell you his quick bio, and then I’ll let him introduce himself. Scott is the CEO and founder of the Urban Pacific Group of Companies and their Long Beach-based California real estate development company. We’re going to talk about some construction, which is cool.
They were founded in 2000 and they almost exclusively work on rental housing communities throughout California and the Western US. And they’ve created some new housing innovation that they call it UTH which is Urban Town Houses, which they basically do a lot of the similar things on the funding side. They put private capital with some middle-income multi-generational rental housing, and they’re providing some really strong returns for investors. I’m excited to talk about some of these really nice 22% IRR yields that you guys are producing. And Scott, you’re the man. Let me turn this over to you. Tell us about yourself in your own words. And we’ll just start the here, my friend.
Scott: I appreciate it. I grew up in a family that was involved in the real estate development business. It’s not a career you’d necessarily, figure out the early years of, learning that you want to go do. It’s an obscure, career choice. I grew up around, it had a background in it, got out of high school and worked in the construction trades for a few years, for about three years, which, taught me about construction and also informed me, I didn’t want to be doing physical labor for the rest of my life. And at 18 years old, I came across a series of books about real estate investment that you’d say; ‘Hey’ the guy grew up in a family of real estate developers. He must know all about it.
And that’s, not correct because I saw what I saw my family and I went to see projects, but that didn’t teach me how to do deals and be an entrepreneur. And so this book sort of opened up, it was one of those classic fifties books, invest in real estate on the weekends and make a million bucks. But what those books showed me was how to, how deal-making was done, How to buy low and sell high. It sounds ridiculously obvious, but, when you think about it, you go, well, how do you make money? Do you need to make money? And I was very fortunate at 18, 19 years old, I worked in the trades. I figured out I was not going to produce the financial ambitions that I had for myself working in construction grade.
We worked with a lot of construction people, good folks, salt of the earth, very valuable, but it wasn’t going to be my career choice. In fact, I’ll tell a funny story. So I’m working on one of these apartment projects. So my construction career started in apartment buildings, building new construction and nothing related to my family, but the developer of the project role that and nice car, wearing the suit and tie, pointing, bossing people around. I go awe, I know who that dude is. I didn’t know him personally, but I know that guy.
Abel: I know who that guy is.
Scott: It was an epiphany for I go that’s what I want to do.
Abel: That’s the guy.
Scott: That’s, I wanted to be that guy. And so that was pretty informative, really, that set the path for me for the next, several years of, getting a college degree and working professionally for major development, nationally recognized development companies and then ended up in 2000, leaving my professional career to start Urban Pacific. And now that will be 21 years in March operating this company.
Abel: That’s awesome. And the rest is the history, my friend, the rest is history.
Scott: A lot of worse stories in there that I’m, I’m going to ignore for the moment.
Abel: That is awesome. And if you want to hear more about Scott’s background, Scott’s done a ton of podcast interviews, 60 something, so you can just hit the old Google machine and, dig into a little bit more about how he got here, but that’s just a tremendous swallow, I think so many of us, we don’t really know what we’re getting into when we say I want to be that guy. I want to own these apartment buildings. I want to be the commercial real estate investor. You don’t really know until you’re actually doing it. And for 20 years now you got an idea.
Scott: We’ve figured out a few things made, as I put it. We’ve deposited it, a fair amount in the bank account of experience, but it’s all good. We’re loving. I frankly wouldn’t choose anything else. Well, it’s the most challenging career I know of…because developers have to do so many different things, politics, construction, financing, design, markets, economics, I’m a person who’s relatively restless. Switching, going from talking to a council member to talking to the bank, to raising capital, to designing buildings and figuring out that economic cycle, frankly, I wouldn’t choose it any other way.
Abel: And that’s awesome. I love it. I love your description of it. That’s so amazing. I would have to say I’m an, I’m going to opt-in. I want to do the same. I’m younger in that, in that career of my ten years cycle as you. I hope to look back on it 20 years from now and say, that was amazing. And, that’s, that’s awesome, man. I would describe myself as a second-generation real estate investor as well. And my dad did nothing like what we’re doing, now he had one rental property and he was a, he was an investor and I’m the second-gen. And that’s awesome. So you have kids?
Scott: I do. I have three. 19, 17, and 13. The two oldest are boys and my youngest is my daughter. Jenna.
Abel: Are they in the business or they kind of in the, in the background or what?
Scott: My oldest, Sean Patrick is 19. He’s actually at USC right now. And he enrolled in what’s called their ‘be read’ or bachelors of real estate development. So they actually have a major on the real estate development. I think he’s figuring out what he wants to do. He has certain ambitions, he wants to be successful. Obviously, you’ve seen the background and the real estate development world. Like kids do, I was the same way. It’s sometimes you go, I don’t want to do that. My parents do it. I’m going to do whatever is opposite. I think, Sean Patrick has aspirations to be in the investment world versus development. I’m here to be a resource for him and guide him. He’s got to be the one who figures out what his ambitions ultimately going to be.
What his objective is. My main thing that I tell my kids is in this environment, we’re in, in this economy and this, where we are in that, technology early development and you really being an entrepreneur I think is going to be critically important. And, things like competitive learning practices, you can’t graduate from high school and even college and just call it good. And, and I don’t need to learn anymore. In fact, what I tell my kids is your college career starts, you’re learning. Now, that’s where I’m going to help them most. In fact, what I tell them is I got all the stuff. I took me a long time to figure out, I want to give to you earlier. You can figure out long before I did, took me years in some cases.
That’s the story we’re in at our house about, career choice and learning. Even doing your own development project, you mentioned earlier, it’s a high-risk, high-reward business, people who are new, make more mistakes and people that are seasoned and even seasoned people still make mistakes. And so I’ve come to my career, arriving at the fact that whoever makes the least mistakes wins and produces the most profits. It’s, it’s a harsh way to think about it, but it’s true.
Abel: A hundred percent.
Scott: In fact, what I work on predominantly right now is, forming and developing teams and systems and practices and new innovations that like we avoid, major mistakes. There’s always going to be little mistakes, what I call friction inside the development process.
But, for anybody who’s listening, who’s, earlier in their career as an investor developer, know that about yourself, you’re young. If you self-selected to be an entrepreneur, you, you have the capability to take risk in the stomach for it. Then what you got to do is pair that up with, getting the crap beat out of you and learning hard lessons. So you don’t do that again. And, use people, mentors, internships, joint ventures, have other people’s mistakes, inform how you do things and you don’t have to pay for them yourself.
Abel: I love that. I think that’s a so key. I realizing the team aspect in commercial real estate is just so different than I did single family run for 10 years. And we got up to eight properties in the portfolio and it was me and my wife and we weren’t really bouncing any ideas off of anybody because nobody really, was going to help guide us through or cared about it or whatever. And then the commercial real estate side, I go, well, man, there’s absolutely a way to kind of partner and put everything together. And, I was telling somebody the other day, I don’t remember who, but I don’t know how to sit in an apartment complex. If I was in a front office, sitting in the chair and somebody new came in and renters and showing up, I wouldn’t know what to do there.
But the thing is, you don’t have to, you build the team and amazing team. And on the construction side, there’s architects and engineers and there’s somebody to help you with the MEP and a radon, the appraisals environmental. You’re, I don’t know, there’s experts in every one of those areas that. And it comes in and, and that’s, the best team possible, best team formed least amount of mistakes along the way. And you’re going to win. That’s awesome.
Scott: I’m right with you. I used to, probably did you just go, I’ll go learn. I got to do this thing. Research, learn, read books, watch videos and I mean still do that, but I do more of that in the innovation and new trends and economic cycle side. Big, big picture economic strategy, if you will. And right now, when it’s something new, I’m right with you, I’m not going to do it. Who do I know, or who can I find or who knows, who knows? And really it’s a very dramatic change from I think what we’re taught in school. And even our culture in the US is Maverick. Lone ranger, I’m going to do it myself.
And I’m going to go to the top of the Hill with the machine gun and I’m going to kill the enemy and save the day and save everybody. And that’s cool. I love this, into that narrative as much as anybody, but the reality is two people are better than one, three people are better than two. Brains and thinking and action are, amplify through working with others where, lone rangers, a weak position to be in, trying to do it on your own and by yourself is the weakest configuration that exists. Everybody don’t do that.
Abel: I think maybe dive into what you’re doing today, UTH, serving town homes, houses, and then how you do it development, just take us through a little bit of education, man. What’s a day in the life of.
Scott: Being a real estate developers is, it’s different than being a real estate investor. I, always sort of put those together, but more recently the last few years, I’m really thinking that they’re distinctly different, different skillsets, although there’s overlap that’s what, so sometimes has people think that, they’re, they’re the same or similar. And so really as a real estate developer, and particularly going through the 2008 recession, it really taught us a law of, good and sometimes hard lessons. And one of those lessons was to not compete in a space where everybody else is competing. Product type locations, geography, unit design, unit type, those kinds of things. And so, in 2016, 2017, we were finishing a group of projects that were ended up being very successful, but they were in a specific product category.
And that was studio and one bedroom product and a downtown location. Earlier you were talking about, knocking over three stories, think podium stuff. In fact, it’s going to match a couple of pictures into your background, but, think four or five stories over a parking structure below. Urban downtown stuff.
Abel: It’s cool.
Scott: And great product type, very much matched the millennial demographic that was coming out into there, newly renting apartments lifestyle, or part of their life cycle and great product. But here’s what happens when you have that sort of economic, movement. Demographically, all your competition recognizes that too. So, all the big guys come in and everybody gets into that same space. And so by about 2016, 2017, we had started 2011 doing a series of projects by 2016, the market had come to that space.
Everybody was in it all the big guys, Trammell Crow, Grant Hall and Partners, JPI, all the Alliance all the big guys. And so that by itself was a signal to me to look at the marketplace and go, do we need to do something different? Because everybody’s piling into that space. And in that 2011-2016, we’re still coming out of the recession. There’s a lot of growth. A lot of people are still, sort of moving into the apartment sector. And, it’s only accelerated even the last few years, men, that was just for us, in 2016, we sold some assets and it gave us a chance to look at what do we do next? What’s the next, group of projects, and do we want to do the same thing?
And really it started to really appear to me that we didn’t, we needed to make a different move. And so we sold off our last group of the assets and late 2016 on the capital markets were going through some sort of a flat spot. I call that where lenders and equity investors are, the market’s is really good right now, maybe this is at a point we need to pause. I was saying that they were saying that that was another thing that informed me. We started looking around for different product type and, didn’t have necessarily, we knew we wanted to innovate. We knew we wanted to be contrary and do something different. We didn’t know what that was going to look like. But I, we ended up buying a piece of ground in downtown Long Beach, actually from the City of Long Beach where we’re headquartered and we bought it really well.
Not right in the central business district of downtown, but let’s say one sort of neighborhood outside of it’s still downtown, but not that central core. And this site, basically, we had the ability to develop a certain number of units. We are limited on unit count for density, but the zoning allowed whatever unit type we wanted within that. Whether you did a one-bedroom unit or something different, you could still fit it. And so this site sort of lends itself to doing a bigger townhouse rental unit. We can fit a four-bedroom townhouse unit in there. And I said, okay, to the architect, let’s go, we can fit it in there. It’s something different, interesting revenue generation story. A one-bedroom would get, two grand a month, four bedrooms should get more is it, 2500, 3000, 3500?
What’s the story there? And so we did that project and it was key for us that we bought the land so well able, because we could basically experiment. And even if the thing went bad, we would still do okay. We’re sort of break. Even worst case was break even. And it gave us the capability to do this experiment. Well, it ended up basically that the four-bedroom units were a two-story townhouse with a two-car garage, four bedrooms, three bathrooms. And that was pretty, a typical ended up. We sold the building empty to an investor who wanted to pick their own tenants. Were fine. They wanted to pay cash. They were willing to wave the contingency of leasing up, which is unusual. And they went out there and they got 39 50 for the first unit they rented. Way above what we were underwriting. And so we’re dude, what did we miss here? This is, [inaudible 18:05] I even exceeded my expectations. And so this was it.
Abel: How many units was it? How many units was it?
Scott: It was a tiny project, was a duplex grand total of two units. Again, another, the experiment, if it went wrong, it was going to, and I’d never done it. Two unit project in my life, by the way. I’m happy to do it. It was, it was an interesting experiment, but that really was the seed project for what turned into the UTH program. So on the next project, we said, if four bedrooms is good, maybe more is better. Let’s sort of experiment more. So we sort of worked around a five-bedroom unit and I said, ‘hey’ can we do a six-bedroom?
Is that too crazy? What’s the deal. So we settled on a three-story townhouse, instead of two-story went up one level, we did five-bedroom, four-bath, still, two-car garage on the ground floor is still a townhouse, So your three levels are all your own same unit, a row home, it would be another version of it. And so we basically launched a series of projects in that what we named UTH or urban townhouse program. And the early projects, including the first one, we’re all a continuation of the experiment. I call it the test phase. The test phase was to do three things. One, can we build it for our projected price? Construction costs. Rising is always a story we’re all in as ambassadors and developers to, could we rent it for what we, underwrote.
This guy rented these units at 3950 or whatever the price was, we need to see is that sustainable? Can we do more of that? Was that a, just a, an anomaly and the guy was super lucky on, on a small project. And then the third is which, all your investors will and sponsors well, could we get the values that we wanted, Can we either sell it for the values that we project or in a refi to, we get the appraise values that we need to refight appropriately. And in the demonstration phase, the first four projects, we in fact prove that all three of those, like even above expectations. So, that 22.6, 6% IRR programmatically is over the first four projects as we built them and sold them. This experiment, we got bigger projects, we got more of them.
Once we demonstrated that it was going to be a model that we could sustain. We could trust that the numbers would work correctly, that we could build that, rent it and sell it or value it at the right price. I go, let’s do more of this. This is clearly a niche. Nobody’s doing five-bedroom, four-bath, by the way, able, at scale, certainly nobody at scale. And so go fast forward really four years later, bringing us to today, we’re in now and we finished those first four projects, sold the first three. And now we’re in a story as of about two years ago that we want to build and hold all of this for long-term. We don’t want to sell any of it because we think it’s so valuable. And so unusual a niche and, the families love the units they’re willing to pay.
They can pay. Now during coronavirus, it’s a roommate groups working from home. That’s a, that’s a big growth area. We’re actually in now eight projects, eight additional projects, all bigger projects. We’re growing the scale both in size and volume of projects. And then actually you’re the first all mentioned for show that I will mention this on, but we’re in process of putting together a 30 to $50 million real estate equity fund that will be specifically raising capital to invest in this specific UTH program. We build, develop, and hold in a portfolio really throughout California, up to $50 million worth of product, which, probably is going to be 12 projects, give or take depending on the size of the project. Our projects right now range from 15 to 85 units in that what we call now, the production phase. And of course, we want to get bigger projects, just more efficiencies, better cost production, better construction costs, that kind of thing.
Abel: All right on. Well, that sounds so exciting. A lot to, to kind of dive into and let me kind of go back to a few things that I heard at the very beginning. You mentioned that the geography, the market, the unit type, and the design, what led you to try to differentiate yourself? That sounds like it was absolutely key clutch along with the low, low price of land or the right price of land actually, you could do a little bit of experimentation, but you usually don’t hear experimentation and development or investing. We’re not experimenting for nothing.
So maybe talk a little bit about that. What were you seeing in the geographies, the market, the unit type design, and then what’s that, we’re going to, let’s try to experiment a little.
Infomercial: Hello. Hello. This is Abel Pacheco your host for the five talents podcast. After listening to a few episodes deep down, do you know that multifamily and commercial real estate investing is one of the best ways to create financial freedom? If you said yes to that question and you are where I was a few years ago, then I’d absolutely love to connect with you. A few years ago, I started personally consuming a ton of real estate education. I traveled all over the country as many real estate conferences and seminars that I could go to. I took 200 plus hours of real estate education. I spent thousands of dollars the way, and I did this because I knew the path to financial freedom for me and my family was through commercial real estate and syndication. So if you’ve made a similar decision, I’d love to connect with you and potentially in the future. I’d love to partner with you as well. Take a moment, go to 5tcre.com/invest. And I’d love to set up a time to talk.
Scott: Well, this goes back to that, I’m referenced 2008, and really in anybody who’s been through a recession, you really learn what’s oversupplied versus what’s undersupplied, That’s a key tenant of how I think about when we do new projects or new geographies or new locations or, or product type is what’s the competitive landscape. And is it oversupplied? You’re based in Texas and different than California. If housing costs or have rents go up, and values go up in Austin or San Antonio. Then people can buy land on the periphery and continue to build new. Or maybe they build in downtown. That happens in Texas too. But the market’s not restrained any other way other than the marketplace and rental demand and values. And so that gives the opportunity for oversupply to be created.
And developers are notorious for everybody descends in a marketplace and everybody’s trying to get while the getting’s good, you said, nobody wants to experiment and they go, everybody else is doing this. The crowd…. following the crowd as the thing and development. And so then you go, you learned from recession’s that when the crowd all jumps into a space and then the market turns against that space, either geography or product type or, whatever that market sector is, then you immediately expose what the oversupply is. Somebody is always last in, so you got downtown San Antonio and there’s demand for 2,500 units, developers descend, they do 3000 units. And the market turns, well that last 500 units or last thousand units, the last to arrive gets host.
It’s just, it happens. And so what I did was the opposite of that. I go look where everybody is going, where everybody is descending into that market in force, piling into a marketplace. And can we do something that’s still in demand, but is different, Because what happens when people start to think about going in a different direction than the crowd, real estate people they’ll go two things. They’ll go, either that different place that you’re going, it doesn’t have competition because there’s no demand there. That’s what a lot of investors will say. They go, you’ve got this niche, and nobody’s competing with you. That tells me that there’s no, there’s no play. There’s nothing to do there because there’s no demand. And that’s true. And so then the innovation comes into find a market sector that’s undersupplied but does have demand.
And, I didn’t give you, a lot of background info, but the first few years that I worked in the professional real estate development environment, I worked for a company that used to be called Kaufman and Broad. It’s now KB Home, big home builder. And the group I worked for was a division that built affordable housing. So rental tax credit, finance, basically true affordable housing. And that background gave me a view into the world of what it was for families to rent affordable housing. And big families, we used to build projects that have four-bedroom apartment units in the affordable housing projects, those things were always massively undersupply. We would build a hundred units and, 15 of them were four bedrooms and we had so many more applications for those four-bedroom units than we had units way oversubscribed, much more so than the ones and two and three-bedroom units. And so that always stuck in the back of my mind. I go, there’s these families that, of course affordable, income families at, or below 60% definitely need that. But if you think about it, the housing, market’s not building units for big families, it’s just not. And so if you’re a family of six or eight and your mom and dad, and maybe you have adult child living at home and three or four people are working and maybe grandma lives with you or in-laws.
And you look at the marketplace where you go, everybody’s doing studio one-bedroom units. So that family doesn’t even have, if they want a new unit, there is no place for them to go. Now I’m speaking specifically, maybe California is different than other markets, but the idea of multi-generational multi-bedroom units is not part of what the development marketplace serves up. And so that was really, I go, this two-unit project. Plus my background in affordable housing, I go, that starts to come together. And I go, there’s this interesting idea. I don’t know how it’s going to work. So let’s test it. We can’t screw it up too badly because we bought the land so well. But it really developed over time. This is probably a three-year process, but after a while, I go, here’s a middle income.
What we chose to do is go not true affordable. We thought here’s working class families that make 80 to 120% of median income. They make too much money to qualify for the true affordable housing. They’re over income for that. They don’t live in the sexy high rise in downtown San Antonio or downtown Houston or downtown LA because that’s a studio unit. They don’t afford it nor do they want to live in it. So their only choice is to rent a house or they live in more than one unit. Classically and so we said, let’s take this background and family housing that I had plus this unit that we’re experimenting on. And I go, we’ve got an interesting makings of something here. And then over the next couple of years, it really turned into this full focus and the creation of the UTH program to go look, let’s bring unlimited, virtually unlimited private capital to a workforce housing family.
And that’s underserved in California, high cost, and families are rent burdened above 30%, 50 to 60% on average. Here’s a really interesting social impact story with an under-supplied marketplace with relatively unlimited private capital. And that was really, I started from the story go ‘oh”, this is what I’ve been looking for to be doing something that, has a good social impact story can produce great markets for your turns, is in demand, low supply, The Tramwell Crows of the world. They’re not going to do five-bedroom units maybe ever or at least very limited. So we, we have this sort of, Warren buffet calls that a moat, It’s a way to compete in a way that keeps other people separate from you, they can’t, attack your program directly because it’s so different. Or you have some technology or some patent or some style of doing business that keeps people away. And I’m not sitting here and saying, we’re Bulletproof that nobody’s going to compete with us. We’re absolutely know they will. And so we’ll of course continue to innovate.
Abel: A lot of good insights there. Thank you so much, Scott, because you talk a little bit about the market supply and demand competition, sub-market cycles first to kind of understand or see the need. And then you guys were able to fill it. And then in other markets, obviously there’s always somebody at the tail end trying to get in and they get, you said, they get hosed with KB, Kaufman, and Broad. I think that’s a, we have KB, a lot of KB houses. I know who those guys
Scott: Actually funny story side note. In San Antonio, in the old days, there was a company called Reiko. Biggest home builder in San Antonio. And they had this production model of building single-family houses that was unprecedented manufacturing houses, their systems, and their production cycles. Actually, when I was at KB, they bought Reiko to adopt their model to other markets. And plus Reiko had this killer market share, the biggest market share in San Antonio, which, you live there and but great market.
Abel: KB every, KB is everywhere. I see all their signs everywhere. And that’s awesome. I think my first house was a KB.
Scott: That’s why you see their signs so many places because they took over the market.
Abel: That’s awesome.
Scott: They bought that market share, but good for them. It was a success.
Abel: And so a couple of the things that, to ask about as, as you’re talking about this competitive landscape, is, well, this is for our guests. Our listeners, if you are a passive investor or a general partner, and you’re trying to figure out, which market should I be, something from a supply and demand spot it’s, that that’s just the classic, spot where you want to be. And when you have demand, that’s high and supply is low, prices are going to increase. And so in this test, that Scott did with a piece of land and let me, let me try a couple, just a couple of units. You get this massive amount for a huge rental amount. Well, then that’s that proved to be the case. And then you saw it again with the KB in San Antonio, which was, you get all of these applications for these four-bedroom houses and you all, didn’t build enough or what, whatever.
So there’s another indicator and you’re looking at, you’re looking for those indicators of supply and demand, what is in demand and you are trying to kind of meet that, line on a curve a little bit. And that might be a little bit of your speculation, but can you talk a little bit about the other data points that you may use? Formal data points that anybody can go use maybe websites or tools or, and what are some of those things that I’m looking at to see supply and demand where they’re meeting
Scott: I look at it a couple of different ways and it’s a great question. Because I mentioned earlier in passing, I spent a lot of time now looking at very high-level economic cycles. I think macro big picture national, regional economic cycles, So that’s one thing to keep track of. And then you got to look at your local market both the cycle and also the competitive landscape. So I’ll give you an example. I think I was having a cold call with somebody. I don’t remember who, but basically somebody was just calling me to ask questions. They go; I’m working on this deal. I’m going to develop this deal. And what do you think? And ask them for some input. I was, you gave them some help. And I said, well, tell me about your design so that not, where, what not really important.
But he she said, well I’m doing all two-bedroom units. I go, why are you doing that? He goes, well, I thought that was right. I go based on what, I didn’t want to be a jerk about it, but I go, well what study did you do? And they go, I didn’t. I go, I talked to a couple of people and, looked around that seemed to be the right thing. And I used this example because it’s the classic, early-career or starter or new ambassador, new developer meet to think that what applies to the marketplace. And it’s exactly what you said about networks. Now you go talk to somebody who really knows about it. If you want to develop new housing, go talk to your broker.
And all the brokers in San Antonio who sell investment sales, multifamily, apartment assets, and ask them about demand, characteristics, what are the best-selling unit types. Projects that have two bedrooms and they sell well or is one better, or as a mix or whatever. So what this guy did realize, I said, do you understand that your two-bedroom unit happens to supply new units into the most pervasively available unit type in your marketplace, which has a lot of two bedrooms go, don’t do that. I’m not saying, go do five bedrooms. You don’t need to, what we do, ours is an extreme choice, but very much informed based on, data and background. And the move would be to go get stats, talk to your brokers. And by the way, it’s brokers who sell apartment assets because people go, I got a buddy, who’s a broker. I go, what does he sell? Single-family homes. Nope.
Abel: That guy.
Scott: You need your multifamily broker. Those are the guys, they know cap rates, they know operating expense ratio. They know, they probably know the rents. What’s new, what’s selling hot. Who’s coming into the market. Buyers and who’s selling in the market. All the stuff that you really want to know for this background and, or you can hire a company that does market studies. A guy my buddy, Rich Gollis at Concord Group and national recognize market study firm and hire them and go, I want to develop new department assets in San Antonio. What should I be doing? I’m thinking it’s two bedrooms, but what do you say? No, don’t do two bedrooms, dude. That’s the break competitive space. Maybe think about ones or threes or whatever, I don’t know, I’m making that up.
It’s definitely about networks. What I call it, networks of capability. Which is, who is the strongest information source? Maybe there’s eight brokers in the local community. Who’s got the best reputation who’s got. Who’s got the most sales? Who’s got the highest valuations in the sales? Those are the kind of people that you want to gravitate to and recruit them into your network. I’m new in the marketplace. I’m going to be building a new apartment buildings. If you help me underwrite these deals, I will give you the sale. When I go sell them, when we’re done, let’s trade. And you can crude that person market study guide, guess what he wants to do market studies and get paid for it. So there’s that thing. But you can do a lot of research on your own.
Interesting websites, you wouldn’t think of it. Zillow is a great resource for figuring out the rental market in a given geographic area. You can, you can draw the circle on the map and get, rental comps. In their local area or your city or whatever. A lot of those Zillow have good market reports. You can get market reports on rental rates and increases, decrease market trends for rental. You got to go to the bottom of the website and look for research, click on that. Now of course they’re for sale centric. So the vast majority of their data is about for sale. But if you sort of weed through it, they’ll actually have reporting on rental markets. In fact, Zillow’s probably one of the, because our product is so different. Abel, we can’t look on apartments.com and find a lot of five bedroom townhouses for rent.
It’s just not in the marketplace. So we use what I call alternative sources. Even something Craigslist we’ll do, we don’t use Craigslist per say, but we’ll use it as a gut check. What are houses renting for? Have you got a five-bedroom house? And we’re competing with our five-bedroom rental unit? Well, we want to know what that house is renting for now.
Of course, we’re always generally below houses in our rental rates. It’s on purpose. The, so there’s that. You got your local market info. That’s people, that’s networks of capability that some resources Zillow, CoStar’s a good, there’s a lot of multifamily market research that, CoStar’s very expensive. So if you’re a new investor, a new developer and you don’t necessarily want to pay for that, we pay for coach starts because we want to have that, that data. But I don’t really trust CoStar to be good rental comps for our product because it’s so off the scale on unit type that they just don’t have a good database and units and that’ll grow back now today we’re building so many projects instead of California, that we’re becoming our own set of comparable, we have our own database of our own project of rented and sold for valuation. So that’s sort of interesting. I haven’t had that before.
Abel: That’s awesome. This has been an amazing conversation. And I feel we’re just kind of scratching the surface, but maybe sometimes I would have to have you down
Scott: Abel, that’s a reason you can have me another time. How about that?
Abel: We host a weekly, Wednesday, 12:00 PM. Meet up maybe sometimes we’ll have you come be a guest.
Scott: I would love to do it.
Abel: And just do some networking afterwards and, meet some new folks, but at the same time. Share a little knowledge of what you have
Scott: That’s great. I love the Q and A, I don’t know if it’s a Q and A format,
Abel: It is, it is.
Scott: That’s the best, because people always have, well, I heard you say this thing, but my thing is different. That’s always such a powerful environment, so love to do it.
Abel: We’ll do it. Well is there anything I didn’t ask about anything that you wanted to bring some exposure to anything, definitely your name. Your name is Scott, your contact information, so, but anything else in general that you wanted to bring some exposure to
Scott: What I’ll do Abel is I’ll offer to your listeners. They can go to our website www. urbanpacific.com/eBook, and that will bring you to a landing page and sign up there and you’ll get the eBook. What we’re putting out right now is how to thrive and survive a recession, which I think is good lessons that we took from this 2008 era, relatively real estate centric, but a lot of just how to be an entrepreneur and go through a recession or fortunate as you guys are probably seeing that real estate. At least residential rental real estate and for sales even doing better, but we’re relatively unscathed right now, but recessions are a fact of life. When people are new in the business that, they tend to sort of underplay what a recession can do. And sometimes that’s true. Sometimes it’s not, we did that in 2008.
And we learned a lot of hard lessons that, got put into this eBook, but go and sign up for that. And when you’re on our webpage can look at our investor education section, just a ton of videos and papers and blog posts. About many of the things we’ve talked about, how to track economic cycle, how to underwrite apartment development deals, how to assess zoning. A lot of people who might be looking at transitioning in development, we got a lot of background in, so both as a developer, how to be that, but also as an investor, looking at investing in development projects, although you’re not going to be the developer, you need to assess the investment. If you’re not familiar with development, maybe you’re looking at making that move to try to increase your returns because the value-add landscape. Let’s be honest as a very competitive environment. Even now deals are highly sought after. And it’s challenging to find, sometimes enough deal flow and that causes people probably you’re thinking and start to look at development as an outlet to, to make that move. And then if anybody want to get, so of us go to our contact page, our entire team, email addresses are all there. Get in touch with any of us, my email and my cell phone number there. And so if people want to reach out, feel free.
Abel: That’s awesome. That sounds you’re a great resource, a great eBook, and we’ll go there and check it out. And what is it called again? How to
Scott: How to survive and thrive in a recession.
Abel: All right. It’s a great title too. I’m, I’m working on a full length book. I created a small eBook, how I invested passively into all my first deals, but I go the titles. If I like the title tackling commercial real estate the easy way.
Scott: Creating a good title is a little bit of an art form. And I don’t profess to be all that great at it. I’ve had a lot of duds, so…
Abel: This is not your first one.
Scott: No, you got to throw out a bunch and you got out that doesn’t work that sort of try it on that’s bad. Even being on a show yours and speaking, that’s awful title.
Abel: This sounds a good one, man. I’m excited for it.
Scott: I appreciate it.
Abel: And then let’s see, before you go, I guess one or two last things. If, if somebody is really trying to kind of break into the development world versus the investor world, any advice, any wisdom you’ve 20 years of it, I’d be remiss if I didn’t at least ask this question before you
Scott: Sure thing. So first thing people can do is go to LinkedIn and look me up under Scott chopping on LinkedIn. And then under the articles that we publish, there’s an article I wrote called six ways to build your real estate development career. It’s very specific to what you’re asking and there’s, there’s a bunch of things in there, but one of the things that I really focus people on when they’re talking about moving into that space is what I alluded to earlier, which is, get a mentor, being an intern, or do a joint venture. Those are all sort of different versions of the same thing, which is you’re going to pair up with somebody else who knows a lot about real estate development. You got to be selective in your choice of who you pick to be an intern for JV with.
But basically what you’re going to do is you’re going to sort of give something up in the beginning to get a lot of education. Michael Block, you’ve probably listened to his podcasts, but he’s a great advocate of, on your first deal, pair up with somebody don’t be a bonehead and try to know it yourself. This is back to that lone ranger thing that I described before .I tell people all the time, in fact, we regularly entertain interns. We have usually one or two going on at any one time and I’ve had several people that have finished up their internships with us and go on to basically launching successful real estate development careers. Our internships are unpaid. And then, a lot of people, they they’ve got to work for free.
You got to work for free, but here’s what you get and trade for. In fact, one of our earliest interns a guy name Mike Lindsley and he called me several months ago and ended his internship with us and went to work for a couple other companies that weren’t real estate development. But then several months later was able to interview with a real estate development company and land the job as a project manager. And he called me and he goes, dude, I didn’t know how much you taught me until I went to this interview and it got this job. And every, almost everything I talked about in the interview was stuff that you and I; and in the internship had worked on. So I use that as an example, in fact, Mike’s assessment was, dude, I would pay you a lot of money to learn now, know what I know.
And if I were to have to learn again, in fact, he’s going through the USC, urban planning program, which is 40 or 50 K for the, two year program, he goes easily. What I did with you over a year and an internship was worth that and probably more. And so I only offer that because people will, they’ll get itchy about working for free, dude, I don’t want to do that. And then I’m not saying do it full time. And if you could, you, you learn faster, but find your local developer and you’re in whatever location you’re in and you may have to call, dozens and dozens, but the offer is, look, I will come and work for you for free. I will go, do all that crap stuff that you need done that real estate developer go to the city and get the permit poll, then call the plan checker and get this thing pushed through whatever.
But that will be so valuable. And then of course you get to pick the right people and the right company, they got to be oriented to actually educating you. Of course, we do that. Because it’s, a part of our set of practices, but that alone, get a mentor, pay somebody, I’m not saying, go do that with us. Although we have that offer. But, pay somebody to impart knowledge. A joint venture is a different version of that. I’m going to give up, 80% of my deal to somebody else that sucks. I want the whole thing for myself. You take 20%, but you get to sit there and learn from this person and make that part of the deal. I’ll bring you this deal.
You pay me 20% or whatever. I’m not making that number up, but teach me, let me be in every meeting. I tell people when you’re a joint venture read every document, you see stuff on email, you see that totter report, you see those backup documents, you see that contract, you see that boost that, that read everything. There’s nothing you have, you could spend time on. That would be more important than getting full exposure to the development process. That’s what I did when I was a project manager, I had nobody paid me extra, but I read everything. And I asked, 80,000 million questions, (laughs) to the people I worked with, but, the point is that you get to participate in somebody else’s knowledge and watch them do it and see them do it. And by the way, your 20% is probably going to be more valuable, a hundred percent of zeros, worse than, 20% of 100. When you’re profitable and again, Michael Block has this thing, he goes there’s nothing more valuable than that. And you give up a lot, but you get a lot. And I think people just don’t realize how much they get. And so I try to use these examples of things that we’ve seen, but learn from other people’s mistakes, avoid your own. You get to learn on somebody else’s dime. If you’re an employee or, an intern or whatever, it’ll be well worth it.
Abel: You’re bringing us so many great memories and all this is really, really good knowledge and insight. When I, I ran a Cutco office when I was younger, I don’t know if what Cutco is, but these knives. We had a recruiting office. And so we would recruit high school and college age kids and they would go so nice. But anyways, in this office, I ran my district manager’s office. I was the Sales managers. I did well at sales. I did helping her with stuff. And anyways, he would let me run some of her interviews and trainings and all that stuff. Well, it was, I didn’t get paid to do that. And I got paid to sell. I got paid commissions there, but all the other stuff was just free time right in there. But she used to tell me, well, that I could go do what you’re doing right now and make so much more money. And when I let you do this, you’re costing me money. Whereas you don’t recruit as well as I do or train as well as I do. And it didn’t set until years later that I thank you so much for letting me get in there. And so then it brings back to you.
Scott: It really is, and I don’t fault anybody who doesn’t recognize that value because the fact that you’re new to that arena means you don’t know how to value it. And, and particularly for me, real estate development is such an obscure, career choice. You can’t go get a book and had to be a real estate developer and do this and do that. And maybe somebody would write a book on that someday, but the more obscure the career is, and some curves or obscure and don’t make you very much money. It’s the ones that are sort of hidden. Even being a real estate investor, isn’t necessarily , you don’t go to your high school counselor and they go, your test says you should be a real estate investor.
No, never happened. Even being an entrepreneur isn’t necessarily, probably more so now than, than when I was in high school. But those are the places that you need to get the knowledge from some non-obvious source. You can’t go to the library and check the book out about how to be a real estate developer. So you have to, pair up with human beings. And so all these things, the intern mentorship and the JV are all different versions of pairing up. And those people, there were the right people and they have the right knowledge. And one of the criteria to look for which you, you, you yourself able, pair up with people who are, have already demonstrated success. If your joint venture partner look for somebody who’s joint venture with other successfully, those people are happy.
They made money. The person themselves, the JV partner, the lead is they’ve made money. They have a good identity. If you’re going to be, hire a mentor, make sure they’ve demonstrated success. And if you’re going to be an intern, work for a company that’s going places that the, how’s the right, , as you said, it has the right attitude around training and knowledge, because a lot of people, they don’t like, I don’t want to, I don’t want to spend my time teaching somebody. When I can be going, doing the stuff. And every individual’s a little bit different. For me, where I go with it, Abel, I had so many great teachers. They owed me nothing. When I was a new project manager, I worked for a couple with a couple of different people.
In fact, one guy commuted with every day, from long beach to West LA, it was a horrible commute hour and a half each way. And this dude put up with my million and one questions every day, he was locked in the car. In fact, we still joke about he’s dude, you were crazy. What’s this, and he didn’t, he could’ve said, dude, I’m tired, man. I got, I got nothing left, but he never did that. And I was just anxious to learn, I was really ambitious to learn, but I think, recognize that if you’re going to make that internship offer or seek that internship, know that value trade. And when you do find the right person, even if you can’t recognize the value, you just go, look, if I pick the right person, they’re going places, they’ve got a good attitude about teaching that alone is probably the two main criteria that you’ll know value would be produced for you. Even if you don’t know what that value is. You can’t, it’s new. It’s a new business for you.
Abel: That’s awesome. Well, thank you so much. Even at the end, man, I’m looking for an intern right now, Scott. This is somebody a thank you for imparting the wisdom. My friend. I’ve gone over on time and I appreciate you hanging in with me.
Scott: Happy to be here.
Abel: Thank you very much again, for all your time, effort, energy, and the resources that you provided our listeners. So if you guys got some value from this, I said, you would please reach out to Scott. He’d love to talk to you. And then also, if you guys would do the pleasure of rating and reviewing a written review on our five town’s podcast, that’ll go miles for us if you appreciate, these shows. Thank you very much. Again, my name is Abel Pacheco. I’m your host for the five towns podcast. Scott. You’re the man.
Scott: Thank you.
Abel: Alright Brother. Bye bye.
Scott: All right man. Take care, man. Thanks so much.
Music- Thank you so much for listening to this episode of the five talents podcast. I’m your host, Abel Pacheco. Each week we’re going to bring you interviews from other industry experts in commercial real estate investors who followed their dreams and achieved massive success. If you enjoyed this episode, then you’re going to want a copy of our passive investors guide, tackling commercial real estate, the easy way. It’s the guide we use to invest in $93 million of commercial real estate. It’s a 65 page eBook. It’s a great resource to learn the basic mechanics of multifamily syndications.
And we’re going to show you how to evaluate your next passive investment opportunity. So if you subscribe to our podcast, now leave us a review and a rating. I’m going to give you a free copy. So take a moment to do that now. We’d appreciate it. And then you can register for the book @5tcre.com/ebook. 5tcre.com/ebook, Let us know, and we’re going to send you a copy. Thank you so much for subscribing to the five towns podcast.
Subscribe to our regular newsletter and get exclusive access to our next investment opportunity.