This week, Ben, John, and Ryan explore the art of understanding new real estate markets -- including what drives appreciation, occupancy, and rent growth.
Ep. 11 - Location, Location, Location - Deciding Where to Invest
Ben Shelley: [00:00:07] Welcome to the Brick x Brick Podcast. I'm Ben and I'm here with John and Ryan for today's episode. We're going to discuss the geographic area of choice for most investors when they're first deciding where they want to make their first real estate investment. We're going to talk about markets in submarkets timing of purchases and how to source those deals and the process itself of narrowing down your search. As an individual investor begin to decide where it is you want to allocate your capital both for your first investment for intermediary investments and for future investments. So guys let's jump right into it maybe we can talk a little bit about our own processes and how we got into the first markets we found and what drew us to those markets I think that might be a good place to start. Ryan you want to take a crack at it.
Ryan Goldfarb: [00:00:49] Sure. The way that I break down this discussion is starting at the top we're looking at things on a market level and then beneath that you begin to consider these submarket. And then beneath that you have different neighborhoods or other areas within that submarket. So when I was making my investment decisions locally or at least most recently what I was originally contemplating was which market I wanted to be in which for me was an easy decision because I was pretty limited in that I wanted to do it close to where I was geographically located. And beyond that I was looking at a variety of factors such as the entry point on the on a purchase which limited me or at least precluded me from buying in let's say an area like Manhattan. And then lastly I was looking for neighborhoods that kind of struck a balance between something that had a a little bit of a positive outlook moving forward but that wasn't so saturated it wasn't so competitive nowadays that I felt liked where I got to where I felt future opportunity or future values had kind of passed me by.
John Errico: [00:02:05] Yeah I think where to invest is a broad topic.
John Errico: [00:02:09] And the way that I got started was just I mean if you listen to the podcast before my investing story is like I just wanted to buy a place near where I was already living. So you know I was living in Manhattan and I wanted my place in the Greater York City area. So I bought a place in New Jersey which was the closest affordable place at the time to where I was living. But the factors that go into where you want to invest I think depend a little bit on your investment thesis. So maybe we can get in a little bit to that. You know I think from a very high level the easiest way to say where I want to invest is I won't invest in a place that makes me the greatest returns. But that may not exactly be the greatest returns monetarily it may not be correlated with your goals in doing real estate investing. So for example if you can make great returns in a city very very far away from where you live that might be nice but if you want to get into doing investing say full time we're going to be a real operator totally outsourcing your investments to a third party in a different city is not going to fulfill the goals that you have of being a real estate operator. I don't Ryan actually started investing not locally right your first deal was in Nashville Memphis Memphis.
Ryan Goldfarb: [00:03:25] I wish it was a outflow of appreciated walking and whether it is Memphis.
Ben Shelley: [00:03:29] It was it was a turnkey investment right.
Ryan Goldfarb: [00:03:31] And it was it was a construction on it was the single family purchased it for right around 50 grand and rented for like six seventy five a month. How did you find that. So that was that was back when I was wrapping up college my brother and I were looking for a turnkey investment to get something under our belts and we had kind of perused a few different markets outside of New York because we were a little bit more capital constrained.
John Errico: [00:03:54] And what is peruse exactly, perused, perused. How did you go about it
Ben Shelley: [00:03:59] This is why the geography map placed them in New Jersey because if you're outside of New Jersey you don't use the word Peru's center.
John Errico: [00:04:05] I mean I mean how how did you peruse I know I'm just certain at the time.
Ryan Goldfarb: [00:04:09] Well we were first and foremost looking for something or for an area where we could buy something by a single family house for under K and building it rents that were obviously able to support the investment and yield a decent return but also to know that we're not buying in what we would have considered a war zone or an area where we wouldn't have really felt comfortable owning property especially remotely. So I think at the time we were looking at Memphis I think we had briefly considered some areas of Atlanta. I think there were some I think either Dallas or Houston there were some providers over there that we had explored very briefly but ultimately Memphis was the first one that we it seemed to take all the boxes. It was also easy to get to which for us was kind of important because we figured if if our manager wasn't holding up their end of the bargain and we had to physically go there we wanted somewhere where it wasn't gonna cost us a thousand dollars to take a roundtrip flight to go for two days just to make sure that the house wasn't on fire.
Ben Shelley: [00:05:09] Yeah it's funny you guys mention both the geography and familiarity with certain areas because I know while I am not as far in my career as either of you what brought me to Ryan first and then John was the fact that I had an interest in college and was seeking in college. My first investments particularly in the Hudson County area across the water in West New York in Union City in North Bergen and the reason for that was twofold. One of them was that the market was strong there was consistent rental growth and sales growth over a certain period of time which I was tracking and was was excited about as an investor. But there is also a familiarity factor in the sense that the person and partner that I was planning on going into this business with had family and friends who had been contractors in the area for many years. And so I understood that I was going in for myself. Looking at the market and having a familiarity with how to source deals and underwrite deals but had a partner who had experience with construction and understanding how much things cost. So I think it's probably important to also think about how do you know in certain areas. I mean it's natural to want to invest I think close by. And if the numbers can work for you and what are the other mitigating factors that might bring you closer to pulling the trigger on a deal in that neighborhood or maybe making you look a little bit further away.
John Errico: [00:06:20] Well yeah I think a really high level the way that I think about geography is so a lot of times I look at an area I'm looking at it for buy and hold purposes at least that's how I've been traditionally doing it I think for flips it's a little bit different we can talk about that but for a buy and hold area I like to come up with a thesis for investing in that area and if I don't have a thesis that I feel comfortable with or if I can't think of one then that's probably a bad sign. So the greatest example for me is then the Tri-State area like the New York City suburb. So the thesis for investing in New York or in New Jersey or in Connecticut anywhere around New York City is New York City. So obviously not everybody who lives in New Jersey or Connecticut or even New York works in New York City but the reason why this region is what it is is because of New York at some point. The reason why it's going to be sustained is because of New York. So when you're betting on when you're buying real estate around New York City you're betting on you know in a sense in New York City you're saying do I think people are going to keep living in New York City traveling a working culture whatever. And for me the answer is yes. Some people might disagree about that but probably a lot of people believe that New York City is going to be a great thing. We also invest in new haven Connecticut which is a little bit of a different market tertiary market not a New York City suburb per say but the reason why invest in new haven is because of Yale. So Yale has a ton of money. It owns a bunch of property in the area and it has the second largest endowment and other university in the entire nation.
Ben Shelley: [00:07:50] Here we go.
John Errico: [00:07:51] But so investing in real estate in New Haven particularly around Yale is betting on Yale and do I think that Yale is going to be a place where people want to go that's gonna have a lot of money that's going to keep care about the city. Yes I think that's a good that's a good answer. So you can take that analysis and say well you know what's my thesis for investing in a small city in Iowa. I don't know maybe the returns look great on paper but I'm wondering why people live there.
Ben Shelley: [00:08:17] Well I think it's going to I think a good example of that is the way that that you John identified and how we as a group are identifying properties in Atlantic City because I think what people would look at as mitigating factors to keep them away from the market things like the environments obviously the fact that the city could be underwater things like a generally I guess maybe you would say some are literally underwater literally underwater figured. So so so a market that is more based on what they deliver in the summertime so vacationers and people come in for maybe weekends or natural parties obviously there's the casinos down there and you found a model the Airbnb which has generated returns well above I think what you would generally get at market rate when you're talking about traditional rentals and so when I like your description of the thesis you bring to the table because that is a perfect example of looking at an area like Atlantic City that to a traditional foot through traditional metrics may maybe you say even if you live further way I don't know about this and turns that into that somewhere that I want to try to source deals and pick things on the cheap.
John Errico: [00:09:17] You can also tease out your assumptions and your risk factors that way right. So if you say I would invest in an area and the only reason why people live in the area is because there is this one big thing like there's a big manufacturing plant or there's this big type of industry. Then your sensitivity is well if that industry or manufacturing plant or whatever closes that's it there's no other reason to live in the area. So I'm not saying that's a bad reason to invest somewhere but it's helpful to have the knowledge of saying here's what I'm sensitive to and if any of those things happen then it's gonna be bad for me. And you know Detroit has an example right. So what.
Ryan Goldfarb: [00:09:53] Or another example of that today or I mean quite timely as Long Island City and Amazon HQ2. There's a lot of hype and a lot of I think probably a lot of speculation that went on over the the last few weeks the last few months since each Q2 was announced for Long Island City and obviously the sensitivity there is a little bit different than it is in some other locations where you don't have such a diverse subset of industry but nonetheless I'm sure there is plenty of speculative work that was done in advance rather either for developments or for just people who thought Oh the rents are going to go through the roof because people who are coming in are going to have quite a bit of money.
Ben Shelley: [00:10:35] To piggyback off that real quick to the L train I think is even a greater example because that was two years in the running and people say new leases and moved businesses and sold homes.
Ben Shelley: [00:10:43] I had friends who were involved in the real estate business who were considering going in with partners and buying up homes or along that area at a discount to market. Given what everybody was anticipating so that's it's a great point.
Ryan Goldfarb: [00:10:54] Or or the Upper East Side of Manhattan where you've had the Second Avenue subway in the works for I think it's been like 30 40 years since I really like or 60 plus or two. But yes it did.
Ryan Goldfarb: [00:11:07] Finally it finally came on line over the last few years from 96 to 72.
Ben Shelley: [00:11:12] So it's getting married. So in another 80 years maybe it'll have to have more than three stops but it is amazing and it does do a lot for congestion as well and for pricing along that line. But it's funny because when I was working for a property manager actually we used to rent two homes that were literally right on Second Avenue on 83rd Street where the hub on eighty third was being built and the no and.
Ben Shelley: [00:11:35] I hate to say this I probably shouldn't put this on record but we would probably strategically not bring people during the height of working hours because it's unconscionably loud. However. At the same time people were then getting a discount to market and frankly if someone had come to us given how delayed that process was had come to my boss and offered a reasonable price maybe a little bit discounted to market. I wouldn't be shocked if she would have maybe considered something like that given the circumstance so it's all considerations to take into account and it's not just from an investing standpoint.
Ryan Goldfarb: [00:12:03] It's interesting to think about how many deals were consummated over the last 20 30 40 years with the assumption that this redevelopment was going to be a success because over the long term that Second Avenue Subway was going to be a boon to the area.
John Errico: [00:12:18] And the other thing about it is you can never truly anticipate what's going to happen in a market you know again that the HQ to example is so great because now that you two is not happening in Long Island City police the time is recording so you can reference this was going to happen with the market and that's OK. But I think it's important to at least have the knowledge of the factors that might implicated. So even if you can't control them and don't know what's going to happen it's at least a modicum of control to have knowledge of what the factors are. So for me the first step in thinking about an area to invest in is is the thesis. Can I come up with a thesis that I feel comfortable with. Is there a reason why it's going to happen. And then along to dovetail with that something that we brought up earlier for me is what is my goal in investing is my goal to maximize the amount of money that I'm investing is my goal to learn about investing is my goal to make this one of many projects to two by only this type of asset to buy different types of assets to do buy and hold stuff to flip stuff but that depends on you. My goal Getting Started in real estate was to do more real estate investing. And for me that meant it was conducive to invest near where I was because if I was investing that's the country even if I had to do a lot of that just physically getting there would be very very hard and it would take me a long time to ramp up because even if I got comfortable with an area I would have to get very very very comfortable off sourcing all of that work to a third party living in wherever it might be before I really got started whereas living in New York and investing in new jersey as I started I mean that's a 15 20 minute trip over that I can do it any time. And did many many times before I moved here.
Ryan Goldfarb: [00:13:59] There's also some calculus involved with what your risk tolerance is because the Amazon HQ2 example highlights the resiliency of the New York market where frankly that's probably not going to make much of a ding in the economic viability of of those areas. But if you're talking about an area. In if you're talking about you know a 1 manufacturing plant town in rural Pennsylvania and your investing thesis is that there are 5000 jobs in that specific area that are tied to that plant at the moment that plant shuts there are going to be very few things to pick up the slack for you. And so the risk is like it's truly a boom bust is either it's going to go well because you have that or you're going to be. There's going to be no suitors for your for your property as tenants and there will probably be very few end buyers should you decide to liquidate.
John Errico: [00:14:54] Yeah it's one of the things that annoys me but sometimes I'll encounter people who say oh man I'm making a killing investing in city I've never heard of in state that is you know among the 10 least populated states in the country and it's like well maybe I mean maybe the returns are great but why do people live there. You know like what what's going on in that. I I don't say that cynically because maybe there is some reason they just don't fully understand. But you know I bet that you could find a multifamily property in small town come a small state that's going to look great on paper but what's going to happen to that property in two five 10 years. I have no idea. I'm probably not sure that market enough nor can I come up with a thesis as to why it's going to do well so that's that's a pretty risk investment to me even if the numbers might bear out as being very conservative.
Ryan Goldfarb: [00:15:42] To what extent this is kind of shifting gears a little bit. But John look to what extent if you have vetted a particular market let's say you're talking about New Haven. To what extent do you try to validate some of your assumptions with data you get into some of the demographic data do you get into average incomes. Do you look at home prices like what what's your what's your next step.
John Errico: [00:16:03] I don't I haven't really looked at demographic data per say. What I'm most interested in would be the rents versus price of homes for a buy and hold. So that information is extremely readily available it's literally going on Zillow or anything looking at what homes are and then going on Craigslist or rent on Twitter or any of these other Web sites and seeing what the average rents are. That alone is a pretty good starting point. I think crime data is very helpful. I think crime is probably one of the prerequisites to a lot of. I mean you can have great returns on paper but if you can't walk outside your door nobody is going to know it's going to live there. There's a big distinction in my mind between what the returns could be on paper and what they actually are. A lot of areas that have bad crime you look at whatever analytical model you want to look at cap rate cash on cash return or whatever and you say oh my gosh it's so great. Even if you assume vacancy of 10 percent or whatever and then you go in and it's insane because you just can't get anybody to live there you know your vacancy is like 50 percent or 80 percent or whatever you want to say.
Ryan Goldfarb: [00:17:10] It's funny you mentioned that because I have a theory that oftentimes the best deals the best returns that you can actually realize fall at that intersection between the areas where people have these preconceptions about maybe there being too much crime or it just being undesirable for one reason or another so that you know it scares out a certain class of person. But at the same time the reality is when you investigate it there are still plenty of people who do live there and the perception of crime perhaps is overblown. And so I think that's really where you can maximize returns and that's where that kind of like artistic or subjective metric of like intuition comes into play where you actually go somewhere and you see it and you understand what the living breathing fabric of that is.
John Errico: [00:17:56] Yeah. Davies is a concrete example. So I started investing in Union City New Jersey and I think Union City and Jersey City as well very much had fit that these. So even now there's a perception in parts of Jersey City but certainly 5 10 years ago in many parts of Jersey City and Union City that the area was dangerous and unsafe and it certainly was in the 90s. But if you physically go to the area if you walk around and you talk to people you say do you like living here. You kids like living here if you ever experience bad crime you know whatever. No one says anything at all if you look at the news reports. I mean there's maybe domestic issues or maybe small property crime type stuff but not anything that would really disincentive someone to live there. But there's this widespread perception that the air is not good. And to your point. Absolutely. You can make it you can make a killing.
Ryan Goldfarb: [00:18:43] We've also talked about this in the context of comparing certain cities that have the reputation for being kind of like the worst of the worst. But even within that classification there are big differences. I think we were we were talking about with some of the cities up here where people around here may say like What are you doing buying in so-and-so town or so-and-so city. But when we go there we feel pretty comfortable during the day there's you know there's people coming to and from work. People just kind of hanging around and talking and no hostility no obvious. Signs of threats really. But there are other places where where we've been where you go and you'll be. You'll go like two or three blocks and all you see are vacant abandoned houses and just like the absence of life which is perhaps the scariest thing. And as far as that concerns and actual investment my my theory with a lot of these places up here is that while there are certain tiers of desirability at the end of the day there's a shortage of housing and people want to live where there is a safe clean quiet comfortable place to live. And if you can provide them with that even if it might not be an area where you personally would live that doesn't mean there aren't plenty of reasonable nice qualified people who will live there.
Ben Shelley: [00:20:00] And I think it's an important point too because you want to try to fight your own biases. As you look at these for an area. So I think it's very easy to fall into this sort of ideal especially if you're coming from outside of the real estate business that somebody says something about maybe Irvington or East Orange. Both places that were either invested in or doing work in and you just say Oh yeah. Why would I go there. Or what could possibly be there and then when you put your boots on the ground you learn that there's actually opportunity whether it be in construction or investment and I think that just actually just the other day I was talking to friends who were from the summit New Jersey area describing work we were doing in some of those municipalities and they were stunned. I mean they were flattered that Irvington and what are you doing there. Obviously there are different areas that have different levels of crime. What have you and all these different cities and townships. But fundamentally if you build as Ryan just alluded to safe good fundamentally sound homes there people will come especially as these towns and areas begin to get younger over time. I think you'll see generally speaking a shift in all of these different areas because at one point or another they did thrive.
John Errico: [00:21:02] Yeah I think it's a great point. So something that occurs to me is a lot of what we're talking about is very specific to the northeast and I don't want to gloss over it. There are listeners who are not from the Northeast and I think it's hard to describe exactly how block by block a lot of these neighborhoods are so kind of within that observation is to go back to Ryan's first point something that I really like to look at when I'm looking at cities or blocks or whatever it might be is the build quality of homes because a lot of these homes you know we're not buying new construction in this area. These homes were built 40 50 60 100 plus years ago and by looking at the homes you can say well this area used to be very wealthy or this area was never particularly wealthy or this you know unhealthy area now has become wealthy for some reason. So what a good example for me is East Orange East Orange is a an area New Jersey that has a I would say quite negative perception just in terms of housing and demographics and crime and whatever else you want education the educational system definitely has some problems. However the build quality of a lot of homes any storage is quite nice and there are some areas of East Orange where you look at homes that are on half an acre of land which for this area is a tremendous huge lot. And you say what is a beautiful home. I mean beautiful original woodwork that you could just never reproduce today never would reproduce today. And that gives you some sense to say well this area at one time was wealthy maybe it could be wealthy again. What are the reasons why it became on wealthy. How does that work. And truly I could walk three blocks. I mean the literal blocks in any direction from that and being a totally different area I mean a totally where I live right now where I'm physically located right now literally I could throw a stone across the river and go into an area that is totally demographically economically socially educationally different than where I'm living. That's pretty rare and should inform people that one invest in areas like this that say I need to do my homework to figure out not only that the city not the neighborhood but the block that I'm interested in investing in.
Ben Shelley: [00:23:07] Yeah I mean listen we just had that happen with also a property this is a little bit of a different area on the border of Nutley and Clifton and talking about OK on a macro level right you want to just know what's the neighborhood like. So we've talked about crime we've talked about education and we've talked about socioeconomic and cultural history of the area but also within that is OK so what is the designation SEO been in different counties means you might be designated for different public schools in different zones. So these are the kinds of obviously different costs affiliated with mainland so what have you based on the history of the area and the build of the homes in the area. So these are all things that you have to consider and I know when I'm looking at comps even in these areas and I'm used to growing up in New York City where truly I mean it's I mean just block by block it's lot by lot it's building by building the values change coming in New Jersey where a lot sizes tend to be a little bit smaller probably on aggregate than the rest of the country it's still the same way in many respects and looking at at Garfield the other day I mean I was looking near the water I think on River Drive and again in certain areas a lot by lot. I see sales of similar like properties at the same square footage with similar lot sizes going variant ranges of 100 to 150 thousand dollars. So do your due diligence on the specific area the specific building the specific lot. And John hits the nail on the head with that one.
Ryan Goldfarb: [00:24:22] And if you're going outside of outside of what you know if you're investing remotely and looking at an area where maybe you didn't grow up or maybe you don't currently live it's also important to take into account some other factors that may may be variable depending on the region. So for example in in northern New Jersey it's it's very common that when you buy a house you'll do an oil tank sweep and confirm that there is not an oil tank on the property or an underground oil underground or oftentimes there you may see them in the basement do. But of bigger concern is the. Underground variety. But if you're you know if you're investing from somewhere where that fuel source was never prevalent you would never even think to. To call someone out to do a tank sweep. Likewise if you're in New Jersey and you're looking to buy something in Florida you should. You're going to be thinking about hurricane preparedness and and whether it is like hurricane compliant. Likewise in. California you're going to be taking into account certain seismic issues and concerns. So there are a lot of nuances to different areas that you should at least know to be aware of or know to ask about.
Ryan Goldfarb: [00:25:31] If you are investing from out of town.
John Errico: [00:25:32] What you guys think about school districts because that's something that people talk to me about a lot and I have various thoughts on it. New Jersey has a lot of school districts because their municipality by municipality which in some states it's not the case. But what do you guys think about the value importance of that.
Ryan Goldfarb: [00:25:48] I mean it's huge. I think they're the way that I think about it is it is quite possibly the most important factor that a particular subset of buyers will consider when making their housing decision. But in a lot of ways I also think that the respectability or the clout of a school district is already embedded in the price of real estate in that area. So just because I'm to I'm looking at one property in one school district and another property in another school district. That are priced the same I'm not immediately going to say I'm going to buy the one in a better school district. There may be other reasons why someone would live in an area that has a less desirable school district. You may be renting to primarily. Seniors or you may be. Looking at something in a vacation community where schools just don't matter as much. So I think it's certainly it's certainly a factor. And it's one that I would weigh considerably. But it also has to be consistent with what your strategy is.
John Errico: [00:26:49] The funny thing about school districts is that it's the perception of the school district that cares right now. No there's no like definitive rating of this is the absolute number one best school district in the state or whatever. It's just your perception of it. If it's a good school district right. So vote for me because it's a perception thing. I think that school districts school districts are the best insulator of value positive or negative. If you have a bad school district and you're trying to make the area better I think that's going to be really hard because this is a far afield from real estate. But I think that it's hard to change the quality of the school district and if you're in a good school district or perceived good school district your value is going to maintain that level because for better or for worse people are going to continue to perceive that school district as being good.
Ryan Goldfarb: [00:27:36] Yeah. I have two points to make from different ends of the spectrum. On the pro side of why to invest in an area with a good school district no matter what the market is no matter what point in the economic cycle we're at. If you are a young family with kids who are entering your you know who are turning four or five six years old and looking to be are going to be going to school soon. They're going to be they're going to be interested in areas with good school districts and that is going to be more of a guiding light than whether. Whether they're buying at the best time or whether this particular properties ticks every box on their checklist. On the flip side to my point earlier about considering school districts in the context of what your investing strategy is if you look at an area like Jersey City or Hoboken years ago those were not desirable school districts whatsoever. And I think to a large extent at least based on what their property values are they're are still quite poor school districts. But what drove development in those towns was the demographic changes of getting very very young and catering to a class of people that are not necessarily concerned with school districts because they're only living there in their years prior to having kids school age children.
Ben Shelley: [00:28:55] I mean I think it's worth noting where we're Jersey City and Hoboken as good examples are concerned is that there is spill over areas though as well. So you know when you're already we're already constantly weighing all these different factors. And I think that's a perfect example of where a lesser school district isn't going to deter you from a certain neighborhood. But I think it's worth noting for new investors or even intermediate investors that when you're looking at these areas you talk about John talked about right at the beginning of this episode the resiliency of the Tri-State area and a lot of why that makes everywhere around this very appealing. And I think that if you're identifying an area just outside a city oftentimes your bias is going to take you towards thinking well look what happened to Long Island City or is happening to Long Island City look at what's happened to Jersey City and you'll extrapolate and say that's going to happen in my area. And just to be careful about that so so to look at the school districts for example if if you're looking at a spillover area in a really good city if the school district is bad now seeing some of these other areas doing your due diligence of like kind cities areas municipalities townships you might be more inclined to take the leap.
Ben Shelley: [00:29:57] And looking at an investment like that.
John Errico: [00:29:59] I want to frame this too by saying it is the case that there are areas that are not. Not only are they not getting better but they're getting worse. I mean I think we maybe look at real estate a little bit like we being the three of us with rose colored glasses because we've been investing in the longest kind of bull market that has been in a very long time fought for real estate specifically.
John Errico: [00:30:22] But there are you know not to pick on Newark but Newark is a city many parts of Newark have been economically depressed since the 60s and are still that way. And I bet you could go back to 1965 and talk to somebody like you know what it's gonna be in five 10 years the city is coming back and we're doing is do that. And you know I don't know. I don't know what's going to happen to Newark in five or 10 years certainly some areas of Newark have gotten better but I would say some mayors have stayed the same or maybe even gotten worse so it's OK to come to conclusion that look I mean statistically Connecticut people are leaving Connecticut people are I'm moving to Connecticut anymore so you could say well I mean some areas of Connecticut like I mentioned New Haven I have a thesis about. But Connecticut broadly I don't really want invest in a place where there's a net outflow of people. There's some reason why people are leaving Connecticut. And that concerns me. So it's OK to say look this is an area that isn't getting better it might be getting worse for some a thesis about why it might get worse. So I mean how do you guys feel about that.
Ryan Goldfarb: [00:31:23] Well I think this also comes back to just having a having an investment strategy and choosing a market based on what your strategy is. If your bank. Banking on appreciation I think would be quite unwise to look at a market where all of the demographic factors and shifts are trending in the wrong direction. I don't think I don't think it's wise to assume that your property value is going to skyrocket when all of you know when you're facing all of these headwinds. Having said that if you're looking at an area if you're looking for an area where your primary goal is cash flow and you're making reasonable assumptions on what your vacancy is going to be and you're not assuming 10 percent annual rent growth which would be you know pretty absurd in an area that is an appreciating and isn't trying new blood every year it's it's a matter of being consistent with what your strategy is. If you're looking at an area that's going to appreciate over the long haul you should have a thesis that is consistent with that and you should have some data to back it up.
John Errico: [00:32:22] What do you feel about investing in college towns.
Ben Shelley: [00:32:25] It's funny junkies because I was actually sent an article about this a couple of years ago even a buddy of mine who I went to the shack program with me him and his program at NYU and we had some very procedures for a notice how I pointedly do not name the school I'm just joking I love NYU love that school in Goshen New York universe I believe in careful and wide I think is the offer but I'm not really sure Bob Gates who when you go to our football team undefeated that's all that matters because we don't have a football team.
Ben Shelley: [00:32:54] So it's interesting so I got an article sent to me a couple of years ago by this this buddy of mine and his dad and they were very interested in this concept and again the theory goes well these school towns are young they're generally thriving within the nucleus of where the the school owns buildings. Generally speaking if it's a good academic institution they're going to look to eventually expand because they're all looking to bring profits up so they need to bring in more people who can pay full tuition so they'll expand outwards. And we see a little bit of that in New Haven. And and it's been maybe slow and maybe not expended as far as some people would think. But this is the question because as I now know having been introduced to the neighborhood to John within a certain radius that is true the margins still work out for. For new and intermediate investors but it hasn't come all the way I think within a margin.
Ben Shelley: [00:33:42] And when I say margin I mean the geographic margin that I think most people would have predicted giving the prestige and the academic successes that surround a school like Yale and the perception.
Ryan Goldfarb: [00:33:50] To me no matter what what your thesis is it's almost impossible to accurately predict appreciation because any appreciation that you are assuming. Okay let's say let's say your thesis is Temple University is expanding here. That's going to catalyze the area and there's going to be a lot of growth it's going to drive property values up. The other thing that can counteract that is if there are 30 other developers who have the same theory that you have and they go snatch up all developable land and they build way and act like an overall excess of supply relative to what the increase in demand will support. So just because things are happening and things are trending in the right direction in that scenario you may actually see a decrease in property values. So I think appreciation is always very difficult to predict. And I think it's foolish to make an investment solely based off of that thesis.
John Errico: [00:34:48] What do you think about. So I often have this problem. I think even recently we were talking about this and I run where you'll look at an area and you'll just run the numbers and you'll see these returns like monster returns like 10 percent cap rate ex and sometimes I look at that and it's like why don't I just buy everything in this city you know like why why am I even bothering and other places where you know I'm not getting those returns I can come up with reasons right now like as to why I wouldn't but I wonder how you guys feel about that if you've seen places
Ben Shelley: [00:35:17] like that. Well I mean I think diversification is the name of the game I think people talk about this term a lot but to me the first thought I have is Atlantic City is a perfect example. The returns that we see cash on cash the cap rates particularly for our model and our thesis in that area is quite substantial.
John Errico: [00:35:34] Of course hurricane cynic everybody's gonna start investing you like I just like your audience just like you can't right now. Just somebody has to go about it.
Ryan Goldfarb: [00:35:42] Also keep in mind that a lot of these models that we're running are predicated on an Airbnb model which is highly susceptible to regulatory risk.
Ben Shelley: [00:35:49] Do we have right give a disclaimer. Listen you go out you try your best see if you could do in line. We are trained professionals under closed or delay.
Ryan Goldfarb: [00:35:57] The reason I bring this up we in in 93 the reason I bring this up is because I actually texted John about this the
Ryan Goldfarb: [00:36:05] other day. There's I think there are rumors swirling that Newark is potentially clamping down on Airbnb. I don't if you saw the article that I sent you because. Again John what he's ignored me.
John Errico: [00:36:17] No I I didn't ignore you. In fact I've been thinking about it constantly. So that's it. I'm just getting emails.
Ben Shelley: [00:36:24] We are always thinking about them.
Ryan Goldfarb: [00:36:25] I'm not bitter not ignored means I just like you know doing it. I just I just actively didn't respond.
Ben Shelley: [00:36:31] Let me just let me just say because that was that sort of a parlays to the point that I wanted to make I hate to keep bringing up Atlantic City but the reason I do that is look what happened in 2012. Hurricane Sandy hits the entire area was ravaged and destroyed it could happen where Atlantic City or Atlantic County completely clamps down on Airbnb BS and throws the thesis out the window. So the idea is diversification you want to be invested in a number of different areas with a number of different hopefully successful theses so that if in any scenario the worst case risk factor occurs you're hedging and you're able to continue to sustain positive net cash flow throughout
John Errico: [00:37:06] your entire portfolio. Yeah I mean.
Ryan Goldfarb: [00:37:07] I mean what what other arbitration are you guys why is this I think a lot of that's I think a lot of that is predicated on underwriting to an Airbnb Airbnb context which I would argue is not necessarily as much of a real estate play as it is a quote unquote business play because the end of the day your income is going to be driven by the fact that you are effectively running a hospitality business despite what Airbnb will be lobbyists What.
Ben Shelley: [00:37:35] What do you mean by that. Because to me I understand the distinction you're making between an as a true real estate versus just generally business hospitality play but like when I look at different areas underwriting New Haven is different in underwriting Hudson County is different underwriting Bergen County and so still diversification is diversification because it's a cash flow play doesn't get an appreciation.
John Errico: [00:37:54] It's really like you. It's not. I see what you look like you could use it right or just depending on how good or bad you are at doing it. I mean to some extent strip management in general. Yeah. Much more so in Airbnb sorry.
Ryan Goldfarb: [00:38:06] Well I think what I'm but I was also getting it as I think the baseline underwriting assumption in any real estate deal should be more of a conventional strategy whether it's I would say more of a conventional strategy know if it's a 2-family house underwrite it as to stabilized apartments renting out on twelve month leases and then if you think that there's opportunity to employ a strategy like Airbnb be with one or both of those maybe that's your upside case. But I think it's a super risky investing thesis to have all of your eggs in that one basket. And I think that kind of gets back to our overall investing strategy being a little bit more diversified and not having all of our eggs in that one.
Ben Shelley: [00:38:48] It's a good point and I want to be clear that most of what we look at is not for that business model and the idea being that if it works conventionally it's probably going to work with other means.
John Errico: [00:38:56] I mean it's an interesting broader topic for me we've been talking about this a lot in the context of our private equity fund which is how to quantify risk. And I I like the idea of baking in risk in an analytical model in a numerical model in some way. But I think that's really difficult to do. Like I so we're talking about say regulatory risk with European bee or maybe we're talking about a risk involved with some industry being the only driver for people to live in a certain city. How do you quantify that. How do you say Well I think there's like a 20 percent chance of this happening or 10 percent or higher. I mean it's hard for me to do that. And so it can be hard to build a portfolio so you have you know you're trying to buy 10 homes and you want to have a risk adjusted diversified kind of portfolio. I think it's really difficult to come up with the right allocation.
Ryan Goldfarb: [00:39:47] Well I think the mitigant to that is on the portfolio level and it's on the strategy side. I don't know that even the smartest quantitative minds I think would struggle to come up with a model that accurately depicts the risk associated with that but I think the beauty of working in the space where we work where our assets are smaller and you know we're talking about maybe a portfolio of 100 different properties in 15, 10 different markets versus another fund that is working on a portfolio with a similar asset size. But that is tied to one physical property with you know one hundred and fifty units. I think the benefit to being in our shoes is that we can we can diversify risk across that portfolio and say OK to mitigate the risk like the regulatory risk of the Airbnb model we're going to only allocate 15 percent of our portfolio to properties whose cash flow is tied to that strategy. We're also going to mitigate risk. We're going to mitigate the risk of let's say Amazon HQ to influence on our on our portfolio and on our returns by only limiting exposure to 10 percent of our portfolio in Long Island Cityetc.
John Errico: [00:41:03] Yeah I'm glad that we got here. I think because even if you don't have the answers to these questions I think it's it's fair to consider them. You know I think there are a lot of investors that start out and you know the one might have like don't worry but all these things because then you'll never do anything on the other hand. I'm like Well don't you know don't invest in a place just because your buddy says it's a cool place to invest right. Like we think because it's just that our level of experience and what we do professionally with being the three of us here are more analytical about it than I think a beginning investor should be or could be. But even even knowing you even having this thought process I think it is novel for a lot of investors just getting started because they're not thinking about risk and investing theses and things like that in
Ryan Goldfarb: [00:41:53] an area. I think under Understanding risk is a difficult topic but I think there is or maybe quantifying risk is next to impossible but Understanding risk is a little bit different. And I think that is a goal that every investor should strive towards when like prior to making a significant investment decision. And what I mean by that is you may say you may be looking at something in New Haven and you may be looking at something next to another town that is heavily driven by like a smaller university. You may say oh like college towns are great as an overlying thesis but I think to understand the risk of hitching your wagon to an institution like Yale versus the University of Phoenix which is you know a quasi education a quasi educational institution.
John Errico: [00:42:45] No I totally agree.
John Errico: [00:42:46] I think the reason why I brought up investing in college towns and not to go everywhere but what I wanted to say about it was that there's a big difference in investing in a established university than a community college even if they're both might be in a college town not there's anything wrong with the community college at all but in terms of your long term idea is this place going to be around. I mean I've a pretty good idea that you know the second oldest university in the country that has the scholars now is gonna be around.
John Errico: [00:43:15] I don't know that about a school that was maybe started three years ago that has no money that is just trying to make a quick buck or something like I don't I mean it's.
Ryan Goldfarb: [00:43:23] I think it's also worth worth at least throwing out there the fact that maybe education down the road won't look like what it looks like today. So I think an institution like Yale it's prestigious enough that they will probably find a way to stay relevant and to live on. But you know if in 20 30 years down the road education may not take the same form that it does today we may I think we kind of take for granted the assumption that four year colleges are kind of the norm these days. But that wasn't always the case and it may not always be the case in the future. And it's interesting to contemplate a world in which that is not the case especially if you are especially your hitching your wagon to investing in quote unquote college town.
John Errico: [00:44:07] It's a really exciting point and I want to actually touch on one thing very related which is that there's so many things like this that are going on that that are limited perspective having invest in real estate only for a few years. Can't really observe it but one thing that always blows my mind is the influence of ride sharing Uber and Lyft that they have had on suburban America I think is is tremendous. I mean it's changed a lot. What it means to live in a suburb and still be able to go out and say drink or do whatever else that you maybe couldn't do if you had to drive and imagine what say we you know someday soon maybe we'll have autonomous vehicles what might that change for people living in a suburb or people that have to commute you know what if we have the Elon Musk you know Hyperloop dream or we can get from San Francisco to New York in an hour or something like what what how might that change.
Ben Shelley: [00:45:02] I am just so inspired right.
Ryan Goldfarb: [00:45:03] It's funny that it's funny that you brought these up because I had if we could live on Mars.
Ryan Goldfarb: [00:45:07] I got I had those same two thoughts running through my head as winter as this conversation was evolving and I don't know the extent to which either of you are familiar with like Black Swan Theory Black Swan investing.
John Errico: [00:45:19] But it's a great film. I've actually surprise surprise.
Ryan Goldfarb: [00:45:27] But the I think as human beings we are we are uniquely poor at quantifying the risk of outlier events. And there are a lot of things that in our minds are probably perceived as impossible that are really just improbable which means there are enough of these improbabilities that eventually something is going to stick and that's going to be something transformative and it's going to be something that turns on its head. All of these things that we take for granted like something like a Yale falling off the face of the earth or something like you know Washington DC ceasing to be the political capital of the United States or New York ceasing to be the most relevant city in the state here in the country.
Ben Shelley: [00:46:13] And this is kind of a diversion from where we're going because these two are inspiring me with the words of wisdom about the future. But I do want to also address to newer investors kind of like myself as well and go back to a point about not necessarily being overly cautious but but understanding sort of where you're at in terms of your equity means and in terms of the amount of research and experience you have in certain areas. Even looking beyond what the future holds because one of the things I come back to because I think about all of these potential changes that are going to occur in society and cities and suburbs etc which will affect markets and I would just encourage I think investors when you're identifying the geographic location are going to to just be real with yourself within your means and not to necessarily extrapolate beyond what the numbers and area and people who are on the ground are telling you because you may believe in a lot of these things that are coming to these areas but it's very easy to fall into the confirmation bias cycle of saying of believing a certain ARV for a flip or believing a 2-family is going to generate you know X Y Z market when really it's rent control or rent stabilized and I realize this seems like a huge diversion from from where we work. But I do want to get back to sort of this idea that when you're looking at some of these areas to be that maybe that first project isn't always saying well this this and this is going to happen so I'm going to be super aggressive and invest in you know a 5000 square foot commercial space station in for example the multi-family market might be the best idea for you as you're analyzing the geographic area that you want to invest in for the first time.
John Errico: [00:47:45] Yeah it's all for me it's a it's a risk reward sort of calculation right. I mean it goes back to one of the first things that we were talking about for me which is just to define your goals you know if your goal is to learn more than that dictates where you are going to invest if your goal is to make as much money as you can then that's a very different goal. If your goal is to make as much money as you can in a year versus in 10 years in a hundred years that's a very different goal to make your goal is just to house hack and not have to pay rent to try and get a little ancillary income on the side.
John Errico: [00:48:17] That's a different thesis that I mean and honestly if your thesis is law if you're investing horizon is long you can make some pretty fantastic investments I mean there are families in New York that have generational investing theses. So I mean they literally bought property in World War 2 that only now are they really cashing in on. And good for them. You know I mean that's you know probably in 1950 buying a very large piece of land in Times Square might have been very speculative and it probably looked like a horrible investment until you imagine you know the Giuliani administration let's be honest no it looked like a bad investment or pretty recently and and now it's it's really pay dividends.
John Errico: [00:49:04] I don't know what the return on investment might be but it's substantial it's probably not.
John Errico: [00:49:08] So you know but if your thesis is I want to do a flip and sell it in three months then you know don't invest in Manhattan but I mean there are different categories of things that you should buy.
Ben Shelley: [00:49:20] I think the word that I was looking for the phrase I was looking forward to to sort of tie in all these different points is as been as a as a newer investor or even an intermediate investor a cautiously aggressive both in actually allocating your capital in your equity and also how you analyze these deals don't be aggressively cautious though don't be aggressive. Alan let me try to figure out that pretzel in my head. Don't be aggressively coy. I like that. Yes I agree. Yeah I learned some new from these guys every day.
Ryan Goldfarb: [00:49:47] Yeah I guess the way that I would frame this in my mind is before you look at a specific deal and before you decide they're going to make an investment first understand what you are investing in you're investing in market you're investing in maybe that school system you're investing in that economy and it's not just is this property going to on paper show that it's going to be profitable there. There are a variety of inputs and there are a variety of factors that are going to contribute to whether those rents are going to stay the same over the next 20 years whether they're going to maybe increase or decrease whether your vacancy is going to increase or decrease or stay stable and and whether the appreciation on the property is going to be what you hope it will be whether it's going to be stable or whether it's whether you're going to be stuck down the line with a property that there just aren't as many buyers for it as what you were expecting.
Ben Shelley: [00:50:44] Yeah I think to that point and that's what we talked about the fact that the three of us look at things perhaps more analytically than your your most common investor which makes sense because this is what we do for a living. But I think kind of moving into the next episode. That's where I get excited about talking with our listeners and everyday investors about both from a basic intermediate and expert level. What are the best ways to analyze the numbers that you're seeing in front of you. Because like we said there are a million outside factors that affect whether or not an investment is good both forward looking backward looking and in the present. So just sort of understanding. You know we say cash on cash when we say cap rate not just what those means but how to get those numbers and whether and how that will inform your decisions. After you've decided on which geographic location you want to invest in.
John Errico: [00:51:33] Yeah. And one thing I mean as I've said in many many podcast episodes are that we have very many but something that I've said several times as I still think it's very important just to do it and get started. So what I hope people would take away from this is not that I need to be sucked into this analysis vortex of numbers and thoughts and risk and everything else but that these are important things to consider. I don't have the answers we don't have the answers to many the questions that we posed. But it's important to answer to them. However the end of the day if you want to get started just get started and do it. So that's how I got started with not any of this analysis or thought process that I've backed into it and it's been fortunate for me but I wouldn't have had been in that position been in this position if it didn't just start.
Ryan Goldfarb: [00:52:16] I would also just think about the risk that you are taking. I think a lot of the reason why this kind of analysis paralysis or the these kind of these kinds of mental models are there for quote unquote market analysis those are in large part driven by developers who are looking at building 600 units in an area and where at the margins the difference between. Two percent population growth and two and a half percent population growth are going to be the difference between whether they have enough people to live in their building or not. If you're talking about a two or three unit building in a town that's been around for hundreds of years and where there are dozens and dozens of large employers chances are the landscape is not going to change that much. So if you've got a decent deal which will discuss how to find in the next episode you can pretty safely pull the trigger knowing that the variables that are outside of your control are likely not going to move the needle too much.
Ben Shelley: [00:53:16] Guys. Thank you for your time and your expertise as always I appreciate it. For the folks listening at home make sure you subscribe to us wherever you get your podcast reach out to us on the brick by brick. That's brick X brick Facebook and make sure to listen to us on iTunes and Spotify. Thanks for listening.