Podcast

A Top Multifamily Investor’s Response to COVID & Pricey Markets

4Q20

How a commercial real estate professional took it upon himself to build, and run, a firm driven by his personal values, and how this approach benefits residents, partners, and investors.

Read The Transcript

In this week’s episode of Real Wealth Real Health, we are excited to welcome Eddie Ring of New Standard Equities, one of Alpha Investing’s first Sponsor-Partners. Eddie began his Commercial Real Estate career working for a large institutional sponsor but found that his strong personal values were often at odds with high-level decision making. He made the brave decision to branch out on his own, with a Real Estate company that would be based on his own set of core values. New Standard Equities delivers to its residential communities an excellent-quality living space, with attractive, reasonable, amenities at a price they can easily afford.

In this episode, we discuss the impact of the Pandemic on various Commercial Real Estate markets, particularly as it pertains to pricing, deal volume, and demographic trends. We speak to Eddie about where he is finding value in today’s market, the cities he’s most excited by, and the prevalent mistakes made by other sponsors in the current environment. We also hear his personal perspective on wealth, it’s definition, and how it informs his business decisions, especially in the context of running a Commercial Real Estate company, as his firm aims to build and preserve wealth for its investors with each property they invest in, while continuing to prioritize the company’s values of integrity, performance, collaboration, creativity, and caring.

Key Insights

  • How a set of strong personal values can translate into a well-defined company brand identity
  • The importance of surrounding oneself with capable, trustworthy team-members and coworkers, when trying to set yourself up for success
  • Taking advantage of opportunities in business, and making the most of your downtime or slow periods in order to do so effectively
  • Anticipating how the Commercial Real Estate landscape will be affected by the broader economy, especially in the context of a global pandemic
  • How the values espoused by Environmental, Social, and Governance (ESG) initiatives can be incorporated into an institutional Commercial Real Estate Sponsor

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Guest Bio:

Eddie Ring founded New Standard Equities (NSE) in 2010 and serves as its Chief Executive Officer. He has ultimate responsibility for NSE’s investment strategy, operations, risk management, and investor relationships. Mr. Ring has over 25 years of real estate and financial consulting experience, with 16 years of dedicated investing and operating experience in the multifamily sector. Under Mr. Ring’s leadership, NSE is known as a full-service, vertically integrated organization, and a leading investor of multifamily properties primarily located in the Western U.S. including Seattle, Northern and Southern California, and San Diego.

Prior to forming NSE, Mr. Ring was Chief Operating Officer at Kennedy Wilson Multifamily. During his nearly 8-year tenure, he was responsible for the strategic leadership of the firm’s multifamily investment platform, including deal sourcing, business plan development, capital structuring, and asset management. Additionally, he was instrumental in developing relationships with a global base of notable institutional investors. Previously, he was with Evensen Dodge Financial and Investment Advisors, Inc., served as financial advisor to California Governor Gray Davis’ Commission on Building the 21st Century, and managed a portfolio of industrial assets at family-owned MSR, Inc. Eddie began his career in television and wrote comedies for NBC, UPN, Saban Entertainment, VH1, and HBO where he earned a Cable ACE nomination for his work on The Larry Sanders Show.

Mr. Ring received his Bachelor of Arts degree from the University of California, Berkeley, a Master of Fine Arts degree from New York University, and a Master of Business Administration degree from the Anderson School of Management at the University of California, Los Angeles.  He is a member of Mensa, the Writers Guild of America (Emeritus), and currently serves on the Board of Governors at Cedars-Sinai Medical Center in Los Angeles.

Resources:

Real Wealth Real Health

Alpha Investing

[email protected]

www.newstandardequities.com

Podcast Transcript

Speaker 1:

Welcome to Real Wealth Real Health, the show that empowers you with insights, information, and inspiration to achieve your version of financial wellness. Learn how to balance living a full life today with planning for the future. This podcast is brought to you by Alpha Investing, a real estate-centric private capital network that provides exclusive investment opportunities to its members. And now, here are your hosts, AdaPia d’Errico and Daniel Cocca.

AdaPia d’Errico:

Eddie, welcome to the podcast. It’s pleasure to have you.

Eddie Ring:

Thank you. It’s a pleasure to be here.

AdaPia d’Errico:

Just for our listeners to know, Eddie Ring of NSE is one of our earliest sponsors, earliest sponsor partners at Alpha Investing. We’ve been working with them since around 2015, and you’re very active in the Western US, in the multi-family space, and this is such a great time to be speaking about investing in real estate, the multi-family market, and we’re going to get into a variety of topics, but to start with, I love the story of NSC and where it came from and what you’re really infusing into the work you do. Could you just spend a few minutes just telling listeners who you are, what you do and who NSE is?

Eddie Ring:

Sure, absolutely. I’m happy to talk about it. I started this company back in 2010. It was really out of the last great recession, the big financial crisis, and what I saw was happening all around me and my predecessor firm, I was working for a larger institutional accompany. I saw that, frankly, there was a lot of things going on that I wouldn’t have done. Ethical questions are not something I want to be a part of, I’ll just put it that way. But what I did was I sat down and I really looked at myself in the mirror, and I said, well, who do you want to be? Where do you want to be in 10 years? It’s precipitous that we’re having a call right now 10 years, hence, but it’s super interesting to me when I look back and think about the values that I have personally and what I wanted to infuse in my own company.

Eddie Ring:

I set about the task of actually creating a company based on a set of core values that I truly believed in. I even thought about it long and hard. I was going through a lot of internal kind of who am Is types of questions, and literally standing in Hawaii in the ocean, with the ocean coming up on my legs, looking out, going, what do I want to be and who am I? I realized that I want to be the highest, most transparent, most ethical real estate operator out there. That’s who I am, and what I really felt strongly, this was right in the thick, if you remember, of the Bernie Madoff scandals and the craziness that was going on way back in 2010 and I really thought that I wanted to have a company that stood for something different.

Eddie Ring:

I even thought of my company name standing there in Hawaii, with the water under my feet, and I thought New Standard, because I wanted to operate at a new standard, a new standard of transparency, a new standard of integrity. I really thought about that a lot and developed the company around that image and that idea. Today, what I have is I have a company that’s roughly 2000 units, 65 employees or so, and we really have formed our entire organization around these four core values that I truly believe in and that we perform. We keep our promises. We operate with integrity and excellence at every level. We collaborate. Teamwork is vital to our business and how I think of things. We’re creative. We’re actually known for thinking out of the box. We look at the assets from all kinds of different perspectives to really make sure we renovate with the sense of creativity and also financially manage the assets with enough creativity, to not just throw money at things, to hope they go away, but literally come up with more creative solutions than just the easy way out.

Eddie Ring:

The last core value is that we care, and that care and concern is what drives us. Fortunately, we’ve had these core values pre pandemic, because that we care value really did come in handy. We put together care packages for our employees and sent masks early on and hand sanitizers and reached out to our residents. We’ve done an enormous amount of work on that resident experience. In fact, over the last couple of years, I think it was about a year and a half ago or so, I wanted to try to figure out how to really capture our entire vibe in those four core values. We came up with a mission and a vision, I guess I could say the text of the mission and the vision, and it’s very simple. I can explain it in a little bit, but you’ll see how it all wraps into what I was just saying.

Eddie Ring:

Our mission is that we deliver outstanding returns to our investors by providing the ideal living experience for our residents. It doesn’t mean the best living experience. It’s just the ideal one, given where they are and what their ability to pay is. Our vision is actually we attempt and we try, but we want to match every single dollar our residents spend on rent with what they truly value and appreciate. The closer I can match their rental dollar with a service or an amenity that they’ll pay for, the higher our investor returns will be. We came up with, about a year and a half ago, maybe almost two years ago now, a cute little branding mechanism that we call Just Right Living. If you go on our website, you can see a little video and it’s all over our site-level websites.

Eddie Ring:

It’s all about branding that resident experience as just right, i.e., it’s just right for them. You and I, maybe not so much. I wouldn’t want to live in some of my buildings, but you know what? At the price point, it’s fantastic for our resident profile. We really liked that. We liked that branding and that imagery, and it also works for investors. They understand typically that we’re not over improving and we’re not under improving. If we can see a creative component to their investor dollars, that’s going to come out in the IRR at the end of the day, or the cash on cash return at the end of the day, depending on what we’re talking about. So, I’m very, very moved and excited that I’ve taken this concept that was really born out of my four values that I cherish, or four of my own personal values, and created a company that’s abide with those values and envelop a branding mechanism around that.

Eddie Ring:

Today, our employees are thrilled. We’ve reduced our turnover to very, very minimal comparatively to the marketplace. That’s also a creative to IRRs, if you look at the site-level turnover. We’ve developed a best-in-class team. I’ve brought in folks from, over the last eight years, 10 years or so, I’ve brought in a chief operating officer that used to be with Carmel Partners and Riverstone Residential and Greystar. My chief financial officer came over from Kennedy Wilson with me, who I’d worked with previously for 15 years. My chief investment officer is my latest C-suite hire from about a little bit more than a year ago now, Tim Walters. Tim and has been … he used to run the Avalon Bay on the West Coast. All acquisitions and dispositions under Avalon happened under Tim rather for Avalon.

Eddie Ring:

I have this really solid best-in-class C suite of folks, and we’re really pumped and excited about what we see in the future here on the West Coast. Long-winded, but that’s the story.

AdaPia d’Errico:

No, it’s never long-winded. We always like to give our guests an opportunity to say everything that needs to be said and then we dig in. There’s actually a few things that you said that I think are really valuable to extrapolate a little bit for our listeners. One of them relates to what you said about basically like your resident management and through the pandemic and even before the pandemic, but especially the portfolio has done relatively well. Even our investments with you have done relatively well. I tell people, when I do investor calls, it’s a function of who our sponsors are and how well they take care of people, because in a way, some people think that rent isn’t obligatory and they might not have it to pay, but if you’re a good person to them, they’re more likely to pay. What you said validated that for me.

Eddie Ring:

Absolutely. The second that this thing happened, I call it … or maybe it was the second week in March when we started looking at the news and saying, hang on a second, we got an issue. We stopped all renovation activity. Everything we do here, I think you know, is some kind of value add. We’re running the assets at 91%, 92% because we’ve got things in renovation, and others are coming out and they’re on the market. We’re trying to get the highest rent dollar, the highest rent we can for those units. We’re generally in that 91-ish percent category. Well, we saw the news and we kind of said, hang on, we have to react, and we immediately stopped all renovation activity. We shifted from a, get the highest price we can, to fill the box as fast as we can.

Eddie Ring:

So, we took the portfolio from 91 all the way up to, I want to say at one point during the thick of the lockdowns, we were up at 98% physically occupied. There was no units available. We did that purposefully because I figured, well, if we can fill the boxes up as close to a hundred as possible, anything that wouldn’t come out in terms of COVID related deferments would bring us back down into that 91, 92 kind of economic collections sort of range. I was right, because ultimately today, I think we’re about 92-ish percent. I’ve got about 8% COVID deferrals. Our distributions really haven’t been affected. They come from higher occupancy rather than higher rents for those particular units that were remaining. But by and large, we haven’t really, if you look at our in-place rents, we haven’t really had to drop rents that significantly.

Eddie Ring:

We’ve been able to really kind of maintain our positions with this extra occupancy that we’ve been striving for. So, we’ve been super successful at that. We also, at the very beginning of the pandemic, we reached out to one of our bad debt collection agencies and struck a deal with them to help us track COVID deferments. We actually made a programmatic kind of thing with our residents to say to them, hey, if you’d like to get on a payment, no problem, we’re more than happy to have you on a payment plan. You don’t have to pay your rent, obviously per the entire governmental restrictions or relaxations of rent collections, etc, but we would like you to be on this payment plan. So, we wanted to sort of make it a kind of an obligation that they understood that they had still, wasn’t just a free ride, because we’re now able to give them notices and give them updates on what their account looks like and their balances and all that.

Eddie Ring:

Now the question will be with, I don’t know, I think portfolio wide, I think we’re up to around $3 million owed or something like that. It’s a lot of money, but I think I have a strategy for all of that. I’m going to most likely forgive a month or call it three weeks for every six weeks that somebody pays current. As people, as we come out of this thing, I’m not interested in just evicting everybody, because if we just evicted everybody, we’re going to end up specialing the rent and having to lower rent and fight against ourselves and all our neighbors and whatnot. Instead, I want to work with the people that we have, call the uncollectable money or the non collected money, or the uncollected money on not collectible and write off little pieces of it as I’m collecting more and more.

Eddie Ring:

Hopefully, I translate the exact same resident profile as they get work and then go back to work, etc, and we don’t wind up actually losing anything. That’s kind of my insight for how I’m going to handle the thing, but it all comes out from trying to actually put ourselves in our resident’s shoes and really understand what they’re going through. We did it with a lot of compassion and a lot of concern and in multi languages as well. We’re really trying hard. We really made a concerted effort to get out in front of this thing with our residents and really just do our darnedest to lead with compassion and yet still collect the rent. It’s really important.

Daniel Cocca:

Yeah, that’s something that is great to hear because it illustrates a point that I think is particularly important and one that, whenever we chat with new investors, we really try to get across, which is the caliber of the sponsor is at the very top of our deal evaluation hierarchy. You can look at the underwriting, you can stress test every assumption. You can look at all of third party market reports, but at some point, during the life of a project, something is going to happen, probably not as extreme as COVID, but something’s going to happen where the sponsor’s going to need to use their expertise to figure out how to be flexible and get out of this situation.

Daniel Cocca:

It’s great to hear how forward seeking you’ve been with respect to COVID in these properties. Then the question I would have is, on a going forward basis, what are you expecting to see? How are you planning now that we’re at this point in the health crisis, where things look like going forward for NSC properties?

Eddie Ring:

I think about this, of course, I think of nothing else. That’s kind of a problem too, by the way. I think our company is poised for great things in the next year to year and a half. I honestly think that we’re going to be on the front end of a lot of opportunities because I’ve not furloughed anybody, I’ve not laid anybody off. I’ve kept the machinery going. We haven’t done a deal in a year, but we’ve gotten really good at operating and we’ve refined our tools and we’ve automated things, and we’ve done all kinds of really super interesting things on the, in the back office in terms of how we’ve kind of improved ourselves. We really are poised for tremendous growth, which is where we think we’re going to see opportunities.

Eddie Ring:

I actually think we’re going to see opportunities in slightly newer product. I think there’s going to be a chance to get into some stuff that made math a little bit less deep value add and a little more core plus kind of opportunities. I see that there’s a lack of buyers in that product that’s 2010 and newer. It’s interesting. We might be able to find our way into a little sweet spot of some really interesting communities. We’re seeing cap rates obviously very, very low, so we’re cognizant of what that means to our investor yields and we want to make sure that we’re still offering something for everybody’s investor dollar. That’s really super important. Yields, in general, will probably be a little lower. But I’d rather the yields be lower because we’re buying higher and better product than the yields are lower because other people are paying more for the same older vintage stuff that’s got tons of extra risk.

Eddie Ring:

We’re always looking at the cap rate and really trying to understand what’s driving the cap rate and where that risk is. We want to make sure that we can mitigate that risk with capital, or we don’t want to take the risk. So, it’s kind of one of those ever lit guides that we have to always just kind of pay attention to. But in terms of opportunities, we’re excited about Denver. We think that there’s some really incredible opportunities out there. We’re still bullish on greater Seattle, not CBD proper, unless I can get some really awesome discounts for being right in the middle of downtown, but the suburban markets in Seattle are still great. The Northern Cal markets, I think they’d been hit the hardest out of our entire portfolio.

Eddie Ring:

Again, I think it’s because of messaging at the local level, but nevertheless, we still see a lot of opportunity there if we can find the product. Of course, Southern Cal, there’s always interesting things that pop up. It’s just very, very competitive right now so we have to always find our niche. We had one deal that I thought would have been an amazing project that literally got … it slipped through our fingers for no real reason other than there was some quid pro quo happening between the broker and the winning buyer and I just don’t participate in that kind of stuff. That’s life.

AdaPia d’Errico:

Right. It’s interesting, you said so many things, so many of these nuances that you know so well, that maybe an investor doesn’t really understand you starting with this, this aspect of like the competitive nature of the market, and there’s things that happen. Like you said, you thought you had a deal and then it slips out of your fingers, but then, was it last year or two years ago where you came to us and because we’ve done so many deals with you, you had something that needed to close, I want to say it was like a three week close. Something really fast that you … the first buyer fell out and then they came to you. Can you talk just a little bit from the on the ground perspective of doing what you do, the life of acquisitions, I guess?

Eddie Ring:

Sure. Yeah, absolutely. We look at almost everything that we possibly can. Tim runs our acquisitions group. We have a VP of acquisitions and oops … are you still there?

AdaPia d’Errico:

Yep. Yeah, no worries.

Eddie Ring:

Okay. Sorry, you disappeared for a second there. We have a VP of acquisitions and we have an analyst. With those three and myself, because I’m still intimately involved with the sourcing, we will really turn over every rock, everything that is in our markets, which is, by the way, everything that we can get to a plane train or automobile within three hours, so from our corporate office, or now we have two corporate offices, one down in Irvine and one here in Los Angeles, but literally everything is within three hours. So, at any given moment, if I needed to hop on a plane at Burbank Airport, I could be at one of our assets in Seattle. It’s just not that tough. Or hop on a train or a car or whatever it is we do, I like to be within that three hour kind of timeframe.

Eddie Ring:

We are looking at literally everything. We had an asset that we were chasing really hard down in Vista, California, which is a kind of a North San Diego sub-market. That asset was … it hadn’t been touched, incredible story, hadn’t been touched in 60 years, really, in terms of any value add improvements, was run by a family. The kids didn’t want it, the parents died. The kids didn’t want it anymore. They wanted to sell it. Incredible. The story was amazing. The on paper story. It’s everything we look for, except for every single investor in greater San Diego liked that story too. We spent a long time trying to make those numbers work and look at it and understand it.

Eddie Ring:

As an operator, we understand how difficult it is to run some of these things. That thing was going to … I think it ultimately traded at a 3.8 cap rate going in, and we looked at it and our numbers stopped at around four and a quarter or something like that. The numbers didn’t work. We looked at ourselves and we looked at our investor base and we looked at what these other groups were buying this thing for, and didn’t agree with their assessment at all. No matter how awesome that story sounded, we literally looked down our pipeline list and we were like, well, I don’t get it, if we can buy a four and a quarter cap for 30 years, newer product in Northern Cal, where there’s tech workers down in Vista, it’s a much more working class demographic.

Eddie Ring:

All of a sudden, we were like, well, wait a minute, why would we pay for a three eight cap for a lower end demographic when we can buy a four and a quarter cap and actually have a demographic that will be willing to pay a higher rent down the road, or similarly out in Denver, there’s a project right now that we’re looking at. It’s like a four, three, four, four cap, it’s built in 2004, really, really beautiful asset. Great product. We don’t necessarily have to do that much to it, but our investors will get paid for what they’re buying, as opposed to buy something, say in Vista, at a three eight cap, bunch of deferred maintenance and a bunch of, basically things that you have to do that won’t accrue to higher rent.

Eddie Ring:

Our investors may like the story going in better, but it’s not going to yield them more money, and that’s really important. I look at that kind of stuff and we really dissect it.

AdaPia d’Errico:

Yeah. It sounds like it. What you’re saying is you’re looking at risk adjusted returns.

Eddie Ring:

Yes.

AdaPia d’Errico:

You said it a few times in different ways, but you just outlined exactly what a risk adjusted return is, and what you just said about the story is important, but sort of the facts and the numbers, everybody loves a good story, but we also like to make a difference.

Eddie Ring:

Exactly. I actually laugh sometimes because I call myself, yeah, I’m in real estate, woo. It’s crazy. But I am actually a very risk averse person. I don’t like taking risk. That’s why I do multi-family. That’s why I’m in the value add space. That’s why I hug these West Coast markets. I don’t really like taking risk. I like taking risk where I know I’m taking less risk that I’m able to achieve in premium and yield. That I like, because I like a good deal, but I don’t like risk. So if I could figure out a way to buy and get a higher than normal risk adjusted return, that’s gold for me. I feel great, because I feel like, wow, I just bought something that I’m not taking that much risk, but, whoa, look at these returns I’m able to deliver. Love that. All day long I will do that kind of a deal.

Eddie Ring:

But the times where I’m forced to take risks that I’m not loving, I stay away, and that includes environmental risk, it includes operational type risks. It includes everything. I just don’t want to take that risk. If I’m not getting paid for it, forget it. If we are getting paid for it, okay, maybe it’s all right. That’s why we have an investment committee, for instance. I have five people that are weighing in on the thing before we’ll pull the trigger. Then of course, you guys have your own committee and whatnot, but internally for us, it doesn’t even get to you unless it’s passed our committee.

Daniel Cocca:

Let me ask you what might be an obvious question. Now, what compels a group to buy that San Diego property at a three eight cap rate? Is it 1031 capital, foreign capital, just different return profile? How does a group actually get comfortable, or are they just someone who’s making a mistake?

Eddie Ring:

It’s a great question. I don’t 100% know who bought that thing, but I have a feeling I do know who’d … I know at least one group that was really pursuing it hard. It’s a long-term family office who operates a bunch of assets in the area, and they look at things on a 10 year plus kind of time horizon that they know that, over time, that three eight cap will turn into a four seven cap, or a five cap, or whatever, and that will ultimately lead to decent cashflow, maybe it’s year fine. But they’re not looking to buy, renovate, sell like we all are. We’re trying to generate five-year returns in that, call it mid, whatever, I don’t know, low to mid team level returns to investors. Other folks are running around with their own private money. It’s better to get something than nothing.

Eddie Ring:

I was in a lunch a couple of weeks ago where a gentleman was talking about the same kind of dynamic, but even more egregious, something like a two and a half cap or something that the group was purchasing. He asked them, “How could you possibly get used to a two and a half cap? That doesn’t make any sense.” The guy said, “Listen, our money is coming from Germany, and Germany has negative interest right now. Actually, two and a half cap, that’s incredible, that’s positive by 250 basis points.” From their perspective, that made a whole lot of sense. Daniel, your point is right on. Where their capital comes from, is a huge component of it. What the investors or that ultimate buyer’s sort of end game is a huge component of it.

Eddie Ring:

But if it’s folks that have funds the way our access to funds are with similar kind of yields that our investors expect, we’re not going to do that two and a half cap kind of deal, as we’d rather, or we can, unlike Germany, at least for now, we can keep the money in the market here or keep it in our cash accounts, because we feel better, rather than getting a 2.5% yield, we feel better generally looking at it every day and going, oh, I haven’t lost that.

Daniel Cocca:

Yeah. Hearing about the two and a half cap is terrifying. It’s a question of where’s the market going? It actually it’d be something that I think it’d be really helpful for our listeners to hear just from you. We’ve been in this period of pretty much across the board cap rate compression for a very long time, where does it end? When do the trends start to reverse? What has to happen in order for that to occur? Or is there just so much dry powder, so much interest in real estate that cap rates are going to continue to compress for the foreseeable future?

Eddie Ring:

I think my, and this is just me forecasting, so it’s worth toilet paper, but from my viewpoint, there is a lot of capital out there chasing real estate and that’s driving prices down. The primary thing that is bolstering everybody’s investment ideas is low interest rate environment. We’re borrowing it to two and a quarter, 2.3% I think interest only on some of our deals. It’s just crazy. It’s literally crazy, but that is what’s driving cap rates so low. Now, I don’t think that’s going to stay this way forever, but I don’t think that interest rates are going to be rising anytime soon because of where we are in the economic sort of cycle. I think we’re in a recession, we’re in a period of unemployment that’s going to stick around for at least through the time that we can get this vaccine out to the people. I’m thinking, at least the next nine to 18 months, we’re going to be in a lower interest rate environment.

Eddie Ring:

Maybe that interest rate environment extends itself 24 to 36 months. Again, then it’ll start creeping up again maybe. Ultimately, it has to, I think has to adjust because we’ve got trillions of dollars out there in stimulus. This is a lot of free money out there that I don’t see how it doesn’t ultimately cause some inflation. Now, don’t forget, inflation is not a terrible thing. Rent is part of inflation. If there’s inflation, rent is going up, which is great. Hopefully, inflation happens, rent continues to appreciate, and then cap rates sort of maybe decompress and will offset that decompression with higher rents. That’s the big hope.

Eddie Ring:

I kind of don’t see how it could happen otherwise, although I’m not an economist, and there are probably people out there that can throw some good facts and figures my way and I’d be silenced. But I actually feel pretty good about where I think it’s all heading that’s, to be clear, several more years, call it 18 to 36 months of low interest rates and maybe some real rent growth in the coming 18 to 36 month period as well, so bodes well for us.

AdaPia d’Errico:

Yeah. Do you see that in, because you’re operating in Western, the Western US where, especially on the coast, where we’re looking more at capital appreciation and you were doing more of the value add. Can you talk a little bit about why you continue to like these markets that some might say, hey, the price is topped out, and why do you still like these higher priced markets, so to speak?

Eddie Ring:

Great question. Number one, first and foremost, the market decisions that we make are knowledge, our own knowledge. I never want to put an investor dollar at risk from my own ignorance. If I’m buying in California, well, I happen to know California really well. Denver, we’ve got Tim Walters who bought about 2,500 units or so for Avalon Bay in Denver. We are really well versed in each of the markets that we pursue. We also look at the jobs in the markets, then where we are employment-wise, where we are COVID-wise, all of that goes into our market selection. It just so happens that those markets that we know and we like are on a lower cap rate markets. But again, I’d rather buy all day long. I’d rather buy a three nine cap in Anaheim, right outside Disneyland, even though there’s all these unemployed Disney workers. That’s not going to last. But I’d rather buy that at a three nine, than say somewhere in, I don’t know, pick a town Duluth.

Eddie Ring:

I don’t even know. Knoxville, Tennessee, I don’t know. Maybe that’s a great market, who knows? But I’d rather buy something in a market that I know at a cap rate that feels right than to go out on a limb and say that I got a nine cap somewhere and I’m all excited and realize that I’m going to lose my principal at the end of the day, even though it’s a great looking cap rate. I don’t take that kind of risk.

AdaPia d’Errico:

Yeah, just a follow-up question. I wonder because I think everybody is cognizant of how much rents dropped in San Francisco. This is like a crystal ball kind of a question, but I’m really curious of what you think about the San Francisco market. Are you seeing properties come on the market? When do you expect those properties potentially to come on the market and the opportunity there?

Eddie Ring:

Yeah. It’s fascinating. San Francisco literally is 30% to, maybe even 40% off now from where it was. It’s a lot. Rent has plummeted. The City of San Francisco is a ghost town, except for homeless people and people who don’t want to leave their families, I guess. But for the most part, the millennial renter that flooded that market for the last three or four years and drove rents up alongside the tech companies who were paying out outside salaries for those folks who wanted to live in San Francisco, well, they’ve all left. That’s, unfortunately, what’s gone on there. If we could buy in San Francisco right now on a cap rate that includes the depressed rents, all day long, I’d buy that all day. I don’t know that those projects are going to come to market.

Eddie Ring:

Actually, there was one particular deal I was looking at off market. In my own head, I thought it would be amazing. So, wrote an offer and tried to peel it out from the institutional owner that owns it, and they’re like, “No, we’re not selling now. We’re going to sell it, and if we ever sell it, it’ll be after we’ve stabilized and gotten that cap rate back up.” It’s not really going to be a buying opportunity, I don’t think, but maybe. We have our eye on it. It’s possible that we might be able to peel something out that’s really a discount to where it was pre-COVID, which would be very exciting. At the same time, there are other assets that we have and that we look at. We bought, I don’t think you guys are a part of it, we bought down in Moreno Valley a couple of years ago.

Eddie Ring:

Moreno Valley was very rough, very, almost red line with most institutional type investors several years ago. I looked at this thing and I was like, well, wait a minute. I think it’s got all the fundamentals that we’re looking for. I think we should take a run at it. So, we bought this thing, and that’s one of those huge surprises in this COVID sort of world where probably the asset with the lowest demographic, in terms of median income and a willingness to pay, it’s 227 units, and we’ve been 100% occupied for most of the last time, in 99%, whatever. That’s an asset where we’ve been able to raise rents all through the pandemic, because there are people who like that price point and Amazon has really come into that Moreno Valley market and filled up the employment gap that used to be there when March Air Force Base went out.

Eddie Ring:

I think it was March. Anyway, when they went out of business or got closed or shuttered or whatever, it was a big gap in employment. Now that’s kind of been bridged, and it’s really, really on fire out there. It’s terrific. When we select markets, we also understand we have to have an understanding of the market, but we also have to really understand the nuances. It took a lot of effort for me to explain to our investors in that particular deal that this is not the Moreno Valley from 10 years ago. It’s the Moreno Valley where Amazon, and is really the biggest employer and our residents are out delivering packages and coming back and paying for a nice building and they like it. Our price points started low. I think our cap rate, there was a five and three quarter cap or something three years ago, but our price point was low, and now it’s a little inched up because, well, that’s what we do. We inch things up a little and we’ll enjoy that yield when we go to sell it.

AdaPia d’Errico:

Right. Yeah, it’s always, like you said, there are so many nuances and every building has its own business plan, and its own P&L and everything. I actually wanted to see about … talking a little bit about who the tenants are. When we talk to our investors, we’re saying we’re investing in class B. Can you tell us, from your perspective, what somebody would expect when they hear a class B and when they hear like the value add and who these tenants are, and just kind of talk about that from your perspective?

Eddie Ring:

Sure. Yeah. That’s another really great question. Our residents are, and of course it varies, depending on where we are, but a typical workforce housing class B renter that we target, they might be teachers, nurses, they are service personnel. They are kind of entry-level management folks, some retail, some janitorial, but not much. It’s a class below, usually, and no offense. It’s generally not hospitality line workers. It’s generally a little bit higher than that demographic. When you look across our portfolio, and we were really worried about our, during COVID, with all the unemployment out there and what was going to happen to our assets, we really didn’t get a huge hit most of our portfolio because mostly we were catering to folks that couldn’t quite afford a single family home, but they weren’t really in that first line of cuts that have everybody made, all the bus staff and wait staff and hospitality staff that just got shuttered.

Eddie Ring:

Really, people were a little bit higher end than that. Call it that 30 to $50,000 earner and not the below 30 earner.

AdaPia d’Errico:

Along those lines, I want to bring it all the way back to when you said the just right. What is just right for these tenants?

Eddie Ring:

It sort of depends on exactly where we are, but at most of our assets, Just Right Living is clean, it’s relatively safe. We can’t promise that, but it’s relatively safe environment. It’s a friendly staff, it’s a location that is easily walkable to amenities, restaurants, theaters. Sometimes it has a nice view of the Bay. It’s a property that feels good. It’s got a fitness center, but it doesn’t necessarily have the greatest fitness center that anybody’s ever seen, but it works. It works to work out in. Works and somebody doesn’t have to buy a gym membership. They can hop on the bike, they can hop on the treadmill or whatever. It’s just enough for them and they feel like they don’t have to pay through the nose to get it. Then in all of that sort of soft stuff, which is a friendly hello from the leasing office, it’s a friendly reminders, it’s community events.

Eddie Ring:

We do everything. We’re building out a community garden at one of our sites. It’s just going to be fantastic. It’s things like, frankly, it doesn’t cost a lot of money, but wow, our residents love it. They love having things that they really want. Sometimes we’ll do a survey or we’ll do an ask or whatever it is, but we’ve been doing this long enough that we understand what they’re looking for. We really try to cater to that. Again, it’s about class and style. If we’re buying something in the 2010 vintage that we’re able to charge a little higher rent, well, that fitness center is going to be a lot nicer than something that’s in the 1985 vintage in a more working-class neighborhood. But the ’85 vintage we’ll have a fitness center and the residents there will love it.

AdaPia d’Errico:

Right. Yeah, it really sounds like you’re catering to what they need as opposed to … maybe this is, I dunno if it’s like an amateur mistake, I don’t know if that’s the right word, but like somebody going in and saying, I’m going to buy this building and I’m going to put all this money into it and I’m going to make it fantastic. Really, they’re not going to get the kind of tenants that are going to justify what you just spent on the CapEx.

Eddie Ring:

That’s right. Then if that happens that you can kiss your returns goodbye. It’s the worst mistake you can make. Over improve a unit, over improve an … it’s just terrible. You want to make sure that you’re getting a nice return on that investor dollars. I think we target somewhere between, and call it nine on the very low end, but it’s usually closer to 12% to 18% return on cost for that investor dollar. In other words, we want to see, call it a 15% return in higher rent for that dollar that got spent on your fitness center. If we can’t get that, we’re not building it.

AdaPia d’Errico:

Right. Yeah, and it might not even be what those residents want, anyway.

Eddie Ring:

It won’t be. If you can’t get it, it’s not what they want.

AdaPia d’Errico:

That’s right. Yeah, I guess. Yeah, just a demand. Okay. Well, we’re kind of running up on time, so I wanted to ask you one final question which we ask all our guests, and that’s, how do you think about building wealth, and what does wealth mean to you personally?

Eddie Ring:

That’s a great question. It’s funny, I don’t really think about it that often. I think of my needs in terms of what I can give and my family and how I can take care of people. I think, first and foremost, about the 65 different families that I’m sort of supporting as employees for my company. But, ultimately, you can’t take it with you. I know that’s a dumb kind of stereotype or whatever you call it, not stereotype. You can’t, I get it. It’s an adage, and it’s fun to have cash and have wealth and you can kind of not worry so much about things. But I think you get more by giving things away. I think you get more by get more internally by giving. We have an ESG program now where we’re really thinking about that component of what we do as very, very vital.

Eddie Ring:

We’re doing things like, in each of our regions, we’re having our sites come together and figure out where to donate locally at the community level, where in the community. Right now, the money just comes from me, and I’ll write the checks. It doesn’t come from the properties generally, almost never, but I want that level of engagement where we’re giving and that behavior of giving. When you can actually give, I think that’s wealth. I think that you are a wealthy person if you are able to give and I think that’s really my definition. It’s not healthy if you’re not able to give, and you’re not wealthy if you’re not giving. It’s sort of one of those things.

Eddie Ring:

Then for investors to create wealth or to build wealth, generally speaking, our investors have done a remarkable job on their own to create their own wealth and it’s our job to assist them in furthering that wealth and maybe containing that wealth or keeping that wealth and not losing it in something willy-nilly like the stock market, where nobody has any control anywhere. But at the end of the day, an investor wants to sort of build on their wealth. Hopefully, if they’re like-minded, they’re doing it in part at least to give back to their own communities and their own families, etc. I think that the world will be a really awesome place if everybody had that mentality, where wealth is about how much we can give.

AdaPia d’Errico:

I agree. I love that definition. That’s really great to hear and that you’re doing an ESG. Can we just define it for those who may not know. It’s environmental, sustainable and green?

Eddie Ring:

It’s environmental, social and governance.

AdaPia d’Errico:

I see.

Eddie Ring:

Yeah, so what we look for, and we try to do green and environmentally friendly projects. We try as much as possible where it actually still generates a yield for the investor, that’s first and foremost, but if we can switch out to LED lights so we can switch out to low-flow toilets, sometimes there are programs, government programs that pay for it. It’s just, we take the extra step in trying to find those. Then the S is social, social awareness. It’s diversity in our hiring. It’s who are we about and who do we stand for, and what groups are out there that need a leg up that we can actually help without hindering?

Eddie Ring:

Governance is how we measure ourselves against all of these other goals and how we measure ourselves against the global community. We actually joined, it’s a little bit, I don’t know if there’s any other sponsors out there like this, but we joined the UN Global Compact last year as a way to stand up with, I don’t know, thousands of other organizations all over the world to say, no, we stand up for these kinds of values and diversity and ethics and social responsibility. We really do try to live those values. Nobody told us to go do an ESG program, but we just felt that that was part of who we are and it would be relatively easy for us to do the few things that could actually make a little difference in our communities.

AdaPia d’Errico:

That’s amazing. Thank you so much for sharing all of that and for taking the time to be with us today and have this really just very educational about real estate from the sponsor’s perspective and everything that we’ve talked about. Really appreciate your time, really appreciate your partnership and everything that you’re doing for us and our investors. I’m really proud to be partnered with you.

Eddie Ring:

Great. Thank you so much. Really appreciate it, both of you guys. Thank you.

AdaPia d’Errico:

Thanks for tuning in to Real Wealth Real Health. We hope that you’ve enjoyed today’s episode and found it both informative and insightful. We welcome all your questions and your feedback about today’s episode, and especially, we welcome your questions about specific topics that you would like us to cover. So, shoot us an email at [email protected] If you have a moment, we really appreciate ratings and reviews as it helps us grow our online community and our interactions with you. We’ll also be linking to a number of relevant articles on topics that we might’ve touched on during our conversations. Some of them are broad, some of them are technical, but we’re always aiming to provide information that helps you better understand the mechanics of building this healthy financial foundation, especially if you’re looking to do this with real estate.